Mr. Ravi Ajit Kulkarni (Personal Guarantor of Pratibha Industries Ltd.) Vs. State Bank of India - The stage for considering default would arrive when the matter is taken up under Section 100 of IBC.

NCLAT (12.08.2021) in Mr. Ravi Ajit Kulkarni (Personal Guarantor of Pratibha Industries Ltd.) Vs. State Bank of India  [Company Appeal (AT) (Insolvency) No. 316 and 317 of 2021 ] held that;

• In substance, once the application is “filed” (as per Section 95, 96 read with Rule 10) the Adjudicating Authority has to act on it, and following principles of natural justice, give limited notice to Personal Guarantor to appear referring to the Interim Moratorium that has commenced as per terms of Section 96. Then the next stage is of appointing Resolution Professional as per Section 97 read with Rules and Regulations. Third stage will be Resolution Professional acting in terms of Section 99 and submitting Report. At the fourth stage comes in adjudication of the application under Section 100 which ought to be decided by giving hearing to parties keeping in view Application, evidence collected and report under Section 99.

• According to us, as mentioned, the stage for considering default would arrive when the matter is taken up under Section 100 of IBC. The Appellant is right when the Appellant submits that if the Adjudicating Authority gives such finding in advance, the report under Section 99 could not be in the negative. 

• At the stage of Section 95 Adjudicating Authority is to act upon the application to take further steps. The stage for “allowing” Application to admit or reject the application would be under Section 100. At the stage of appointment of Resolution Professional, such allowing is not contemplated. In Section 97 no adjudication as such is involved.

• The Personal Guarantor of Corporate Debtor can express “opinion” that Resolution Professional “appointed” under Section 97 is required to be replaced under Section 98 only after Resolution Professional has been appointed. No concurrence of such Personal Guarantor is required to be taken before appointment.

 

Facts of the case

The Appellants in both appeals are Personal Guarantor of Pratibha Industries Ltd., filed this appeal against the impugned order passed by the Adjudicating Authority in application under Section 95 of the IBC appointing Resolution Professional and calling report under Section 99 of the IBC. The Creditor had served a copy of the application after it was filed and a copy of amended application also after it was filed to the Appellant but the notice through Court was not served.

 

Excerpts of the order;

# 24. Section 95(5) requires the Creditor to provide copy of the application under sub-section (1) to the Debtor. This section needs to be read with Rule 3(1)(g) reproduced above. It is evident from reading the Section alongwith the Rule that what Creditor has to serve is copy of the application “made under sub-section (1)” to the Debtor. Reading Rule 7(2) with Rule 3 shows that the application filed under sub-section (1) of Section 95 shall be submitted in ‘Form C’ and that the Creditor will serve forthwith “a copy of the application” to the Guarantor and the Corporate Debtor for whom the Guarantor is a Personal Guarantor. Thus, what has to be served is the copy of application which has been “submitted”. What is contemplated is that the application in Form C should be “submitted” and then the Creditor should serve forthwith a copy of the application to the Guarantor and the Corporate Debtor for whom the Guarantor is a Personal Guarantor. The procedure thus prescribed will give the Personal Guarantor notice of the application already filed before the Adjudicating Authority. Section 95(5) requires Creditor to provided copy of the application “made under sub-section (1)” to the Debtor. Thus, serving advance copy is not contemplated.

# 25. Section 96 deals with Interim-moratorium. As is clear from the section reproduced above, relevant is that when an application is “filed” under Section 95, the interim-moratorium will automatically kick in. Thus, the effect of interim-moratorium immediately starts when the application is “filed”. No adjudication is involved here.

 

# 30. Between Section 97 dealing with appointment of Resolution Professional and Section 99 which deals with submission of report by Resolution Professional, the legislature has provided Section 98 which deals with regard to replacement of Resolution Professional. Counsel for the Appellant argued that before taking report from the Resolution Professional, the Debtor should have got an opportunity to seek replacement of the Resolution Professional and by the impugned order this opportunity has been denied.

 

# 31. Going through Section 98 of IBC, we do not find that Section 98 is stage specific. Section 98 itself shows that the Section could be resorted to even on stages like implementation of repayment plan which would be stage beyond Section 116, where implementation and supervision of repayment plan is provided for. Thus, the argument that before report of Resolution Professional the Debtor must get a chance to seek replacement of Resolution Professional and thus notice was required to be given has no substance. It is only after the Resolution Professional is appointed by the Adjudicating Authority under Section 97(5), that step under Section 98 is contemplated.

