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

The NLCAT New Delhi bench of Justice Ashok Bhushan (Chairperson), Barun Mitra (Technical Member) and Arun Baroka (Technical Member) affirmed that Adjudicating Authority cannot exercise its adjudicatory power at the stage of consideration of application under section 95 of the IBC by entering into the merits of the case. The power which is conferred on the adjudicating authority at this stage is to appoint a resolution professional. The Adjudicatory role comes into play when a report is submitted by the Resolution Professional under section 99 recommending either to admit or reject the application. 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...

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

Mohd Malik Chauhan

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