The Insolvency and Bankruptcy Board of India (hereinafter, IBBI) had notified Part III of the Insolvency and Bankruptcy Code, 2016 (hereinafter, IBC) vide gazette notification no. S.O. 4126 (E) on 15th November, 2019. Part III of IBC now consists of chapters III, IV, V, VI, VII or simply, sections 94 to 187. The following piece is concerned with Chapter III (Insolvency Resolution for Individuals and Partnership Firms), particularly sections 95 to 101. Further, on 15th November, 2019 the IBBI (Application to adjudicating authority for bankruptcy process for personal guarantors to corporate debtors) Regulations, 2019 was notified vide gazette notification no. G.S.R. 855 (E).
As soon as Part III and regulations concerned were notified, various writ petitions were filed in High Courts against sections 95, 96, 99, 100 and 101 as they applied to the personal guarantors of the corporate debtors. Consequently, the IBBI filed a transfer petition before the Supreme Court under Article 139-A read with Article 142 of the constitution. The Supreme Court allowed the transfer petition to avoid any confusion as the IBC was at a “nascent stage”.[1] A three-judge bench, led by then Hon’ble Chief Justice of India Dr. D.Y. Chandrachud, and consisting of Justice J.B. Pardiwala and Justice Manoj Mishra was constituted to ascertain if section 95 to 101 violated Article 14 and Article 21, among other issues.
In this judgement, the Supreme Court has laid down clarity on the following aspects: (a) If the test of intelligible differentia is being satisfied vis-à-vis the scheme under Part II of the code and Part III of the code; (b) the scope of commencement and validity of the adjudicatory function of the adjudicatory authority (hereinafter, AA); (c) the purpose and relevance of interim moratorium under Section 96 once an application is filed under Section 94 or Section 95; and (d) If the procedure under Sections 95 to 100 are against the principles of natural justice. For the sake of simplicity and flow, I will explain the aspects in the same order I have mentioned in this paragraph.
The Supreme Court found a clear and reasonable intelligible differentia for treating insolvency of corporate entities under Part II of the IBC differently from the insolvency of individuals and partnerships under Part III. The corporate entities have fundamentally distinct structures, stakeholders (like financial and operational creditors), and resolution needs compared to individuals or partnerships. Recognizing this inherent difference in the structure of the entities concerned, the Court highlighted the key difference between Part II and Part III. Part II sets out specific triggers and procedures (like applications by distinct creditor types or the corporate debtor itself) which are suited for companies. On the other hand, Part III establishes a different framework (involving resolution professionals differently and requiring their report before adjudication) which is appropriate for individuals and partnerships. I believe this tailored approach, based on the essential nature of the entities involved, is logical and fair, which essentially means that the two different schemes under Part II and Part III is in consonance with the test laid down under Article 14.
The Supreme Court clarified that under Part III, the role of the AA begins once the report under section 99 has been filed. The AA has to accept or reject the application within 14 days of its submission as required by section 100(1), though the report is purely recommendatory and the AA is not bound by it. If the AA admits the application, it can instruct the debtor and creditor to negotiate, though the creditors may be entitled to file for bankruptcy if the AA rejects the application on grounds of intention to defraud the creditors or the Resolution Professional (hereinafter, RP).
The Supreme Court highlighted that the moratorium under Section 101(2)(c), particularly restraining asset transfers, operates only post-admission under Section 100, unlike Section 96(1)(b) applicable earlier in the process. This analysis, demonstrates that the AA’s true adjudicatory function commences under Part III specifically after the Section 99 report is submitted. The Supreme Court observed that the legislature deliberately calibrated three key elements based on an intelligible differentia between corporate (Part II) and non-corporate (Part III) insolvency: (i) the RPs preliminary role, (ii) the timing of the moratorium’s imposition, and (iii) the stage at which the adjudicating authority actively intervenes.
The Supreme Court held that the interim moratorium under Section 96 of the IBC automatically takes effect the moment an application for insolvency resolution is filed for an individual or partnership under Section 94 by the debtor or Section 95 by the creditor. Its sole purpose is to provide immediate, temporary protection specifically “in respect of any debt” by automatically staying any pending legal actions or proceedings aimed at recovering those debts under Section 96(1)(b)(i) and preventing the initiation of any new such actions under Section 96(1)(b)(ii). Crucially, this moratorium focuses only on restraining debt collection lawsuits; it does not freeze the debtor’s general assets or stop non-debt related legal actions. This automatic freeze ceases as soon as the AA decides whether to admit or reject the application under Section 100. The Supreme Court contrasted the moratorium under Part III with the broader corporate moratorium under Section 14 i.e., Part II, which requires a specific court order and stops all legal actions against the corporate debtor along with freezing of assets. The Supreme Court stated that purpose of Section 96’s limited interim moratorium is “protective” i.e., to prevent disruptive individual creditor lawsuits for specific debts during the short window while the AA processes the insolvency application.