 

# 32. Section 99 require the Resolution Professional to “examine the application” and to “submit the report” to the Adjudicating Authority “recommending for approval or rejection of the application”. What the Resolution Professional does under Section 99(2) is to “require the Debtor to prove repayment of the debt claimed as unpaid by the Creditor” by furnishing (a) evidence of electronic transfer of the unpaid amount from the bank account of the Debtor; (b) evidence of encashment of a cheque issued by the Debtor; or  (c) a signed acknowledgement by the Creditor accepting receipt of dues. This is mere collection of evidence. These provisions give opportunity to the Debtor to submit material in his favour. Section 99(3) provides that where the debt for which an application has been filed by a Creditor is registered with the information utility, “the Debtor shall not be entitled to dispute the validity of such debt”. Thus, where debt concerned is registered with information utility is established, it would be conclusive evidence of valid debt and Personal Guarantor is not entitle to raise dispute regarding validity of the debt. Thus, where the debt is registered as mentioned, dispute of validity of debt cannot be raised and thus Adjudicating Authority need not adjudicate on it.

 

Section 99(4) shows that purpose of “examining” the application, is that Resolution Professional may seek such further information or explanation in connection with the application as may be required from the Debtor or the Creditor or any other person who in the opinion of the Resolution Professional may provide such information. Thus, Resolution Professional has option to call for information from different sources. Sub-section (5) of 99 makes provision that the person from whom information or explanation is sought “shall” furnish the same within seven days of receipt of request. Here again, the procedure for Resolution Professional is of collecting necessary material or evidence.

 

# 33. Like Section 99(1) and Section 99(4), sub-section (6) of Section 99 also refers to the Resolution Professional “examining” the application and ascertaining if the applicant satisfies the requirements set out in Section 95 and that the applicant has provided the necessary information and given explanation sought by the Resolution Professional. It is only after such collecting material and, examination by the Resolution Professional, Section 9(7) requires the Resolution Professional to “recommend” acceptance or rejection of application in his report. (Provision with regard to fresh start has not been enforced and thus sub-section (8) of Section 99 will not be relevant for present.) Sub-section (9) of Section 99 requires the Resolution Professional to “record” the reasons for acceptance or rejection of the application. Thus, the recommendation has to be supported by Resolution Professional with reasons. Resolution Professional does not adjudicate and only gives his reasons for the recommendation. Copy of report is to be given to the Debtor or Creditor, as the case may be, as per Section 99(10).

 

# 37. Form A referred in Regulation 4(2) is part of the Forms under the Regulations and provides for particulars required to be given by the Resolution Professional while giving written consent to act as Resolution Professional. These are protective measures. The procedures are time bound and legislature has expressed faith in the Resolution Professionals empanelled. Section 97(2)(a) does not bar the same Resolution Professional from being appointed who may have filed the application for Creditor under Section 95(1).

 

# 41. It has been argued that although in the present matter the Creditor had served a copy of the application after it was filed and a copy of amended application also after it was filed to the Appellant but the notice through Court was not served. We find from the scheme, as discussed above, the requirement is only to the extent that the application will be filed after serving a notice in terms of “Form B” of the Rules and when the application is filed in Form C the same would be served on the Personal Guarantor. This acts as a notice to the Personal Guarantor who would be given opportunity by the Resolution Professional while examining the application in terms of Section 99 of IBC to submit material as mentioned. Before the stage of appointment of the Resolution Professional, the Code or Rules and Regulations do not provide for any hearing as such to be given to the Debtor. Undertone of Section 97(5) also is to bind Adjudicating Authority to appoint Resolution Professional as nominated by the Board. Thus, once application under Section 95 is “filed” the next step for Adjudicating Authority is to appoint the Resolution Professional.

 

# 42. However, considering the judgment of the Hon’ble Supreme Court in the matter of ‘Swiss Ribbons’ it appears to us that keeping principles of natural justice in view, limited notice of the application should be given to the Personal Guarantors of the Corporate Debtors. The limited notice has to be only to secure presence of the Personal Guarantor referring to the Interim Moratorium which has commenced. Before appointment of the Resolution Professional no hearing as such is contemplated and before appointment of the Resolution Professional the Debtor cannot be allowed to raise disputes for which the stage would be Section 100. Under NCLT Rule 11, Adjudicating Authority is duty bound to pass orders to prevent abuse of process. As such, limited notice to appear may be given to the Personal Guarantors so that when Resolution Professional is appointed, he may provide material as per Section 99(2) of IBC. Till the stage of Section 100, the process is of collecting necessary evidence.

