The High Court erred in interdicting personal insolvency proceedings at a premature stage and failed to allow the statutory process under the IBC to take its course.
On 20-02-2025, the Supreme Court Bench of Justice Pamidighantam Sri Narasimha and Justice Manoj Misra heard an appeal and held that the High Court erred in invoking its writ jurisdiction under Article 226 to interdict personal insolvency proceedings at a premature stage, as the statutory scheme under the IBC mandates that objections regarding the existence of debt and other factual disputes be adjudicated by the Adjudicating Authority only after the resolution professional submits his report under Section 99. The Court reaffirmed that judicial review is not excluded but should not override the specialized statutory framework to ensure that the insolvency process follows its prescribed course.
In the present appeal, leave had been granted, wherein the Supreme Court considered whether the High Court had justifiably invoked its writ jurisdiction under Article 226 of the Constitution to interdict personal insolvency proceedings initiated against respondent no. 1 under Section 95 of the Insolvency and Bankruptcy Code, 2016 (IBC). The proceedings before the High Court arose from an order dated 16.02.2024 passed by the Adjudicating Authority, appointing a resolution professional and directing him to examine the application and submit a report under Section 99 of the IBC. After considering the relevant facts and legal submissions, the Supreme Court set aside the High Court’s order and restored the proceedings before the Adjudicating Authority.
Respondent no. 1, a promoter and director of Associate Décor Limited had entered into a deed of guarantee on 10.07.2014 to secure various loans availed by the corporate debtor from the appellant and a consortium of banks. Following defaults by the corporate debtor, the appellant invoked the personal guarantee on 11.08.2020, demanding Rs. 244 crores. In response, respondent no. 1 and other guarantors offered Rs. 25 crores as full and final settlement by letter dated 14.12.2020. Thereafter, the appellant issued a demand notice under Rule 7(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019, and subsequently filed an application under Section 95(1) of the IBC to initiate personal insolvency proceedings against respondent no. 1.
The Adjudicating Authority, by its order dated 16.02.2024, appointed a resolution professional and directed him to examine the application and submit a report as per Section 99 of the IBC. Respondent no. 1 raised objections regarding limitation and the validity of the personal guarantee, which the Adjudicating Authority deferred for consideration until the resolution professional’s report was submitted, relying on the Supreme Court’s decision in Dilip B. Jiwrajka v. Union of India (2024) 5 SCC 435. However, respondent no. 1 filed a writ petition before the High Court under Article 226, contending that his liability as a guarantor had been waived. The High Court allowed the writ petition and held that the personal insolvency proceedings were not maintainable. Consequently, the Adjudicating Authority disposed of the insolvency proceedings against respondent no. 1 by order dated 19.06.2024.
The Supreme Court, after hearing both parties, examined the statutory scheme of personal insolvency under the IBC and reaffirmed that at the stage of appointing a resolution professional, no adjudicatory function was involved. The Court emphasized that under Part III, Chapter III of the IBC, the resolution professional is tasked with collating information and making a recommendation under Section 99, which the Adjudicating Authority then considers under Section 100. The Court reiterated the principle laid down in Jiwrajka that objections regarding the existence of debt are to be considered by the Adjudicating Authority only after the resolution professional submits his report. The High Court’s intervention was premature, as it precluded the statutory process from taking its course and assumed the role of the Adjudicating Authority by making findings on disputed questions of fact.
It was further observed that High Courts while exercising judicial review, should not substitute themselves as the adjudicating authority where specialized statutory mechanisms exist. The Supreme Court noted that the High Court’s intervention prior to the submission of the resolution professional’s report violated the statutory procedure. While acknowledging that judicial review is not excluded, the Court held that matters concerning the existence of debt and other factual issues are within the domain of the Adjudicating Authority under the IBC.
In light of these findings, the Supreme Court allowed the appeal, set aside the impugned order dated 28.05.2024 of the Karnataka High Court, and restored the insolvency proceedings before the Adjudicating Authority to be continued from the stage of its order dated 16.02.2024. The Court reiterated that adherence to the statutory framework under the IBC is essential to maintaining legal discipline and ensuring proper adjudication of insolvency matters.
Mr. Tushar Mehta, Solicitor General represented the Appellant.
Mr. Shyam Mehta, Senior Advocate appeared for Respondent No. 1.
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