2025 (5) TMI 2002 - AT - IBC

Appointment of the Resolution Professional (RP) by the Adjudicating Authority under Section 97 of the Insolvency and Bankruptcy Code 2016 (I B Code) - Appellant contends that such an appointment of the Resolution Professional happens to be in an apparent contradiction to the provisions contained under Section 97 of the I B Code 2016 - HELD THAT - The Hon ble Apex Court in Dilip B. Jiwrajka V. Union of India and others 2024 (1) TMI 33 - SUPREME COURT has observed that appointment of the Resolution Professional under Section 97 of the I B Code 2016 is only intended to facilitate for the purposes of collating the facts and materials which has to assimilated for examination of the Application preferred under Section 95 of the I B Code 2016 in order to justify the initiation of the IRP proceedings under Section 95 as against the Personal Guarantor. The stages under Section 95 and 97 of the I B Code 2016 in itself is not an initiation of proceedings which would be giving a cause of action to the Appellants to invoke an Appellate Jurisdiction under Section 61 of I B Code 2016 because it is not the adjudicatory function discharged by Learned Adjudicating Authority where a right is determined. The Learned Adjudicating Authority after examining the entire documents on record while observing that the stage under Section 99 of the I B Code 2016 is yet to be achieved either recommending for approval or rejection of the petition as referred under Section 99(1) of the I B Code 2016 coupled with the facts that since the interim moratorium under Section 96(1)(a) has already commenced as observed in the impugned order of 28.01.2025 directing thereof that the Resolution Professional is directed to serve the copy of the Report on the Personal Guarantor i.e. the Appellants herein. Conclusion - The appointment of the RP on the recommendation of the Financial Creditor without directing the IBBI Board to nominate the RP was not a violation of Section 97 of the I B Code. The appellants as Personal Guarantors did not have a cause of action to challenge the appointment at this stage under Section 61 of the I B Code. The dismissal of these Appeals at this stage would be without prejudice to the rights of the Appellant to raise all the questions qua the appointment of the Resolution Professional if at all tenable under law at the stage when admission of the proceedings of insolvency resolution process initiated under Section 95 of the I B Code 2016 is taken up for consideration under Section 100 of the I B Code 2016 - Appeal dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in these connected appeals are:

• Whether the appointment of the Resolution Professional (RP) by the Adjudicating Authority under Section 97 of the Insolvency and Bankruptcy Code, 2016 (I&B Code), on the recommendation of the Financial Creditor, without directing the Insolvency and Bankruptcy Board of India (IBBI) to nominate the RP, contravenes the statutory provisions of the I&B Code.
• Whether the appellants, as Personal Guarantors, have a cause of action to challenge the appointment of the RP at the stage of appointment under Section 97, or whether such challenge can only be raised at the stage of admission or rejection of the insolvency application under Section 100 of the I&B Code.
• Whether the procedural steps undertaken by the Adjudicating Authority in appointing the RP without following the nomination procedure under Section 97(3) violate principles of natural justice or the statutory scheme.
• The scope and nature of the functions and powers exercised by the RP appointed under Section 97, and whether such appointment is subject to judicial scrutiny at the stage prior to admission of the insolvency application.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Legality of Appointment of Resolution Professional on Recommendation of Financial Creditor

Relevant Legal Framework and Precedents: Section 97 of the I&B Code governs the appointment of the RP. Sub-sections (1) and (2) apply where the application under Section 94 or 95 is filed through a RP, requiring the Board to confirm or reject the appointment. Sub-sections (3) and (4) apply where the application is filed by the debtor or creditor themselves, mandating the Adjudicating Authority to direct the Board to nominate an RP within ten days. Sub-section (5) mandates the Adjudicating Authority to appoint the RP recommended or nominated accordingly.

Court's Interpretation and Reasoning: The Tribunal examined whether the Adjudicating Authority erred in appointing the RP recommended by the Financial Creditor without directing the IBBI Board to nominate an RP as required under Section 97(3) when the application is filed by the creditor himself. The Appellants contended that the procedure prescribed under Section 97(3) was mandatory and non-compliance rendered the appointment invalid.

