Bank's Section 95 application against personal guarantors set aside for lack of independent assessment by adjudicating authority

NCLAT Principal Bench set aside the adjudicating authority's order admitting a Section 95 application filed by a bank against personal guarantors. The tribunal held that the adjudicating authority failed to conduct independent assessment as required under Dilip B. Jiwrajka precedent, mechanically following the resolution professional's report without considering relevant factors including Rs. 5.92 crore already realized under SARFAESI and guarantor's claim that remaining assets were sufficient to liquidate debt. The matter was remanded for fresh consideration after allowing guarantors to file objections within 30 days. Appeal allowed.

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ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment include:

• Whether the application under Section 95 of the Insolvency and Bankruptcy Code, 2016 (IBC) filed by the Indian Bank against the personal guarantors was complete and compliant with the relevant legal framework.
• Whether the adjudicating authority properly assessed the evidence and facts before admitting the Section 95 application.
• Whether the adjudicating authority's decision to admit the application was justified in light of the bank's previous inability to substantiate the debt amount in a Section 7 application.
• Whether the adjudicating authority considered the realization of assets under SARFAESI and its impact on the debt claimed by the bank.
• Whether the adjudicating authority fulfilled its adjudicatory role as outlined by the Supreme Court in relevant precedents.

ISSUE-WISE DETAILED ANALYSIS

1. Completeness of the Section 95 Application

The appellant argued that the application under Section 95 filed by the Indian Bank was incomplete as it lacked the necessary record or evidence of default as required by Regulation 2A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. The appellant contended that this regulation should apply due to the absence of specific provisions in the 2019 Regulations for personal guarantors.

The court, however, noted that the 2019 Rules specifically govern applications under Section 95 and provide for the necessary documents through 'Form-C'. The court disagreed with the appellant's reliance on Regulation 2A of the 2016 Regulations, affirming that the 2019 Rules adequately cover the filing requirements for applications against personal guarantors.

2. Assessment of Evidence and Facts by the Adjudicating Authority

The appellant claimed that the adjudicating authority did not properly adjudicate the issue of debt and relied mechanically on the Resolution Professional's (RP) report without independent assessment. The court emphasized the need for the adjudicating authority to conduct an independent assessment, as mandated by the Supreme Court in 'Dilip B. Jiwrajka v. Union of India & Ors.', where it was held that the authority must not merely rely on the RP's report but actively engage in a fair process.

The court found that the adjudicating authority failed to independently assess the evidence and facts, particularly regarding the realization of assets under SARFAESI and the sufficiency of these realizations to cover the claimed debt.

3. Impact of Previous Section 7 Application

The appellant highlighted that the Indian Bank's Section 7 application against the corporate debtor was withdrawn due to the inability to substantiate the debt amount. The court noted that the adjudicating authority did not adequately address this issue, which was crucial for determining the validity of proceeding against the personal guarantors.

4. Consideration of Asset Realization under SARFAESI

The appellant argued that the bank had already realized a significant amount from the sale of mortgaged assets under SARFAESI, which was sufficient to cover the debt. The court found that neither the RP nor the adjudicating authority properly considered this realization in their assessments. The adjudicating authority's failure to address this point was a significant oversight.

5. Fulfillment of Adjudicatory Role

The court reiterated the Supreme Court's guidance that the adjudicating authority's role begins in earnest after the RP's report is submitted. The authority must independently assess the application, considering all relevant materials and arguments. The court concluded that the adjudicating authority did not fulfill this role, as it did not engage in the necessary independent assessment.

SIGNIFICANT HOLDINGS

The court held that the adjudicating authority's order admitting the Section 95 application was unsustainable due to its failure to independently assess the evidence and facts, particularly regarding the realization of assets under SARFAESI and the previous Section 7 application.

Key principles established include:

• The need for adjudicating authorities to conduct independent assessments of applications under Sections 94 and 95 of the IBC, rather than relying solely on the RP's report.
• The importance of considering all relevant evidence and arguments, including the realization of assets under SARFAESI, when determining the validity of debt claims against personal guarantors.
• The requirement for adjudicating authorities to apply their minds to all matters that may affect the admission of insolvency applications.

Final determinations on each issue led to the setting aside of the adjudicating authority's order and the revival of the Section 95 applications for fresh consideration. The court directed that personal guarantors be given an opportunity to file objections to the RP's report, and the adjudicating authority must consider all relevant materials before passing a fresh order under Section 100.

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