The Supreme Court recently upheld critical provisions of the Insolvency and Bankruptcy Code (IBC) that were previously challenged on constitutional grounds. The court addressed concerns regarding a potential violation of fundamental rights, including the right to equality within insolvency proceedings.
Petitioners’ Arguments and the Supreme Court’s Observations
The key issue raised by the petitioners was that the personal guarantor was not given an opportunity to present their case, contest the initiation of the insolvency resolution process, or contribute to the appointment of Resolution Professionals (RPs). The petitioners also argued that the challenged parts of the IBC did not follow fair principles (natural justice) and infringed upon fundamental rights like the right to livelihood, trade, and equality under the Constitution’s Articles 21, 19(1)(g), and 14.
The Supreme Court upheld the constitutionality of vital aspects of the IBC, including allowing insolvency proceedings against personal guarantors. The court ruled that the IBC is not retroactive and held that Sections 95 to 100 cannot be deemed unconstitutional simply because they do not provide personal guarantors an opportunity to be heard before creditors’ insolvency petitions.
Role of Resolution Professionals (RPs)
The court rejected the idea of judicial intervention before appointing RPs, stating that incorporating an adjudicatory role before a particular section would disrupt the IBC’s established timelines. Additionally, the court clarified that RPs are facilitators who gather information and make recommendations, not decision-makers.
Moratorium Provisions
The Supreme Court agreed that these provisions largely protect debts rather than debtors. It supported the legislature’s decisions on when the moratorium should apply and highlighted the differences between individual debtors, partnerships, and corporate debtors in the IBC.
Impact of Supreme Court’s Judgement on IBC
The court’s confirmation of the IBC’s provisions, especially concerning personal guarantors, can boost creditor confidence. Also, the clarity provided by the court’s ruling can enhance predictability within the insolvency framework, encouraging smoother and more efficient resolution processes. Furthermore, promoters and individuals providing personal guarantees for corporate debts may become more cautious because of the potential risks highlighted by this judgment.
Introduction to the Insolvency & Bankruptcy Code, 2016
The Indian Government implemented the Insolvency and Bankruptcy Code (IBC) in 2016 to consolidate all laws related to insolvency and bankruptcy and address the pressing issue of Non-Performing Assets (NPA). Insolvency occurs when individuals or companies are unable to repay their pending debt. In contrast, bankruptcy is a legal declaration of one’s inability to pay off debts made by a court of competent jurisdiction. The IBC encapsulates all individuals, companies, Limited Liability Partnerships (LLPs), and partnership firms. The adjudicating authority for companies and LLPs under IBC is the National Company Law Tribunal (NCLT), while the Debt Recovery Tribunal (DRT) acts for individuals and partnership firms.
Legal Insights and Relevant Institutions
In the context of understanding the IBC and its impact on the Indian economy, institutions like the Debt Recovery Tribunal and National Company Law Tribunal become important. For example, the Debt Recovery Tribunal helps in the recovery of NPAs, whereas the National Company Law Tribunal adjudicates issues relating to Indian companies. Both these institutions play a significant role in the successful application of the IBC.
