HIGH COURTS DO NOT SUBSTITUTE THEMSELVES AS DECISION MAKING AUTHORITY WHILE EXERCISING JUDICAL REVIEW

[DR.MARIAPPAN GOVINDARAJAN]

Chapter III of Part III of the Insolvency and Bankruptcy Code, 2016 (‘Code’ for short) provides the procedure of insolvency resolution process.  A financial creditor may initiate Corporate insolvency resolution process against a corporate debtor under section 7 of the Code.  The Financial creditor may simultaneously initiate insolvency resolution process against the personal guarantor under section 95(1) of the Code.  The personal guarantor may also entitle to initiate insolvency resolution process under Section 94(1) of the Code.

The Adjudicating Authority, on receipt of application under any of the above sections, will appoint Resolution Professional and direct the Resolution Professional shall  examine the facts of the case, capacity of the corporate debtor in repaying the debt, and submit the report to the Adjudicating Authority within 10 days from the date of receipt of the order appointing him as Resolution Professional.   The report shall include the recommendations of the Resolution Professional as to the admission or rejection of the said application.  The Adjudicating Authority based on the report of the Resolution Professional and objections, if any, of the corporate debtor/financial creditor and it may either allow the application or reject the application.

No judicial determination takes place until the adjudicating authority decides under Section 100 whether to accept or reject the application. The report of the resolution professional is only recommendatory in nature and hence does not bind the adjudicatory authority when it exercises its jurisdiction under Section 100.

Before this stage, no person can approach High Court challenging the application on any ground.  The High Court cannot interdict the proceedings under the Code.  This has been confirmed by the Supreme Court in BANK OF BARODA VERSUS FAROOQ ALI KHAN & ORS. - 2025 (2) TMI 1021 - SUPREME COURT, decided on 20.02.2025, the first respondent is the promoter director of Associate Décor Limited.  The said company is a corporate debtor in the present corporate insolvency resolution process.  The corporate debtor availed loan from the appellant bank and the consortium banks (respondents No. 3 and 4).  The respondent No.1 gave a corporate guarantee for the loan obtained by the corporate debtor.  The respondent No. 1 gave the said guarantee to the loans obtained by the corporate debtor. 

The appellant bank initiated a corporate insolvency resolution process against the corporate debtor before the Adjudicating Authority.  Besides this, the appellant sent a demand notice to the respondent No.1 (‘guarantor’ for reference) on 11.08.2020 invoking the guarantee of the guarantor and other guarantors for the payment of Rs.244 crores.  On 14.02.2020 the respondent and other guarantors offered the appellant Rs. 25 crores as full and final settlement.

The appellant bank, filed an application on 22.02.2021 before the Adjudicating Authority under Section 95(1) of the Code read with Rule 7(2) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for insolvency resolution process for Personal Guarantors to Corporate Debtors) Rules, 2019.  On 16.02.2024 the Adjudicating Authority appointed a Resolution Professional.  The Adjudicating Authority directed the Resolution Professional to submit his report under Section 99 of the Code recommending to the Adjudicating Authority as to the admission or rejection of the application filed by the appellant. 

The guarantor objected this application.  The guarantor filed a writ petition before the Supreme Court, to prohibit the Adjudicating Authority from entertaining the personal insolvency petition against him on the ground that the liability as a personal guarantor stood waived and discharged.  The High Court allowed the writ petition on the ground that the personal insolvency proceedings are not maintainable as the liability of the personal guarantor has been waived.  On the basis of the High Court, the Adjudicating Authority disposed against the respondent No. 1. 

Against the order of the High Court, the appellant filed the present appeal before the Supreme Court. The Supreme Court considered the submissions of the parties to the appeal and analysed the facts of the case and perused all the documents available on record.  The Supreme Court considered to be answered in the appeal is as to whether the High Court exercised its writ jurisdiction correctly to intervene in the insolvency proceedings against the respondent. 

The Supreme Court analysed the provisions of the Code in regard to the insolvency resolution process against individuals (Sections 95 to 100).  The Supreme Court considered that the objections regarding the limitation and waiver of guarantee will be considered only on submission of the report by the Resolution Professional to the Adjudicating Authority.  This process is mandated under section 97 of the Code.  The Adjudicating Authority does not adjudicate any point at this stage and need not decide jurisdictional questions regarding existence of the debt before appointing the resolution professional.  The existence of the debt will first be examined by the resolution professional in his report, and will then be judicially examined by the Adjudicating Authority when it decides whether to admit or reject the application under Section 100. 

The Supreme Court held that the High Courts cannot substituted themselves as the decision-making authority while exercising their power of judicial review.  In this case, the Supreme Court, the proceedings have not reached the stage when the Adjudicating Authority is to determination of the application.  In this case the High Court exercised its jurisdiction even before the submission of the report and recommendations of the Resolution Professional to the Adjudicating Authority as to the admission or rejection of the application.  Thus, the Supreme Court held that the High Court precluded the Adjudicating Authority from performing its adjudicatory functions under the Code. 

The entire rationale behind appointing a resolution professional under Section 97 is to facilitate this determination by the Adjudicating Authority. The High Court ought not to have interdicted the proceedings under the statute and assumed what it did while exercising jurisdiction under Article 226 of the Constitution.

The Supreme Court set aside the order of the High Court and restored the application of the appellant to the record of National Company Law Board, Bengaluru.  The NCLT shall proceed from the stage of passing of the order dated 16.02.2024.