Adjudicating Authority Is Not Bound By The Recommendation Of The Resolution Professional Under Section 99 Of The Insolvency And Bankruptcy Code, 2016 : Karnataka High Court

Background:

An application was filed before the Hon'ble National Company Law Tribunal, Bangalore ("NCLT") by the Financial Creditor (Piramal Capital and Housing Finance Limited)* through the Resolution Professional under Section 95 of the Code for initiation of personal insolvency resolution process against the Personal Guarantor.

The Hon'ble NCLT confirmed the appointment of the Resolution Professional under Section 97 of the Code. The said appointment of the Resolution Professional was challenged by the Personal Guarantor by filing a writ petition before the Karnataka High Court, seeking the following:

• Declaration that Section 95(1) of the Code is unconstitutional to the extent that it permits the filing of applications through the resolution professional.

• Declaration that Section 99 and 100 of the Code is unconstitutional being violative of Article 14 of the Constitution.

Arguments

The Petitioner contended that under Section 95 of the Code, an application can be filed to initiate insolvency resolution by a creditor through a Resolution Professional. It was argued that the same Resolution Professional who files the application, is required to examine his own application and submit a report for its rejection or approval. Thus, the entire procedure is unconstitutional, as no man can be the judge of his own cause.

The Financial Creditor on the other hand submitted that the process prescribed under Section 95 to 100 of the Code, was a time bound process, which was fair and reasonable with sufficient safeguards. Reliance was placed on the case of John Zachariah and Ors. v. UOI & Ors., 2022 SCC OnLine Ker 849 where the Hon'ble Kerala High Court upheld the constitutional validity of Sections 95, 97, 99 or 100 of the Code.

Courts Observation:

The Karnataka High Court relying upon the judgment of the Supreme Court in Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta (2021) 7 SCC 209 rejected the petition as it found no merit in the challenge. The Court held that the process contemplated under Sections 95 to 100 is a time bound process, which requires the Resolution Professional to firstly give reasons in support of his recommendation. Secondly, the role of the Resolution Professional is limited to giving his recommendation and there is no element of adjudication on the part of the Resolution Professional. It is Adjudicating Authority which takes the final decision on whether the application is to be admitted or rejected, and it is not bound by the recommendation of the Resolution Professional.

The High Court further rejected the contention of the Petitioner that the appointment of the same Resolution Professional through which the application was filed before the NCLT was arbitrary. The Court observed that the Code provides certain eligibility criteria which a Resolution Professional must possess, and there is a Code of Conduct in place which governs their actions. The Court went on to observe that a Resolution Professional has no personal interest in the application.

In light of the aforesaid, the court dismissed the petition filed by the Personal Guarantor.

*The Financial Creditor was represented by a team from Dua Associates comprising of Angad Varma, Prashant Kumar, Toyesh Tewari, Nikhil Mehndiratta and Mahima Singh

Citation: 2022 LiveLaw (Kar) 151