Adjudicating Authority Cannot Enter Into Merits At S. 95 Application Stage Before Report Of RP Is Submitted U/S 99 Of IBC: NCLAT

Brief Facts

This Appeal by the Financial Creditor has been filed challenging order dated 21.02.2024 passed by National Company Law Tribunal by which order the Adjudicating Authority allowed IA No.5501 of 2023 filed by Personal Guarantor (Respondent herein) and dismissed Section 95 application filed by the Appellant – Central Bank of India.

Central Bank of India sanctioned Cash Credit Facility of Rs.75 crores to the Corporate Debtor - M/s. Parekh Aluminex Ltd. A restructuring package to the Corporate Debtor was approved by the Corporate Debts Restructure (“CDR”) Empowered Group on 24.06.2013 and 25.07.2013 and consequently the Appellant sanctioned Working Capital Facilities to the Corporate Debtor.

On 30.09.2013, the Appellant approved the CDR package for credit facilities of the Corporate Debtor of Rs.134.74 crores. The Respondent – Personal Guarantor executed a Deed of Guarantee dated 10.04.2014 and guaranteed the repayment of the credit facility availed by the Corporate Debtor from the Appellant as well as the other lenders.

Corporate Debtor committed default in repayment, hence, the Appellant classified loan account of the Corporate Debtor as NPA on 31.12.2015. The Respondent claimed to have resigned as a Director of the Corporate Debtor on 28.04.2016.On 23.11.2017, the Adjudicating Authority admitted a Section 7 Application against the Corporate Debtor. An order of liquidation was passed on 07.10.2023 against the Corporate Debtor.

A Demand Notice in Form-B was issued to the Respondent on 18.12.2020 and called up on him to pay a sum of Rs.354,09,04,055/-.An application under Section 95 was filed by the Appellant on 14.12.2021 against the Personal Guarantor for financial debt of Rs.354,09,05,055/- as on 18.12.2020.

On 27.11.2023, the Personal Guarantor filed IA No.5501 of 2023 praying for dismissal of Section 95 application raising various grounds, including that Respondent was not the debtor or guarantor.The matter was heard thereafter and by the impugned order dated 21.02.2024, the Adjudicating Authority dismissed the Company Petition (IB)/420(MB)2022 and allowed IA No.5501 of 2023. This Appeal by Central Bank of India has been filed challenging the said order.

Contentions

The appellant submitted that In Section 95 application filed by the Appellant, the Adjudicating Authority was required to appoint a Resolution Professional (“RP”) under Section 97 of the IBC and without appointing the RP and without giving an opportunity to RP to submit a Report as contemplated under Section 99 of the IBC, the Adjudicating Authority ought not to have proceeded to adjudicate various issues raised by the Personal Guarantor.

Reliance was placed on the Supreme Court judgment in Dilip B. Jiwrajka v. Union of India – (2024) wherein it was held that adjudicatory issues in Section 95 application had to be undertaken by the Adjudicating Authority only at the stage of hearing of the application of Section 100.

Per contra, the respondent submitted that the Central Bank of India had not raised any objection regarding jurisdiction of Adjudicating Authority in the reply filed to IA No.5501 of 2023. When the Central Bank of India had not raised any objection with respect to the jurisdiction of the Adjudicating Authority, it has waived its right to raise any objection on the basis of law laid down by the Hon'ble Supreme Court in Dilip B. Jiwrajka's case.

That Deed of Guarantee dated 10.04.2024 executed by Personal Guarantor in favour of the Consortium of Bank, including the Central Bank was a conditional/ contingent guarantee. The guarantee could become effective only if the CDR package was sanctioned and implemented in full. The Deed of Guarantee never came into force.

NCLAT's Analysis

The tribunal, at the outset, noted the scheme of the IBC and observed that Section 95 of the IBC provides for an application by a creditor to initiate insolvency resolution process. Section 96 provides for interim- moratorium and Section 97 deals with appointment of RP.

The tribunal further referred to the Supreme Court judgment in Dilip B. Jiwrajka v. Union of India – (2024) wherein the question before the court was whether at the time when Adjudicating Authority appoint the RP under Section 97, sub-section (5), the Adjudicating Authority should be required to decide the jurisdictional questions.

The Apex Court while rejecting above submission observed that the appointment of a resolution professional is for the purpose of a facilitative exercise which is contemplated by Section 99 which eventually ends in a report either recommending the acceptance or rejection of the application. Bearing in mind the statutory scheme, it would be impermissible for this Court to allow for the adjudicatory intervention of the adjudicating authority in adjudicating what is described as a jurisdictional question at the stage of Section 97(5).

The tribunal further noted the facts of the present case and observed that the Adjudicating Authority has not even appointed the RP and the order impugned has been passed before the stage of appointment of RP and before even any Report could be called. The objections raised by Personal Guarantor in its IA No.5501 of 2023 were considered and findings has been returned by the Adjudicating Authority wherein Section 95 application was dismissed.

The tribunal further observed that law declared by the Hon'ble Supreme Court is law of the land, which needs to be followed by all concerned, even if the judgment was not cited before the Adjudicating Authority, the Appellant can very well rely on the judgment in the present Appeal, which has been filed challenging the impugned order.

The tribunal while rejecting the contention of the respondent with respect to waiving the right to object by the petitioner observed that In the facts of the present case and sequence of events, the Appellant has not waived any of its rights in reference to Section 95 application. Filing of the application – IA No.5501 of 2023 was an act of Personal Guarantor and it was the Personal Guarantor, who raised objection to section 95 application, without even appointment of RP. When the Adjudicating Authority directed the Financial Creditor to file a reply to the application, filing of the reply by the Appellant to IA No.5501 of 2023, cannot be termed as a waiver of any of its rights.

The tribunal while referring to the Supreme Court judgment in Dilip B. Jiwrajka v. Union of India – (2024) observed that waiver is always related to some consideration on the basis of which a party consciously abandons the existing legal right. In the present case, neither any consideration is proved, nor there is any conscious abandonment of any of its rights by the Appellant. Hence, the submission of learned Senior Counsel for the Respondent that Appellant is precluded to raise the ground to challenge the order of the Adjudicating Authority on the ground of waiver, is misconceived.

The tribunal referred to the Supreme Court judgment in Tata Chemicals Ltd. vs. Commissioner of Customs (Preventive) Jamnagar, 2015 wherein it was held that there can be no estoppel against law, if the law requires that something be done in a particular manner.

Based on the above, the tribunal concluded that Adjudicating Authority committed error in considering the objections raised by the Respondent on the merits of the application under Section 95 filed by the Central Bank of India at the stage when RP was not even appointed. The Adjudicating Authority proceeded to enter into adjudicatory issues, which can be taken by the Adjudicating Authority only at the time of hearing of section 95 application under Section 100, as is now the law declared by the Hon'ble Supreme Court in Dilip B. Jiwrajka's case.

Accordingly, the present appeal was allowed.

Case Title:Central Bank of India Versus Deepen Arun Parekh

Case Reference: Company Appeal (AT) (Insolvency) No. 697 of 2024

Judgment Date: 11/11/2024

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