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Automatic Imposition of Interim Moratorium is Violation of Principles of Natural Justice
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Whether automatic imposition of interim moratorium under Section 96 of IBC is contrary to principles of Natural Justice as it does not permit the personal guarantor an opportunity to be heard by the Adjudicating Authority.
The Insolvency and Bankruptcy Code (IBC) is a comprehensive legal framework that establishes a time-bound process for addressing the insolvency of individuals and businesses. An important aspect of the IBC is the automatic application of an interim moratorium under Section 96. This provision imposes an interim moratorium on all debts owed by a personal guarantor as soon as an insolvency application is filed by a creditor under Section 94 or 95, without allowing the personal guarantor an opportunity to present his case.
Initially, the provisions of Part III of the Insolvency and Bankruptcy Code (IBC) that pertain to insolvency resolution and bankruptcy for individuals and partnership firms were not implemented simultaneously with the other parts of the IBC. Part III also covers individuals who have provided personal guarantees to creditors. Therefore, personal guarantors of corporate debtors were not included in any resolution process involving a corporate debtor that was being conducted by the National Company Law Tribunal (NCLT), a quasi-judicial body responsible for addressing issues related to companies in India.
The central government issued the Insolvency and Bankruptcy (Application to Adjudicatory Authority for Insolvency Resolution Process for Personal Guarantee to Corporate Debtors) Rules in November 2019, which allowed creditors to file claims against personal guarantors under the National Company Law Tribunal or Debt Recovery Tribunal using the Insolvency and Bankruptcy Code. These rules made provisions in Part III of the Code (Sections 79-187) applicable to personal guarantors.
According to Section 5(22) of the Insolvency and Bankruptcy Code of 2016, a "personal guarantor" is defined as "an individual who is the surety in a contract of guarantee to a corporate debtor". In the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Settlement Procedure for Personal Guarantors to Corporate Debtors) Rules, 2019, a "guarantor" is defined as "Guarantor means a debtor who is a personal guarantor to a corporate debtor & in respect of whom guarantee has been invoked by the creditor and remains unpaid in full or part."
According to Part III of the Insolvency and Bankruptcy Code (IBC), the insolvency resolution process for personal guarantors can be started through the submission of an application under Sections 94 or 95 of the IBC in following cases-
Ø A debtor who has defaulted on it's debts may personally or through a resolution professional, apply to the adjudicating authority to initiate the insolvency resolution process by submitting an application.
Ø A creditor, either individually or jointly with other creditors, or through a resolution professional, may apply to the adjudicating authority to initiate the insolvency resolution process by submitting an application.
An interim moratorium on all debts will take effect as soon as an application is filed under either Section 94 or 95 of the IBC. The adjudicating authority has the authority to accept an application filed under Sections 94 or 95 of the IBC only after a resolution professional, as specified in Section 97, submits a report in accordance with Section 99. Upon this, the interim moratorium will no longer be in effect, and the moratorium specified in Section 101 will be implemented. During this moratorium, the debtor is prohibited from transferring, alienating, encumbering, or disposing of any of their assets or their legal rights or beneficial interests in those assets. The moratorium under Section 101 will end either at the end of 180 days from the date the application was admitted or on the date the adjudicating authority issues an order on the repayment plan under Section 114, whichever occurs first.
In India, the principles of natural justice have a long history and are firmly established in the country's constitutional framework. Article 14 of the Indian Constitution guarantees the right to be heard, known as "Audi alteram partem," to any individual who may be negatively affected by an administrative direction. The Supreme Court of India has stated in the case of Maneka Gandhi v. Union of India that Article 14 of the Constitution incorporates the principle that natural justice is an essential aspect of the constitutional guarantee of equality, and any directive that denies a person the opportunity to be heard lacks natural justice. However, according to Section 96 of the IBC, 2016, an interim moratorium is automatically imposed on a personal guarantor as soon as a creditor files an application under Section 95 of the IBC, without any consideration by a quasi-judicial or judicial authority.
Recently, the provisions of Sections 95, 96, 97, 99, and 100 of Part III of the Insolvency and Bankruptcy Code (IBC), which govern the insolvency resolution process for personal guarantors, have been challenged in the Supreme Court in "Anil Dhirajlal Ambani vs Union of India-WP(c) 519/22" case. The petitioner argued that these provisions are manifestly arbitrary, unconstitutional, and violate the fundamental rights protected by Sections 14, 19, and 21 of the Indian Constitution. The petitioner, Ambani personally guaranteed two loans worth nearly INR 5,65,00,00,000 and 6,35,00,00,000 to his companies Reliance Communications and Reliance Infratel Ltd (RITL) in the year 2016. The loan accounts were classified as non-performing assets (NPA) in 2017. The petitioner claims to be harmed by the unlawful and arbitrary actions of the State Bank of India, including the issuance of a demand notice on February 24, 2020 and the subsequent filing of an insolvency application under Section 95 of the Insolvency and Bankruptcy Code. The petitioner argued that the process for admission or rejection of applications filed under Sections 94 or 95 of the Insolvency and Bankruptcy Code (IBC) is ex-facie arbitrary and violates his rights under Article 14 of the Indian Constitution. It has been argued that personal guarantors are not given the opportunity to present their case or dispute the application during the initiation of the insolvency resolution process, or before the imposition of an interim moratorium. Additionally, the affected party is not given the right to raise objections to the application based on potential abuse of process, such as forum shopping or the suppression of material facts. The case is currently pending before the Supreme Court.
References
https://carajput.com/learn/overview-on-personal-guarantor-as-per-ibc-code.html
https://www.scobserver.in/cases/rights-of-personal-guarantors-in-insolvency-proceedings/
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