2024 (11) TMI 553 - AT - IBC

Bank wins appeal against personal guarantor after dismissal of Section 95 application was overturned

The NCLAT set aside the Adjudicating Authority's order dismissing a Section 95 application filed by a bank against a personal guarantor. The AA erred by ... Adjudicatory function under Section 100 - Facilitative role of the resolution professional under Section 97-99 - Dilip B. Jiwrajka precedent on stages of Section 95-100 - Waiver of statutory rights - Requirement to follow statutory procedure as prescribedAdjudicatory function under Section 100 - Facilitative role of the resolution professional under Section 97-99 - Dilip B. Jiwrajka precedent on stages of Section 95-100 - Requirement to follow statutory procedure as prescribed - Whether the Adjudicating Authority could adjudicate merits of objections to a Section 95 application before appointment of a resolution professional and receipt of the RP's report. - HELD THAT: - The Tribunal held that Sections 95-100 form a staged statutory scheme in which no judicial adjudication is to take place prior to the stage contemplated by Section 100. The role assigned by Sections 97-99 to the resolution professional is facilitative - to collate facts and submit a recommendatory report - and the Adjudicating Authority's true adjudicatory function commences on receipt of that report under Section 100. Reliance on the Hon'ble Supreme Court's decision in Dilip B. Jiwrajka established that intervening adjudication at the appointment stage under Section 97(5) is impermissible because it would frustrate the timelines and scheme of Sections 99-100 and substitute an adjudicatory role where only facilitation is prescribed. In the present case the Adjudicating Authority proceeded to decide objections on merits before appointing a resolution professional and before any report from an RP could be obtained, including recording findings that the guarantee had not become effective. That process was contrary to the statutory scheme and the binding authority of the Supreme Court; accordingly the impugned order was unsustainable and had to be set aside for fresh consideration at the proper stage. [Paras 15, 16, 17, 36, 37]Impugned order of the Adjudicating Authority dismissing the Section 95 petition after adjudicating objections prior to appointment of an RP is set aside; the matter is to be considered in accordance with law after appointment of a resolution professional and on receipt of the RP's report under Section 100.Waiver of statutory rights - Principle that waiver requires intentional relinquishment and consideration - Whether the Financial Creditor was precluded by waiver from challenging the Adjudicating Authority's jurisdictional or procedural errors. - HELD THAT: - The Tribunal examined the plea of waiver raised by the Personal Guarantor and applied settled principles that waiver is an intentional relinquishment of a known right, generally involving consideration or conduct inconsistent with continuance of the right. The mere filing of a reply to an interlocutory application or failure to cite a particular precedent at the Adjudicating Authority's hearing does not, without more, constitute an abandonment of statutory rights. On the facts, there was no proved consideration or deliberate surrender of rights by the Financial Creditor; consequently it was not estopped from invoking the statutory scheme and binding Supreme Court precedent in this appeal. [Paras 23, 28, 29, 31]The plea of waiver is rejected; the Financial Creditor is not precluded from challenging the Adjudicating Authority's premature adjudication.Final Conclusion: Appeal allowed. The NCLT order dated 21.02.2024 that adjudicated objections to the Section 95 petition before appointment of a resolution professional is set aside. No opinion is expressed on the merits of those objections; the Adjudicating Authority shall consider the Section 95 application in accordance with the statutory scheme (Sections 97-100), after appointment of an RP and on receipt of the RP's report. The Personal Guarantor remains free to raise objections in accordance with law at the appropriate stage. Issues Involved:1. Whether the Adjudicating Authority erred in dismissing the Section 95 application without appointing a Resolution Professional and without following the statutory process as per the Insolvency and Bankruptcy Code (IBC).2. Whether the principle of waiver precludes the Appellant from challenging the order of the Adjudicating Authority.3. Whether the objections raised by the Personal Guarantor regarding the effectiveness of the Deed of Guarantee and the issue of limitation were validly considered by the Adjudicating Authority.Detailed Analysis:1. Error in Dismissing Section 95 Application:The primary issue revolves around the procedural error committed by the Adjudicating Authority in dismissing the Section 95 application without appointing a Resolution Professional (RP) as mandated by the IBC. The statutory scheme under Sections 95 to 100 of the IBC requires that after an application is filed under Section 95, the Adjudicating Authority must appoint an RP to facilitate the process. The RP is tasked with examining the application and submitting a report recommending approval or rejection. The Hon'ble Supreme Court, in the case of Dilip B. Jiwrajka, clarified that the adjudicatory role of the Adjudicating Authority commences only after the submission of the RP's report under Section 100. Thus, the Adjudicating Authority prematurely adjudicated the merits of the application, which was contrary to the statutory process and the Supreme Court's ruling.2. Principle of Waiver:The Respondent argued that the Appellant waived its right to challenge the jurisdiction of the Adjudicating Authority by not raising objections at the appropriate time. However, the principle of waiver applies when a party knowingly relinquishes a known right, often for consideration. In this case, the Appellant did not abandon any rights through conduct or agreement. The Appellant's failure to cite the Supreme Court's judgment in Dilip B. Jiwrajka before the Adjudicating Authority does not constitute a waiver of rights. The law declared by the Supreme Court is binding and must be followed irrespective of whether it was cited in the proceedings. Therefore, the principle of waiver does not preclude the Appellant from challenging the procedural error in the present appeal.3. Objections by Personal Guarantor:The Personal Guarantor raised objections regarding the effectiveness of the Deed of Guarantee and the issue of limitation. The Adjudicating Authority found that the Guarantee was contingent upon the full implementation of the Corporate Debt Restructuring (CDR) package, which allegedly did not occur, rendering the Guarantee ineffective. Consequently, the Authority did not delve into the limitation issue. However, as per the procedural requirements of the IBC, such objections should be considered only after the RP's report is submitted and during the hearing under Section 100. The premature consideration of these objections by the Adjudicating Authority was inconsistent with the statutory process and the Supreme Court's guidance.Conclusion:The Appellate Tribunal concluded that the Adjudicating Authority erred in dismissing the Section 95 application without appointing an RP and without adhering to the statutory scheme outlined in the IBC. The appeal was allowed, and the order of the Adjudicating Authority was set aside. The Tribunal clarified that it did not express any opinion on the merits of the objections raised by the Personal Guarantor, which should be considered at the appropriate stage in accordance with the law.