Adjudicating Authority Is Not Bound By The Recommendation Of The Resolution Professional Under Section 99 Of The Insolvency And Bankruptcy Code, 2016: Karnataka High Court

In its recent decision in the case of Sri Babu A Dhammanagi vs Union of India on April 5, 2022, a division bench of the Karnataka High Court dismissed a writ petition challenging the constitutional validity of Sections 95, 99, and 100 of the Insolvency and Bankruptcy Code, 2016 (“the Code”) as lacking merit.

The facts of the case are that the Financial Creditor (Piramal Capital and Housing Finance Limited) filed an application before the Hon’ble National Company Law Tribunal, Bangalore (“NCLT”) through the Resolution Professional under Sections 95, 99, and 100 of the Insolvency and Bankruptcy Code, 2016 (“the Code”) because it found no merit to the challenge.

The appointment of the Resolution Professional was confirmed by the Hon’ble NCLT under Section 97 of the Code. The Personal Guarantor challenged the Resolution Professional’s appointment in a writ petition filed before the Karnataka High Court, seeking the following:

  • Declaration that Section 95(1) of the Code is unconstitutional insofar as it allows applications to be filed through the resolution professional.
  • Declaration that Sections 99 and 100 of the Code are unconstitutional because they violate Article 14 of the Constitution.

The Petitioner contended that under Section 95 of the Code, a creditor can file an application to initiate insolvency resolution through a Resolution Professional. It was argued that the same Resolution Professional who files the application must examine it and submit a report on its rejection or approval. As a result, the entire procedure is unconstitutional, because no man can be the judge of his own case.

The Financial Creditor, on the other hand, contended that the procedure outlined in Sections 95 to 100 of the Code was a time-bound procedure that was fair and reasonable, with adequate safeguards. The Hon’ble Kerala High Court upheld the constitutional validity of Sections 95, 97, 99, and 100 of the Code in the case of John Zachariah and Ors. v. UOI & Ors., 2022 SCC OnLine Ker 849.

The Karnataka High Court dismissed the petition, citing the Supreme Court’s decision in Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta (2021) 7 SCC 209, as lacking merit. The Court determined that the process contemplated by Sections 95 to 100 is a time-limited process that requires the Resolution Professional to first provide reasons for his recommendation. Second, the Resolution Professional’s role is limited to making recommendations; there is no adjudication on the part of the Resolution Professional. The Adjudicating Authority makes the final decision on whether the application should be admitted or rejected, and it is not bound by the Resolution Professional’s recommendation.

The High Court also rejected the Petitioner’s claim that the appointment of the same Resolution Professional who filed the application with the NCLT was arbitrary. The Court noted that the Code establishes certain eligibility criteria for Resolution Professionals, as well as a Code of Conduct that governs their actions. The Court went on to say that a Resolution Professional has no personal stake in the case.

In light of the foregoing, the court dismissed the Personal Guarantor’s petition.

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