SC Upholds Constitutional Validity of Personal Guarantors’ Insolvency Provisions Under IBC

Dilip B Jiwrajka Vs Union of India & Ors (Supreme Court of India)

The Supreme Court of India adjudicated a batch of 384 writ petitions under Article 32 of the Constitution challenging the constitutional validity of Sections 95 to 100 of the Insolvency and Bankruptcy Code, 2016 (IBC), which govern the Insolvency Resolution Process (IRP) for individuals and partnership firms, including personal guarantors to corporate debtors.

Material Facts & Legal Background

• Part III, Chapter III of the IBC (Sections 94 to 120) deals with the IRP for individuals and partnership firms.
• On November 15, 2019, the Ministry of Corporate Affairs issued a notification bringing into force specific provisions of Part III relating to personal guarantors to corporate debtors.
• Under Section 60 (as amended by Act 26 of 2018), the National Company Law Tribunal (NCLT) serves as the Adjudicating Authority for matters involving the bankruptcy or insolvency of corporate or personal guarantors of a corporate debtor.
• Section 94 enables a debtor to apply for initiating the IRP, while Section 95 enables a creditor to apply for IRP against a debtor/guarantor.
• Upon filing an application under Section 94 or 95, an interim moratorium comes into effect under Section 96, and the Adjudicating Authority appoints a Resolution Professional (RP) under Section 97.
• Under Section 99, the RP examines the application, may seek information, and submits a report to the Adjudicating Authority recommending the approval or rejection of the application.
• Under Section 100, the Adjudicating Authority decides to either admit or reject the application within 14 days of receiving the RP’s report.

Petitioners’ Submissions

• The petitioners argued that Sections 95 to 100 violate Article 14 of the Constitution due to a lack of judicial determination and natural justice at the threshold stage.
• They contended that a judicial body must determine the existence and continuity of a debt (a jurisdictional fact) before an RP is appointed or before the RP takes action under Section 99.
• It was submitted that automatic interim moratorium, automatic appointment of an RP, and extensive information-seeking powers under Section 99(4) (including from third parties) entail serious civil consequences without prior judicial application of mind or an opportunity for a hearing.
• The petitioners argued that natural justice must be read into Section 97(5) and Section 99, asserting that personal guarantors are improperly denied an adjudicatory hearing at the initial stage, unlike corporate debtors under Sections 7 and 9 of Part II.

Respondents’ Submissions

• The Union of India, State Bank of India, and other respondents contended that the scheme under Part II (Corporate Insolvency Resolution Process – CIRP) and Part III (Individual/Guarantor Insolvency) are structurally distinct based on an intelligible differentia.
• A Section 14 moratorium under Part II freezes management powers and imposes an embargo on alienation of assets, justifying early judicial intervention under Sections 7 and 9. Conversely, the Section 96 interim moratorium under Part III operates on the debt to insulate the debtor from legal proceedings, causing no prejudice or restraint on asset transfers.
• The RP’s role under Section 99 is purely non-adjudicatory, statutory, and administrative/facilitative—designed to gather data, seek proofs/explanations, and submit a non-binding report with recommendations.
• The debtor/guarantor is provided adequate participation under Section 99 (e.g., proving repayment under Section 99(2) or providing explanations under Section 99(4)).
• Complete judicial adjudication and full compliance with principles of natural justice occur at the stage of Section 100, where the Adjudicating Authority independently decides whether to admit or reject the application. Inserting a judicial hearing prior to Section 100 would disrupt the strict, time-bound framework of the IBC.

Court’s Findings & Decision

• The Supreme Court upheld the constitutional validity of Sections 95 to 100 of the IBC.
• The Court held that the scheme of Chapter III of Part III maintains a clear distinction between the investigative/facilitative role of the RP under Section 99 and the adjudicatory role of the Adjudicating Authority under Section 100.
• The RP does not possess adjudicatory powers and only compiles facts and submits a non-binding report. The interim moratorium under Section 96 is protective in nature.
• Absolute compliance with natural justice principles is provided at the adjudicatory stage under Section 100 before any adverse legal or civil order is passed.
• The applications for condonation of delay in refiling the writ petitions were allowed.

FULL TEXT OF THE SUPREME COURT JUDGMENT/ORDER