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SC holds IBC cannot be held to be operating in retroactive manner

Nov 9, 2023

In a setback to promoter industrialists, the Supreme Court holds the statute (IBC) does not suffer from any manifest arbitrariness to violate Article 14 of the Constitution. SC rejects challenge to IBC provisions on personal guarantors - challenged by industrialists like Anil Ambani, Venugopal Dhoot and others. SC holds that IBC cannot be held to be operating in a retroactive manner.

In a setback to former promoters of bankrupt companies, including Anil Ambani, Venugopal Dhoot, Sanjay Singhal and others, the Supreme Court on Friday upheld various provisions of the Insolvency and Bankruptcy Code, 2016 (IBC) that allowed lenders to initiate insolvency proceedings against personal guarantors without giving them the opportunity to present their stand.

Prominent industrialists had challenged personal insolvency proceedings initiated against them along with legal validity of various provisions - Sections 95(1), 96(1), 97(5), 99(1), 99(2), 99(4), 99(5), 99(6), and 100 of the IBC - on various grounds including alleged absence of due process and a violation of natural justice principles. In November 2019, the central government had tweaked the bankruptcy law to allow personal insolvency cases against guarantors of corporate entities that fail to honour their debt.

A bench led by Chief Justice DY Chandrachud while orally pronouncing the judgment in a batch of around 200 similar petitions led by Surendra B Jiwrajka versus Omkara Assets Reconstruction held the IBC provisions did not suffer from arbitrariness as contended by the petitioners. "IBC cannot be held to be operating in a retroactive manner in order to hold it violative of the constitution. Thus, we hold that the statute does not suffer from the vices of manifest arbitrariness," the apex court said, while rejecting the petitions of ex-promoters of various other bankrupt companies undergoing insolvency proceedings before the National Company Law Tribunal.

Dismissing their pleas for some form of an adjudicatory process (whether the corporate debtor is also heard) before the appointment of a resolution professional (RP) under Section 97 of the IBC, the CJI said the argument cannot be accepted as “reading an adjudicatory role in section 97 will render Section 99 and Section 100 of the IBC otiose.

It has said that true adjudication only begins at the stage of Section 100 (admission or rejection of application) of the IBC and the SC cannot “rewrite the statute.”

"The role under Section 99 which is ascribed to the RP is that of a facilitator who has to gather relevant information and recommend acceptance or rejection of application. (It) leaves no manner of doubt that resolution professional is not intended to perform an adjudicatory function or to arrive at binding decisions on facts and it is only a recommendation which has no binding force," the court observed.

The top court accepted the Central government’s stand that the IBC provisions imposing a stay on other legal proceedings against corporate debtors was for the benefit of the debtors. "The moratorium is primarily in respect of a debt as opposed to a debtor ... Purpose of moratorium under Section 96 is protective and the Solicitor General was correct that moratorium was to insulate the corporate debtor from the legal action of the debt," it added.

Legal experts representing the lenders hail the SC judgment. "The judgment will now pave the way for smooth functioning of insolvency proceedings against personal guarantors, clearing all the legal hurdles," according to counsel Sanjay Kapur, who represented SBI.

The Supreme Court had in October 2020 today transferred all the personal insolvency cases from various high courts to itself and restrained them from entertaining fresh cases.

Challenging the validity of provisions of Part III of IBC that are applicable to personal guarantors of a corporate debtor, the petitions stated that the impugned provisions were manifestly arbitrary, unconstitutional, and violated fundamental rights. They also alleged that there is a conflict of interest as a resolution professional (RP) named and nominated by a financial creditor files the insolvency petition and is “naturally interested in favourable outcome” of the petition.

At no point is the NCLT statutorily mandated to give the alleged debtor an opportunity to be heard or raise objections on issues of quantum of debt, limitation, illegal claim, abuse of court processes, suppression of material facts, etc, they stated, adding that the impugned provisions susceptible to routine abuse by individuals who may wrongfully claim to be creditors.

[The Economic Times]

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