 

# 43. The Appellant is himself criticizing the impugned order claiming that the Adjudicating Authority has already recorded finding that the Personal Guarantor has committed a default and thus the Resolution Professional cannot while examining the application under Section 99 give a contrary opinion. At the same time, the Learned Senior Counsel for the Appellant has tried to submit that before appointment of Resolution Professional the Personal Guarantor should be able to show that the debt is not due or that it is not payable. This is contradiction. In our view, the stage for examining merits of the Application would be Section 100 of IBC. To prevent abuse of process of double hearings, first on merit before appointment of Resolution Professional and again at the stage of Section 100 which will defeat the objects of IBC by protracted disputes, after limited notice to appear has been issued even if Debtor raises disputes on merit, the same may be adjudicated only after receipt of report from Resolution Professional under Section 99. Before that point of time the process is more of filing of application and collecting of evidence through a professional person like Resolution Professional.

 

# 44. In substance, once the application is “filed” (as per Section 95, 96 read with Rule 10) the Adjudicating Authority has to act on it, and following principles of natural justice, give limited notice to Personal Guarantor to appear referring to the Interim Moratorium that has commenced as per terms of Section 96. Then the next stage is of appointing Resolution Professional as per Section 97 read with Rules and Regulations. Third stage will be Resolution Professional acting in terms of Section 99 and submitting Report. At the fourth stage comes in adjudication of the application under Section 100 which ought to be decided by giving hearing to parties keeping in view Application, evidence collected and report under Section 99.

 

# 46. The observations have been made by the Adjudicating Authority that the Corporate Guarantor (should have been only ‘Guarantor’) has not filed any submission and on date of hearing there was no representation. It appears that the Adjudicating Authority was of the view that service of ‘Form C’ on 29th August, 2020 and ‘Amended Form C’ on 28th January, 2021 was the notice. Having gone through the Form and Rules and Regulations, we do not find that anywhere it is provided that when the Form is submitted it would also contain notice of date as to when the matter is coming up before the Adjudicating Authority. In the absence of any such requirement, we find, as above, that there has to be limited notice for presence conveying the “filing” of application and commencing of Interim Moratorium under Section 96 from date of filing (to be mentioned).

 

# 47. We also find that it was an error on the part of Adjudicating Authority to observe in Para 10 as reproduced above and hold that there is a “default” when matter was at the stage of acting on the application under Section 95 read with Section 96. According to us, as mentioned, the stage for considering default would arrive when the matter is taken up under Section 100 of IBC. The Appellant is right when the Appellant submits that if the Adjudicating Authority gives such finding in advance, the report under Section 99 could not be in the negative. Again the Adjudicating Authority mentioned in Para 11 of the impugned order that it was “allowing” the application under Section 95. At the stage of Section 95 Adjudicating Authority is to act upon the application to take further steps. The stage for “allowing” Application to admit or reject the application would be under Section 100. At the stage of appointment of Resolution Professional, such allowing is not contemplated. In Section 97 no adjudication as such is involved.

 

# 48. The Personal Guarantor of Corporate Debtor can express “opinion” that Resolution Professional “appointed” under Section 97 is required to be replaced under Section 98 only after Resolution Professional has been appointed. No concurrence of such Personal Guarantor is required to be taken before appointment. Apparently, the “opinion” contemplated is limited to say “X” Resolution Professional should be replaced. Reading Section 98(1) with Section 98(3) what appears relevant is whether there is disciplinary proceeding pending against the “X” Resolution Professional appointed.

 

# 49. For reasons mentioned above, Company Appeal (AT) (Insolvency) No. 316 of 2021 requires to be partly allowed. The findings and observations made by the Adjudicating Authority in Para 9 to 11 of impugned order are set aside. The appointment of Mr. Ram Ratan Kanoongoas Resolution Professional is not disturbed. It is stated that he has already given report. As we have set aside the premature observations made, with regard to default, by the Adjudicating Authority, we set aside the report given in consequence to such order. We remit back the matter to the Adjudicating Authority. Parties to appear before Adjudicating Authority on 20th August, 2021.The Resolution Professional will give opportunity to the Appellant in terms of Section 99 and give fresh report. The Adjudicating Authority will then proceed further with the matter as per law in the light of our observations and findings. With these observations the appeal is disposed of.

 

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