2025 (12) TMI 1148 - AT - IBC

Personal guarantor insolvency petitions u/s94 stalled by failure to serve RP copies; interim moratorium extended; dismissals upheld.

Petitions under s.94 IBC were dismissed under Rule 11 NCLT Rules for non-compliance with directions to serve petition copies on the resolution ... Dismissal of separate petitions which the appellants had filed u/s 94 IBC - failure of the appellants to serve copies of their respective petitions which they had filed u/s 94 to RP - RP’s failure to file his report u/s 99 IBC - whether the course adopted by the Adjudicating Authority would vitiate the Orders now under challenge entirely? - HELD THAT:- The issue of appellants’ failure to serve copies of their petitions to RP and RP’s failure to file the report, are two independent issues. If the RP has not filed its report, then the duty is cast on the Adjudicating Authority to either to ensure that the RP files his report, or to replace the RP. Therefore, no petition under Section 94 can be dismissed more so under Rule 11 of the NCLT Rules for the failure of RP to file the report. To this extent the Orders of the Adjudicating Authority cannot be sustained. This Tribunal is conscious that the procedural lapse should not ordinarily be allowed to have consequences which may have penalising effect such as dismissal of the petitions. However, a distinction may have to be made where on the strength by a procedural lapse the defaulting party has gained an advantage in law, then such procedural lapse is required to be viewed more seriously. Very evidently from 16.01.2024 to 17.04.2025 the appellants in both the appeals have been enjoying the moratorium, owing to which the first respondent, the financial creditor, is disabled from enforcing the personal guarantee in the manner known to law. Had these appellants complied with the directions of the Adjudicating Authority dated 16.01.2024, then it is quite possible that the RP would have filed his report in time, which might have enabled the Adjudicating Authority to take a decision on it within a reasonable time. But, the appellant had enjoyed moratorium for about 15 months, and as rightly contended by the counsel for the first respondent, this has disabled the first respondent from proceeding against appellants. There is a compelling need for this tribunal to balance the failure of the appellants to comply with what the Adjudicating Authority had directed to them do vide its Orders dated 16.01.2024, and the impact it had on the substantive right of the first respondent to enforce the personal guarantee against the appellants. If the appellants were to be granted a reprieve now, it then would surely confer an unmerited additional advantage of an extended moratorium on the appellants. We consider that the appellant’s do not deserve it. So far as exercising its inherent powers under Rule 11 of the NCLT Rules goes, the Adjudicating Authority has the authority to pass such directions as would meet the ends of justice. Given the circumstances in which the Adjudicating Authority had invoked its powers Rule 11, we do not consider it unreasonable. The Orders of the Adjudicating Authority are hereby confirmed - appeals are dismissed. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether a petition filed under Section 94 IBC can be dismissed on the ground that the Resolution Professional did not file a report under Section 99 IBC, including by invoking inherent powers under Rule 11 of the NCLT Rules. (ii) Whether dismissal of the Section 94 IBC petitions was justified for the petitioners' failure to comply with the Adjudicating Authority's direction to serve copies of their petitions on the appointed Resolution Professional, and whether Rule 11 could be invoked to dismiss in the circumstances where the petitioners had enjoyed moratorium for an extended period. 2. ISSUE-WISE DETAILED ANALYSIS Issue (i): Dismissal for non-filing of the Section 99 report by the Resolution Professional Legal framework (as discussed by the Court): The Court considered the scheme under which the Resolution Professional is to submit a report under Section 99, and the Adjudicating Authority thereafter takes a decision. The Court also addressed the use of inherent powers under Rule 11 of the NCLT Rules. Interpretation and reasoning: The Court treated the Resolution Professional's failure to file the Section 99 report as an issue distinct from the petitioners' own procedural defaults. It held that if the Resolution Professional does not file the report, the duty lies on the Adjudicating Authority to ensure filing of the report or to replace the Resolution Professional. The Court therefore held that a Section 94 petition cannot be dismissed (including under Rule 11) merely because the Resolution Professional failed to submit the report. Conclusions: To the extent the impugned orders relied on non-filing of the Section 99 report as a ground to dismiss, that part of the reasoning was held unsustainable; however, the orders were held severable and could still stand if supported on the independent ground of the petitioners' non-compliance with service directions. Issue (ii): Dismissal for failure to serve the petition on the Resolution Professional; propriety of invoking Rule 11 Legal framework (as discussed by the Court): The Court examined compliance with a specific direction of the Adjudicating Authority requiring the petitioners to serve copies of the Section 94 petitions on the Resolution Professional, and the scope of Rule 11 to pass orders to meet the ends of justice. Interpretation and reasoning: The Court rejected the explanation of a bona fide belief that the Registry would serve copies on the Resolution Professional, holding that such belief could not override a 'positive' and express direction to serve. While acknowledging that procedural lapses should not ordinarily lead to penal consequences like dismissal, the Court drew a distinction where the lapse resulted in the defaulting party gaining an advantage in law. The Court found that, from the date of the service direction until dismissal, the petitioners enjoyed moratorium for about 15 months, which disabled the financial creditor from enforcing the personal guarantee. The Court reasoned that compliance could have enabled timely filing of the Resolution Professional's report and a decision within a reasonable time; granting relief at the appellate stage would confer an 'unmerited additional advantage' of extended moratorium. Balancing the petitioners' non-compliance against the creditor's impaired substantive rights, the Court held that the petitioners did not deserve a reprieve. Conclusions: Dismissal was upheld on the independent ground of the petitioners' failure to serve copies on the Resolution Professional despite a clear direction, particularly because it enabled prolonged moratorium to the prejudice of the creditor. The Court further held that invoking Rule 11 in these circumstances was not unreasonable, as it served the ends of justice. Consequently, the appeals were dismissed and the dismissal orders were confirmed.