No Cause of Action Arises Unless the Section 95 IBC Petition Is Admitted Against the Personal Guarantors: NCLAT Chennai

Background

The appellants (personal guarantors) are the managing directors of the Corporate Debtor. The appellants executed a Personal Guarantee Deed to secure financial assistance of Rs. 397.64 Cr. from a consortium of banks led by Canara Bank. Due to the corporate debtor's failure to pay the monthly installments, the bank issued the Demand Notice and Possession Notice under Sections 13(2) and 13(4) of the SARFAESI Act, respectively. Challenging the possession notice, the Corporate Debtor initiated the Section 17 SARFAESI proceedings before the DRT, which were pending.

The Financial Creditor issued a demand notice under Section 95(2) of the IBC for an amount of Rs. 93.46 Cr., invoking the Personal Guarantee Deed. Subsequently, the Canara Bank filed a petition before the NCLT, Chennai under Section 95(1) of the IBC. After hearing both parties, the Adjudicating Authority passed an order and appointed Respondent-2 as the Resolution Professional (RP). The tribunal directed RP to examine the petition filed u/s 95(1). The personal guarantors challenged the appointment of the RP on the grounds of procedural irregularities.

Contention of the Parties

The appellant contended that the appointment of the RP violates the requirements of Section 97 IBC. It highlighted that if the process of appointment of the RP is declared to be bad, the entire process becomes illegal.

Highlighting the provisions contained in Section 97 of the IBC, the appellant submitted that it is the exclusive prerogative of the Adjudicating Authority to appoint the Resolution Professional, and there is no exception to this rule. Hence, the consultation with the Financial Creditor before appointing the RP violates Section 97 of the IBC, specifically subsection (3). The appellant contended that this is a sufficient ground to file a company petition.

NCLAT's Judgment

The tribunal observed that the argument of the appellant appears to be logical enough, but the appellant has not challenged the proceedings under Section 95. This implies that the appellant admits the fact that the Corporate Debtor has availed the credit facility of which the appellant was a personal guarantor and the account was declared NPA.

The learned tribunal referred to the judgment of the Hon'ble Supreme Court in the case of Dilip B Jiwrajka v. Union of India & Ors. and observed that the proceedings under Sections 95 to 100 of the IBC do not involve any judicial adjudication until an order is passed u/s 100. The tribunal held that no person can have a cause to file a petition until or unless there is an admission of Section 95 proceedings by passing of an order under Section 100.

Proceedings under Sections 95 to 100 of the IBC, which include Section 97 as well, do not hold any adjudicatory effect and hence cannot be subjected to judicial scrutiny either by NCLT or NCLAT. The tribunal lastly observed that the appointment of the RP doesn't affect any right of the appellant to enable him to file a company petition.

The tribunal dismissed the petition and closed all the Interlocutory Applications.

Case Title: Mr. Rajesh Bhatia v. Canara Bank Asset Recovery Managment Branch & Anr.

Case Number: Company Appeal (AT) (CH) (Ins) No.143/2024

(IA Nos.385/2024 & 306/2025)

For Applicant: Mr. Anandavenu, Advocate

For Mr. P.S. Suman, Advocate

For Respondent: Mr. MS. Viswanathan, Advocate for R1

Bench: Justice Sharad Kumar Sharma (Member-Judicial) and Jatindranath Swain (Member-Technical)

Judgment Date: 30/04/2025

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