The Supreme Court categorically rejected the contention that the procedure under Sections 95 to 100 of the IBC violates principles of natural justice, affirming its constitutionality. The Court began by reiterating the fundamental principles of natural justice- the right to be heard i.e., audi alteram partem and the rule against bias i.e., nemo judex in causa sua, emphasizing that these flexible principles apply universally to any state action be it judicial, quasi-judicial, or administrative. Applying this framework to Part III, the Supreme Court clarified that the RPs role under Section 99 is purely facilitative and investigative. The RP collates information and submits a report to the AA but the AA is not bound by such report as previously stated. Consequently, the rigorous demands of a formal hearing do not apply at this preliminary stage, though the process inherently involves debtor engagement. Crucially, the Supreme Court held that the true adjudicatory function commences only under Section 100, where the AA must decide within fourteen days whether to admit or reject the application. While Section 100 does not explicitly mandate a hearing, the Court stated that this requirement can be read into the provision as a necessary implication to safeguard constitutional validity and cited Swadeshi Cotton Mills v. Union of India,[2] Mangilal v. State of M.P.,[3] and Manohar v. State of Maharashtra,[4] as legal precedents to further its interpretation on reading in such a requirement. It can be assumed that the AA will set a structure in place to comply with the principles of natural justice, the structure can include providing the debtor with copies of the application and all relevant documents, afford a meaningful opportunity to be heard, consider evidence and submissions, and pass a reasoned order before admitting or rejecting the application. This ensures compliance with audi alteram partem at the decisive stage where rights are conclusively affected, such as triggering the moratorium under Section 101 or enabling creditor negotiations under Section 100(2).
Finally, the Supreme Court observed that IBC governs insolvency procedures for ongoing obligations and has validly replaced prior statutes like the Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920. It further held that Section 95(2) which permits applications against partners or firms for partnership debts does not restrict the general right of creditors to apply under Section 95(1), and that applying Part III to pre-existing debts or guarantees is not unconstitutional.
To conclude, the Supreme Court’s judgment in Dilip B. Jiwrajka vs. Union of India, (2024) 5 435, decisively upholds the constitutionality of Sections 95 to 101 of the IBC, pertaining to the insolvency resolution process for individuals and partnership firms. The Court addressed key challenges, finding no violation of Articles 14 or 21 of the Constitution. Central to this validation was the recognition of a clear intelligible differentia between corporate debtors governed under Part II of the IBC and individuals/partnerships under Part III. The distinct structures, stakeholders, and resolution needs of these entities necessitate tailored procedures, satisfying the Article 14 test. The Court clarified the adjudicatory framework, establishing that the AA’s substantive role commences only after the RP submits the report under Section 99. While the RP’s function under Section 99 is preliminary, investigative, and recommendatory, the AA’s decision under Section 100 to admit or reject the application within fourteen days marks the true adjudication stage. Crucially, the Supreme Court read the principles of natural justice specifically, the right of audi alteram partem as a necessary implication into Section 100, ensuring fairness at the point where rights are conclusively affected. Regarding the interim moratorium under Section 96, the Court confirmed its automatic application upon filing an application under Sections 94 or 95. However, its scope is strictly limited to providing temporary protection “in respect of any debt,” staying or preventing debt recovery actions specifically. This targeted, automatic freeze contrasts with the broader, court-ordered moratorium under Part II and ceases upon the AA’s decision under Section 100. Finally, the Court affirmed the validity of applying Part III to pre-existing debts and guarantees and its role in replacing prior insolvency statutes. Overall, the judgment provides crucial clarity, affirming Parliament’s competence in designing a distinct, constitutionally sound insolvency framework for non-corporate entities under the IBC.
*Law Graduate, SLS Pune
[1] Paragraph 6, IBBI v. Lalit Kumar Jain ., 2020 10 SCC 703
[2] Swadeshi Cotton Mills v. Union of India, (1981) 1 SCC 664
[3] Mangilal v. State of M.P., (2004) 2 SCC 447
[4] Manohar v. State of Maharashtra, (2012) 13 SCC 14