In ruling on an appeal concerning insolvency procedures brought against a personal guarantee, the Supreme Court ruled that the High Court had no right to forbid such proceedings by concluding that the guarantor had renounced his duty.
The two judge Bench of Justices P.S. Narasimha and Manoj Mishra observed that “While there is no exclusion of power of judicial review of High Courts, and the limits and restraint that the constitutional court exercises and must exercise are well articulated. The primary issues involved in the present case, including the factual determination of whether the debt exists, is part of the statutory and regulatory regime of the Insolvency and Bankruptcy Code.”
The respondent, Farooq Ali Khan, was a corporate debtor’s director. The respondent served as the debtor’s guarantor while he took out a number of loans from the appellant. Section 95 of the Insolvency and Bankruptcy Code was used to start personal insolvency proceedings against the respondent because of payment default.
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A Resolution Professional was then assigned to review the application and submit a report in accordance with Section 99 of the Code. In accordance with this clause, the Resolution Professional gathers data and determines if the debt has been settled. As a result, a report is submitted suggesting that the Section 95 application be accepted or denied. The Adjudicating Authority ruled that the Personal Guarantor’s concerns will be taken into consideration following the Resolution Professional’s report submission.
In order to stop the insolvency procedures, the respondent petitioned the High Court under Article 226 of the Constitution. On the grounds that his liability as a personal guarantor was waived, the same was permitted. The appellant came to the supreme Court because respondent No. 1 had been the target of the insolvency proceedings.
The court noted that after a Resolution Professional is appointed by the Adjudicating Authority, the professional submits a report. The Authority alone decides whether to accept or deny the application to begin insolvency after this point. Drawing inspiration from this, the Court emphasized that the authority followed the same process.
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It further stated that before selecting the resolution specialist, the Authority is not obligated to make a decision on the existence of the debt. This is because, according to the Court, Section 99 mandates that the resolution professional first collect data and proof pertaining to debt payback and determine whether the application meets the requirements of Section 94 or Section 95 of the IBC.
It was further ruled that the High Court had misused its writ jurisdiction. According to the Court, the High Court stopped the required process from proceeding as it should have. Additionally, it rendered a decision on the existence of debt, which fell under the purview of the authority.
Tax, Law & Supreme Court – The Cases That Changed India’s Financial Landscape
“In light of this statutory scheme, which has been followed by the Adjudicating Authority, we are of the view that the High Court incorrectly exercised its writ jurisdiction as: first, it precluded the statutory mechanism and procedure under the IBC from taking its course, and second, to do so, the High Court arrived at a finding regarding the existence of the debt, which is a mixed question of law and fact that is within the domain of the Adjudicating Authority under Section 100 of the IBC.” the Court said.
The appellant’s application before the adjudicating authority was reinstated while the appeal was granted. The Court also asked for the matter to be resolved quickly, pointing out that it has been pending since 2021.
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