Supreme Court Validates IBC Provisions for Personal Guarantors, Rejects Interpretation of Adjudicatory Role in Section 97

In a landmark ruling, the Supreme Court, on Thursday, November 9, affirmed the constitutionality of the Insolvency and Bankruptcy Code (IBC) provisions pertaining to the Insolvency Resolution of Personal Guarantors, which were introduced through amendments in 2019.

The Court’s judgment maintains that these provisions (Section 95 to 100 of the IBC) cannot be deemed unconstitutional for their failure to provide personal guarantors with an opportunity for a hearing before creditors’ insolvency petitions are admitted against them, and an automatic moratorium takes effect upon the filing of such petitions.

The application of principles of natural justice is context-dependent and may vary in application according to the circumstances. The statute incorporates sufficient safeguards to regulate the role of the Resolution Professional. The legislature ensures that recommendations are made after considering the debtor’s information and explanations.

The Resolution Professional’s role is not adjudicatory in nature. The contention that the RP possesses adjudicatory powers under Section 99 is incorrect; rather, their role is that of a facilitator responsible for gathering relevant information and making recommendations for application acceptance or rejection.

The moratorium primarily relates to a debt rather than an individual debtor. Its purpose under Section 96 is protective, serving to shield the corporate debtor from legal actions arising from the debt.

These provisions are based on intelligible distinctions between individual debtors, partnerships, and corporate debtors.

The bench initiated hearings on the series of petitions on Tuesday, November 7. Following the completion of the hearings, the Chief Justice of India commenced dictating the judgment yesterday afternoon, and it was concluded in open court today.