Stigmatic Negligence Findings Against Creditor Officials Expunged For Lack Of Prior Hearing In Insolvency Appeal

NCLAT Chennai considered an appeal by a financial creditor against an NCLT order that had imposed costs of Rs.50,000/- and made stigmatic observations on alleged negligence of the creditor's officials and counsel, directing communication of the order to senior bank management. Referring to its earlier rulings, NCLAT held that such stigmatic findings could not be sustained without affording an effective opportunity to the concerned officials and counsel to defend themselves against the allegation of negligence. Accordingly, the adverse observations in the impugned order, particularly those in paragraph 2, were ordered to be expunged, and the appeal was disposed of.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether adverse and stigmatic observations recorded against the counsel and officials of the financial creditor, and consequent imposition of costs, could be sustained without affording them an effective opportunity of hearing.

1.2 Whether the directions of the adjudicating authority to communicate its order to senior officials of the financial creditor required modification, in light of the Appellate Tribunal's earlier judgment on identical facts.

1.3 Whether the impugned orders, including rejection of the recall application, should be interfered with and modified in accordance with the Appellate Tribunal's prior decision on the same issue.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Adverse remarks and costs without opportunity of hearing

Interpretation and reasoning: The Tribunal noted that the adjudicating authority, while dealing with a proceeding under Section 95 of the Insolvency and Bankruptcy Code, 2016, had recorded findings that the counsel for the financial creditor and officials of the bank had acted negligently and casually, filed a defective petition without invocation of the bank guarantee and requisite supporting documents, and imposed costs of Rs. 50,000/-. Referring to its earlier judgment of 12.08.2025 in a factually identical matter, the Tribunal reiterated that before making any adverse or stigmatic remarks against professionals, including counsel or bank officials, which may affect their professional career or impede their future career progression, "ample opportunity" must be afforded to such affected persons to defend themselves and to explain the circumstances in which the alleged negligence occurred. In the absence of any exercise by the adjudicating authority to provide such effective opportunity of hearing, the stigmatic observations were held to be unwarranted. As the imposition of cost was founded on these adverse observations regarding the functioning of the bank officials, the justification for imposing cost could not be sustained.

Conclusions: The adverse and stigmatic observations made against the counsel and officials of the financial creditor in the impugned order, being made without affording them an effective opportunity of defence, were ordered to be expunged. The cost of Rs. 50,000/- imposed by the adjudicating authority, being directly linked to such observations, was also ordered to be expunged.

Issue 2 - Scope of directions to communicate the order to senior bank officials

Interpretation and reasoning: The adjudicating authority had directed that its order be communicated to the Chairman and Managing Director of the bank and the General Manager of the Stressed Asset Management Branch for ensuring proper supervision and compliance. Applying the reasoning and directions from the earlier decision dated 12.08.2025 on identical facts, the Tribunal considered it appropriate to modify, rather than completely set aside, the direction to communicate the order. The objective was confined to ensuring future diligence and prompt assistance to the adjudicating authority, without perpetuating the stigmatic character of the original observations.

Conclusions: The direction to communicate the adjudicating authority's order was modified such that a copy of the Appellate Tribunal's present order would be sent to the said senior officials, with the observation that they shall ensure that their subordinates diligently and promptly assist the adjudicating authority in future proceedings.

Issue 3 - Interference with the impugned orders and application of prior precedent

Interpretation and reasoning: The appeals challenged (i) the original order under Section 95 of the Code containing the adverse observations and costs, and (ii) the subsequent order refusing recall of that original order. The Tribunal observed that the issues involved in these appeals were factually the same as those already decided in the earlier judgment dated 12.08.2025 in the leading appeal. In that earlier matter, it was recorded that the adjudicating authority had already granted time to furnish documents relating to invocation of the guarantee and that, as per the counsel's statement, the directions regarding furnishing of relevant documents had been complied with; hence, no further time was required. The present appeals were therefore disposed of by applying, mutatis mutandis, the same reasoning and operative directions, including expunging the adverse remarks and costs and modifying the communication direction.

Conclusions: The impugned orders were interfered with only to the limited extent indicated in the earlier judgment: the adverse remarks against counsel and officials and the cost of Rs. 50,000/- were expunged; the communication direction was modified as above; and, save for these modifications, the appeals were treated as partially allowed and stood disposed of on the same terms, with all pending interlocutory applications closed.

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