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SC rejects personal guarantors’ plea for early NCLT adjudication in their insolvency cases

The Supreme Court has rejected the personal guarantors’ submissions that NCLT be required to adjudicate ‘jurisdictional facts’ during the resolution professional appointment stage itself during their insolvency process.

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The apex court has emphasised that NCLT’s adjudicatory role begins only after the resolution professional’s report submission under Section 100 and not at the appointment stage. The report remains recommendatory and doesn’t bind NCLT during its jurisdictional exercise.

Insolvency law experts anticipate expedited admission processes following this SC stance, negating the need for early NCLT determination.

The apex court has in its latest judgment ( now made public) on personal guarantors’ insolvency (Dilip B Jiwrajka vs Union of India) held that no such adjudicatory function is contemplated at that stage (at time of appointment of RP). “To read in such a requirement at that stage would be to rewrite the statute which is impermissible in the exercise of judicial review”, said the SC Bench of Chief Justice of India DY Chandrachud with Justices J B Pardiwala and Manoj Misra in its 62 page order, dismissing 384 writ petitions that challenged the constitutional validity of IBC Sections 95-100 (provisions on personal guarantors’ insolvency).

Setback

This is seen as a setback for personal guarantors who were keen that the National Company Law Tribunal (NCLT) — at the time of RP appointment itself —adjudicates on the jurisdictional questions of whether there is a subsisting debt or whether the relationship of debtor and creditor exists. 

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“The true adjudicatory function of the AA (NCLT) commences (Under Section 100) after the submission of the resolution professional’s report. Another reason we are not inclined to accept the submission is that what is described as a jurisdictional question by the petitioners may not be a simple matter to be decided as a question of law….This would involve a decision on mixed questions of law and fact”, the SC Bench ruled. 

No judicial determination takes place until the adjudicating authority (NCLT) decides under Section 100 whether to accept or reject the application, the SC has said.

‘Jurisdictional fact’

Dhananjay Kumar, Partner, Cyril Amarchand Mangaldas, said, “This judgement clarifies that the guarantor need not be heard at the time of appointment by NCLT of the resolution professional as it is a  ‘jurisdictional fact’. This will expedite the admission process”.

Hari Hara Mishra, CEO, Association of ARCs in India, said, “The main shortcoming in IBC so far has been time overrun at various stages.  Significant delay in the admission of a case erodes the value of underlying security. 

Any legal impediment like requirement of a hearing  at the pre-admission stage by the Resolution Professional, apart from being an unwarranted exercise as they have no adjudicatory authority under the IBC, would have further adversely affected outcomes.“

Rohan Batra, Partner, Anagram Partners, a law firm, said, “The SC decision respects the statutory scheme for insolvency process for personal guarantors and individuals. With the RP being appointed at the outset, the Adjudicating Authority will have the benefit of RP’s view on the insolvency motion, which facilitates the decision-making process and makes it expedient.”

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