Bank of Baroda Vs. Farooq Ali Khan & Ors,2025
NCLT under Section 95(1) of the IBC by the appellant, a financial creditor, seeking to commence insolvency proceedings against the guarantor, a personal guarantor, after invoking the personal guarantee in relation to unpaid dues. In an order dated 16.02.2024, the National Company Law Tribunal (NCLT), Bengaluru appointed a Resolution Professional to review the application and file a report in terms of Section 99 of the IBC. Before the Karnataka High Court of Karnataka, Respondent No. 1 had challenged the Impugned order by contending that he had been exonerated of his liability as a personal guarantor. The High Court held in his favour and quashed the insolvency proceedings and the appellant moved the Supreme Court. The Supreme Court, after examining the procedure under the IBC and relevant judicial precedents, set aside the decision of the high court and restored the insolvency proceedings, making it clear that the statutory process under the IBC needs to be allowed to complete without premature interference by the court. The judgment reiterates the settled position that High Courts ought to exercise the prerogative of judicial review in respect of insolvency matters only in rare situations, and refrain from interference before the final adjudicatory process as contemplated in the IBC is concluded.
Facts
This appeal arises out of the use of the judicial review under Article 226 of the Indian Constitution in the context of the personal insolvency proceedings against Respondent No. 1, who is a promoter and director of the Associate Décor Limited, in which the Respondent No. 1 had given a personal guarantee for the borrowing made by the corporate debtor. From 2011-2013 the members of the corporate debtor (later Respondents 3 and 4) applied for approval of a debt restructuring, and starting in 2013, the consortium of lenders issued a formal approval for additional loans, with the involvement of an external syndication agency. On 10.07.2014, Respondent No. 1 entered into a deed of guarantee securing these loans. But with respect to Financial debt repayment default, a Corporate Insolvency Resolution Process (CIRP) was filed against Corporate Debtor. Hence, the appellant, as financial creditors, invoked the personal guarantee and issued demand notice dated 11.08.2020 claiming Rs. 244 crores from Respondent No. 1 and other guarantors. Thereafter, Respondent No. 1 and other guarantors on 14.12.2020 proposed a full and final settlement of Rs. 25 crores. After the debt obligations were not discharged, the appellant issued a demand notice in Form B on 22.02.2021 under Rule 7(1) of the Insolvency and Bankruptcy Rules, 2019 and filed an application under Section 95(1) of the IBC, thereby triggering personal insolvency proceedings. On 16.02.2024, the Adjudicating Authority (NCLT, Bengaluru) appointed a Resolution Professional and directed him to consider the application and submit a report under Section 99 of the IBC before deciding on the objections raised by Respondent No. 1 concerning the enforceability of the personal guarantee, making reference to the Supreme Court’s decision in Dilip B. Jiwrajka v. Union of India .
Respondent No. 1 challenged the NCLT’s order before the Karnataka High Court via writ petition under Article 226, claiming that his liability as personal guarantor was waived and discharged. The High Court found in his favor, observing inter alia that the proceedings in personal insolvency were not maintainable, to the extent that the liability had been waived, and comparing the materials on record relating to the guarantee and the loan, with the judgement in Jiwrajka. It went on to reason that the Supreme Court has never been called upon to deal with a case in which the application itself was not maintainable before the Adjudicating Authority and as a result of such conclusion, the order disposing of the insolvency proceedings against Respondent No. 1 was passed on 19.06.2024. Aggrieved, the appellant carried the battle to the Supreme Court, which was heard by learned Solicitor General, Mr. Tushar Mehta for the appellant; Respondent No. 1 was represented by learned senior counsel, Mr. Shyam Mehta.
Issues
- Whether the Adjudicating Authority correctly followed the statutory procedure under the IBC by appointing a resolution professional and awaiting his report before adjudicating on objections raised by the personal guarantor?
- Whether the High Court erred in bypassing the IBC’s statutory scheme by determining the existence of debt at the writ stage, thereby precluding the statutory mechanism from taking its course and usurping the adjudicatory functions of the Adjudicating Authority?
Judgement
The Supreme Court allowed the appeal, challenged by the order dated 28.05.2024 of the High Court, and restored the appellant’s application in C.P.(IB) No. 139/BB/2022 to the records of the National Company Law Tribunal, Bengaluru. The appeal was ordered to be resumed from the stage of order dated 16.02.2024. Considering the long pendency since 2021, the Supreme Court asked the Tribunal to dispose of the matter as soon as possible.
The Supreme Court reiterated that the provisions under Sections 95 to 100 of the IBC make it a statutory exercise on part of the resolution professional to first scrutinise the application and assess if the debt has been discharged then present a report with a recommendation for admission or rejection. The role of the Adjudicating Authority only begins in this stage when adjudicating on the report under Section 100. Referring to the decision in Jiwrajka, the Court reiterated the position that an appointment of a resolution professional under Section 97 is not an exercise in judicial adjudication, and that the Adjudicating Authority does not need to ascertain jurisdictional facts in this preliminary stage.
The Court found that there was no reason for the High Court to interfere, having interjected prematurely in the statutory process, and making decisions which ought to have been left to the resolution professional and the Adjudicating Authority in accordance with the IBC. It is also important to note that the Supreme Court in Indian Oil Corporation added that High Courts should restrain from exercising their writ jurisdiction, particularly where a statutory tribunal has been constituted to adjudicate such matters.
Author – Ketan Joshi, Senior Associate
Co-Author – Tanya Sharma
