The Supreme Court upheld the validity of Section 101 of the IBC and addressed concerns over post-moratorium creditor actions in individual insolvency.
The Supreme Court Bench comprising CJI Sanjiv Khanna and Justice Sanjay Kumar addressed a writ petition along with linked interlocutory applications and observed that Section 101 of the Insolvency and Bankruptcy Code, 2016, which prescribes a 180-day moratorium period for individual insolvency, is constitutionally valid. The Court affirmed that the moratorium for individual insolvency is distinct from corporate insolvency and serves a different purpose. While dismissing the writ petition, the Court issued notice on the limited concern that post-moratorium creditor actions might undermine the insolvency framework.
The Supreme Court dismissed the writ petition challenging the constitutional validity of Section 101 of the Insolvency and Bankruptcy Code, 2016, which prescribes an outer limit of 180 days for the operation of the moratorium. The Court found no merit in the petition and emphasized that the case pertained to individual insolvency rather than corporate insolvency. It distinguished the objectives of moratoriums in both contexts, noting that while corporate insolvency proceedings aim to examine the possibility of reviving the corporate debtor through resolution plans, individual insolvency serves a different purpose.
The Court acknowledged the petitioner’s concern that upon the conclusion of the moratorium period, one of the creditors might gain an undue advantage over others, thereby undermining the fundamental objective of the insolvency framework. In light of this submission, the Court issued notice on this limited issue in the civil appeal, making it returnable in the week commencing April 28, 2025. The notice was directed to be served through all modes, including dasti service.
This ruling does not set a broad precedent on the constitutional validity of Section 101 of the Insolvency and Bankruptcy Code, 2016, as the Supreme Court outrightly dismissed the challenge. However, it does clarify the distinction between individual and corporate insolvency, reinforcing that the moratorium in individual insolvency serves a different purpose than in corporate insolvency.
Additionally, the Court's acknowledgment of the concern that one creditor might gain an unfair advantage post-moratorium suggests that similar issues could be considered in future cases. Since the Court issued notice on this limited aspect in the civil appeal, the final outcome of that appeal may provide further guidance on how courts should address such concerns in individual insolvency matters.
The ruling does not explicitly suggest that individual insolvency cases may require different moratorium durations in the future. However, by distinguishing the objectives of moratoriums in individual and corporate insolvency, the Supreme Court implicitly acknowledged that their treatment under the Insolvency and Bankruptcy Code (IBC), 2016, serves different purposes. The Court upheld the 180-day moratorium period prescribed under Section 101 for individual insolvency without indicating any need for modification.
That said, the Court’s decision to issue notice on the concern that a creditor might take undue advantage once the moratorium ends suggests that this aspect warrants further examination. If the civil appeal results in specific directions addressing post-moratorium creditor actions, it could lead to discussions on whether the current moratorium duration under individual insolvency needs reconsideration. However, as of now, the ruling does not alter the prescribed timeframe but leaves room for potential future deliberations.
While the ruling does not directly call for legislative changes to the Insolvency and Bankruptcy Code (IBC) regarding individual insolvency, it raises a critical issue that could influence future legislative discussions. By distinguishing the purpose of moratoriums in individual and corporate insolvency and acknowledging concerns about a creditor taking undue advantage post-moratorium, the Court has highlighted a potential gap in the current framework.
If the civil appeal results in specific judicial directions or observations on this issue, it may prompt policymakers to reconsider whether additional safeguards or adjustments to the moratorium duration for individual insolvency are necessary. Lawmakers and regulators might also take cues from this case to examine whether the existing 180-day limit under Section 101 sufficiently balances the interests of debtors and creditors in individual insolvency cases. However, any legislative change would depend on broader discussions within the government, insolvency regulators, and stakeholders in the insolvency ecosystem.
The petitioner, Mukund Choudhary, was granted liberty to present this order before the National Company Law Tribunal for appropriate directions.
Ms. Purti Gupta, AOR, Ms. Henna George and Ms. Sunidhi Sah, Advocates represented the Appellant.
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