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PROVISIONS OF INSOLVENCY CODE UPHELD BY THE SUPREME COURT





INTRODUCTION

The Apex court maintained the constitutionality of the Insolvency and Bankruptcy Code (IBC), specifically sections 95(1), 96(1), 97(5), 99(1), 99(2), 99(4), 99(5), 99(6).

The court dismissed 200 petitions that challenged its legal validity.  The bench consists of the chief Justice of India. (CJI) D Y Chandrachud with J B Pardiwala and Manoj Misra held that the process did not suffer from arbitrariness which was contended by the petitioners. “The IBC cannot be held to be operating retroactively to hold it violative of the Constitution. Thus, we hold that the statute does not suffer from the vices of manifest arbitrariness,” the Bench said. This move is expected to give lenders efforts to recover funds from corporate debtors from personal guarantors.


ISSUES BEFORE THE COURT

The ground for the petition was that due process was absent and a violation of natural justice principles. The crux of the issue was that the personal guarantee was not allowed to present their case or challenge the initiation of the insolvency resolution process or have an opinion on the appointment of the Resolution Professional (RP). 

While the law was enacted in 2016, it was amended in 2019 to incorporate provisions related to personal guarantors instead of limiting it to companies that were not settling the liabilities to their creditors. While seeking loans, promoters and related entities often provide personal guarantees to banks in addition to other collaterals.

The issue before the Supreme Court was the constitutionality of the Insolvency and Bankruptcy Code (IBC) provisions on Personal Guarantors' Insolvency Resolution. These provisions were introduced in 2019 but were subsequently challenged before various Courts because they violated the principles of natural justice and were given unchecked powers to seek information including the personal information of the guarantors.


JUDGEMENT 

However, the Supreme Court observed that the role of the RP is to gather information about the application by the creditor and to report it to the adjudicating authority. The adjudicating authority is vested with the function to accept or reject the report of the RP.

The judgement came as a relief to lenders whose petition kept getting delayed due to the personal guarantors filing applications at the stage of section 94/95 to afford them a hearing before any recommendation was by the RP.

The judgement affirms that the principles of natural justice simply cannot be applied in a straight jacket manner, the application status is volatile depending on the situation. The court stated that IBC has enough safeguards about the functioning of the RP.

This decision will equip creditors to aggressively pursue action against promoters of several companies that underwent insolvency resolution. This includes Anil Ambani, Bhushan of Bhushan Steel, among a host of other high-profile businessmen.

Judgement, the NCLTs did not hear the personal insolvency matters or had stayed the proceedings at the stage of filing of report. This has changed, now NCLTs will have to start hearing personal guarantors at the stage or before the stage of filing of report by the RP.

IBC experts praised the court order as it brought clarity to the law “The financial sector would be able to effectively pursue their remedies under the code against personal guarantors as well, who in most cases are the brains of corporate debtors. Creditors are hopeful that the process will now kick-start and timelines under the IBC will be met,” said Ateev Mathur, partner, SNG & Partners.


CONCLUSION

The Supreme Court’s endorsement of the insolvency and bankruptcy code’s constitutionality, particularly regarding personal guarantors, is a pivotal milestone. Dismissing challenges, as the court emphasized the absence of retroactivity, providing lenders a robust framework for fund recovery. The judgement addresses due process concerns, highlighting the RP’s role and the `adjudicating authority’s powers. Mandating NCLTs to hear personal insolvency matters earlier, the ruling is lauded for revitalizing stalled cases and instilling confidence in creditors for timely IBC adherence.


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