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Supreme Court Upholds Vital Insolvency and Bankruptcy Code Provisions: Landmark Verdict on Personal Guarantors’ Insolvency Resolution

09-11-2023 : The Supreme Court delivered a landmark verdict on Thursday, affirming the validity of crucial provisions within the Insolvency and Bankruptcy Code (IBC). These provisions, subject to legal challenges, were contested on the grounds of potential violations of fundamental rights, particularly the right to equality for individuals facing insolvency proceedings.

A bench comprising Chief Justice D Y Chandrachud and justices J B Pardiwala and Manoj Misra upheld the constitutionality of specific amendments introduced to the IBC in 2019, specifically relating to the Personal Guarantors’ Insolvency Resolution. The decision deemed valid certain IBC provisions that did not afford personal guarantors an opportunity for a hearing before creditors’ insolvency petitions were admitted for consideration in cases of default in repayment.

Chief Justice Chandrachud emphasized that the IBC should not be perceived as operating retroactively, asserting that it does not violate the Constitution and is free from the flaws of manifest arbitrariness. The court underscored its limitation in rewriting legislative language.

This verdict addressed a total of 391 petitions challenging various IBC provisions, including sections 95(1), 96(1), 97(5), 99(1), 99(2), 99(4), 99(5), 99(6), and 100. These sections pertain to different stages of insolvency proceedings against defaulting entities, encompassing the right of personal guarantors to a hearing before the initiation of insolvency proceedings.

While the detailed judgment is yet to be uploaded, the court’s decision comes after consolidating and reviewing petitions that raised concerns about the constitutionality of IBC provisions. Notably, the court acknowledged the need for a comprehensive pronouncement on the legal issues raised across these petitions.

One of the petitions, filed by R Shah through advocate Anne Mathew, argued that the impugned provisions of the IBC were inherently violative of natural justice principles and fundamental rights such as the right to livelihood, right to trade and profession, and the right to equality. The petition particularly criticized the lack of an opportunity for a hearing for alleged personal guarantors before the appointment of a resolution professional and the imposition of a moratorium on their assets.

This Supreme Court ruling marks a significant development in clarifying and upholding key elements of the Insolvency and Bankruptcy Code, contributing to the legal framework governing insolvency proceedings in India.