The Tribunal observed that the appointment of the RP at this stage is administrative and procedural, not adjudicatory. The appointment facilitates collation of facts and preparation of a report under Section 99, which is recommendatory in nature. The Tribunal relied heavily on the authoritative pronouncement of the Supreme Court in Dilip B. Jiwrajka v. Union of India, which clarified that no judicial adjudication occurs between Sections 95 to 99, and the RP's role is to assist the Adjudicating Authority in examining the application.

Key Evidence and Findings: The impugned orders showed that the RP had submitted an affidavit confirming no disciplinary proceedings were pending against him, fulfilling the requirements of Section 97. The Adjudicating Authority's appointment was in line with procedural compliance, and the interim moratorium was imposed under Section 96.

Application of Law to Facts: Given that the RP's appointment was for a facilitative role and no substantive rights were prejudiced at this stage, the Tribunal held that the Adjudicating Authority's appointment of the RP on the creditor's recommendation did not violate the provisions of Section 97. The procedural deviation, if any, did not confer a cause of action to challenge the appointment at this stage.

Treatment of Competing Arguments: The Appellants argued for strict adherence to Section 97(3) and that the nomination by the Board was mandatory when the application was filed by the creditor. The Tribunal rejected this, emphasizing the administrative nature of the appointment and the absence of any adjudicatory function at this stage.

Conclusion: The appointment of the RP on the recommendation of the Financial Creditor without directing the Board to nominate was not a violation of the I&B Code, 2016, given the procedural and non-adjudicatory nature of the process under Section 97.

Issue 2: Whether Appellants Have Cause of Action to Challenge RP Appointment at Section 97 Stage

Relevant Legal Framework and Precedents: Section 61 of the I&B Code provides the right to appeal against orders of the Adjudicating Authority. The Supreme Court's judgment in Dilip B. Jiwrajka clarified the procedural stages from Sections 95 to 100, emphasizing that judicial determination occurs only at Section 100.

Court's Interpretation and Reasoning: The Tribunal analyzed whether the appellants, as Personal Guarantors, had the right to challenge the appointment of the RP at the stage of appointment under Section 97 or whether such challenge could only be raised at the admission or rejection stage under Section 100.

The Tribunal held that the stages from initiation under Section 95 to submission of the RP's report under Section 99 are ministerial and procedural, not judicial or adjudicatory. Therefore, no cause of action arises to challenge the appointment of the RP at this stage, as no rights are determined or prejudiced.

Key Evidence and Findings: The Tribunal referred to the Supreme Court's para 86 summary, which states, inter alia, that no judicial adjudication occurs at the appointment stage, and the RP's report is recommendatory. The principles of natural justice apply only at the adjudication stage under Section 100.

Application of Law to Facts: Since the appellants had not yet been admitted into the insolvency resolution process and no final order affecting their rights had been passed, they lacked locus to challenge the RP's appointment under Section 61 at this stage.

Treatment of Competing Arguments: The appellants argued that early objection to RP appointment was necessary to prevent procedural irregularity. The Tribunal rejected this, holding that the statutory scheme contemplates challenge only at the admission stage under Section 100.

Conclusion: The appellants do not have a cause of action to appeal the appointment of the RP at the Section 97 stage; such objections must be reserved for the admission stage under Section 100.

Issue 3: Scope of Powers and Role of Resolution Professional under Section 97 and Related Provisions

Relevant Legal Framework and Precedents: Section 97 outlines the appointment of the RP; Section 99 requires the RP to submit a report recommending acceptance or rejection of the insolvency application. The Supreme Court's ruling in Dilip B. Jiwrajka clarified the RP's role as facilitative and recommendatory.

Court's Interpretation and Reasoning: The Tribunal emphasized that the RP's appointment is to facilitate collation of facts and preparation of a report for the Adjudicating Authority's consideration. The RP's report is not a judicial determination but a recommendatory document to assist the Adjudicating Authority under Section 100.

Key Evidence and Findings: The RP appointed had complied with the procedural requirements, including submitting an affidavit confirming no pending disciplinary proceedings, as mandated by Section 97(1). The interim moratorium was imposed, and the RP was directed to serve the report on the Personal Guarantors.

Application of Law to Facts: The Tribunal found that the RP's appointment and conduct were consistent with the statutory scheme and did not violate any provision or principle of natural justice at this stage.

Treatment of Competing Arguments: The appellants contended that the RP's appointment on the creditor's recommendation compromised impartiality and violated statutory procedure. The Tribunal held that the statutory framework does not preclude such appointment, provided the RP meets the eligibility and disciplinary criteria.

Conclusion: The RP's role is facilitative and recommendatory; appointment on the creditor's recommendation is permissible within the statutory framework, subject to compliance with Section 97 requirements.

Issue 4: Natural Justice and Constitutional Validity of Sections 95 to 100 of the I&B Code

Relevant Legal Framework and Precedents: The appellants argued violation of natural justice and constitutional principles, including Article 14 (equality before law). The Supreme Court in Dilip B. Jiwrajka upheld the constitutional validity of Sections 95 to 100, rejecting claims of violation of natural justice and arbitrariness.

Court's Interpretation and Reasoning: The Tribunal adopted the Supreme Court's reasoning that Sections 95 to 100 are procedural and administrative, and do not involve judicial adjudication or deprivation of rights without due process. The RP's appointment and report preparation do not violate natural justice, as the debtor and guarantor have the opportunity to participate at the adjudicatory stage under Section 100.

Key Evidence and Findings: The Tribunal noted that the interim moratorium protects the debtor and that the procedural steps are designed to facilitate orderly examination of insolvency applications without premature adjudication.

Application of Law to Facts: The appellants' challenge on grounds of natural justice and constitutional violation was found to be untenable in light of the Supreme Court's authoritative pronouncement.

Treatment of Competing Arguments: The appellants' contention that early appointment of RP without hearing violates natural justice was rejected as inconsistent with the statutory scheme and judicial precedents.

Conclusion: Sections 95 to 100 of the I&B Code are constitutionally valid and do not violate natural justice or Article 14.

3. SIGNIFICANT HOLDINGS

The Tribunal, relying on the Supreme Court's judgment in Dilip B. Jiwrajka, held:

"86.1. No judicial adjudication is involved at the stages envisaged in Section 95 to Section 99 IBC;
86.2. The resolution professional appointed under Section 97 serves a facilitative role of collating all the facts relevant to the examination of the application for the commencement of the insolvency resolution process which has been preferred under Section 94 or Section 95. The report to be submitted to the adjudicatory authority is recommendatory in nature on whether to accept or reject the application;
86.3. The submission that a hearing should be conducted by the adjudicatory authority for the purpose of determining "jurisdictional facts" at the stage when it appoints a resolution professional under Section 97(5) IBC is rejected. No such adjudicatory function is contemplated at that stage. To read in such a requirement at that stage would be to rewrite the statute which is impermissible in the exercise of judicial review;
86.4. The resolution professional may exercise the powers vested under Section 99(4) IBC for the purpose of examining the application for insolvency resolution and to seek information on matters relevant to the application in order to facilitate the submission of the report recommending the acceptance or rejection of the application;
86.5. There is no violation of natural justice under Section 95 to Section 100 IBC as the debtor is not deprived of an opportunity to participate in the process of the examination of the application by the resolution professional;
86.6. No judicial determination takes place until the adjudicating authority decides under Section 100 whether to accept or reject the application. The report of the resolution professional is only recommendatory in nature and
86.7. The adjudicating authority must observe the principles of natural justice when it exercises jurisdiction under Section 100 for the purpose of determining whether to accept or reject the application;
86.8. The purpose of the interim moratorium under Section 96 is to protect the debtor from further legal proceedings; and
86.9. The provisions of Section 95 to Section 100 IBC are not unconstitutional as they do not violate Article 14 and Article 21 of the Constitution."

The Tribunal concluded that the appointment of the RP on the recommendation of the Financial Creditor without directing the IBBI Board to nominate the RP was not a violation of Section 97 of the I&B Code. The appellants, as Personal Guarantors, did not have a cause of action to challenge the appointment at this stage under Section 61 of the I&B Code. Any objections to the appointment or procedural irregularities could be raised at the stage of admission or rejection of the insolvency application under Section 100.

The Appeals were dismissed for lack of merit, without prejudice to the appellants' right to raise relevant objections at the appropriate stage under Section 100.