Key Takeaway
In a significant ruling delivered on February 20, 2025, the Supreme Court has reaffirmed the statutory framework of the Insolvency and Bankruptcy Code (IBC), emphasizing that High Courts should not prematurely interdict personal insolvency proceedings through writ jurisdiction under Article 226 of the Constitution.
Case Background
The case arose from a personal guarantee executed by a promoter and director of Associate Décor Limited, who had guaranteed various loans availed by the corporate debtor from a consortium of banks. Following defaults, the creditor invoked the personal guarantee demanding approximately Rs. 244 crores.
After the guarantor and others offered only Rs. 25 crores as a full and final settlement, the creditor initiated personal insolvency proceedings under Section 95(1) of the IBC. The Adjudicating Authority appointed a resolution professional and directed the submission of a report as per Section 99 of the IBC.
Instead of allowing this statutory process to continue, the guarantor approached the Karnataka High Court through a writ petition under Article 226, claiming that his liability as a guarantor had been waived. The High Court intervened and held that the personal insolvency proceedings were not maintainable, resulting in the disposal of the insolvency proceedings.
Supreme Court’s Analysis
The Supreme Court, comprising Justice Pamidighantam Sri Narasimha and Justice Manoj Misra, set aside the High Court’s order and restored the proceedings before the Adjudicating Authority. In its analysis, the Court highlighted several crucial aspects of personal insolvency proceedings under the IBC:
- Statutory Process Must Be Respected: The Court emphasized that the IBC prescribes a specific statutory framework for personal insolvency proceedings that should be allowed to run its course.
- Timing of Objections: Reaffirming its earlier decision in Dilip B. Jiwrajka v. Union of India (2024), the Court held that objections regarding the existence of debt and other factual disputes should be adjudicated by the Adjudicating Authority only after the resolution professional submits their report under Section 99.
- Role of Resolution Professional: At the stage of appointing a resolution professional, no adjudicatory function is involved. The resolution professional is tasked with collating information and making recommendations, which the Adjudicating Authority then considers under Section 100.
- Limits of Judicial Review: While acknowledging that judicial review is not excluded, the Court cautioned that High Courts should not substitute themselves for specialized statutory authorities. The Court noted that matters concerning the existence of debt and factual issues fall within the domain of the Adjudicating Authority under the IBC.
Implications for Insolvency Practice
This ruling has significant implications for stakeholders involved in insolvency proceedings:
- For Creditors: The decision reinforces the statutory process under the IBC, providing creditors with greater certainty that personal insolvency proceedings will follow their prescribed course without premature judicial intervention.
- For Guarantors: Personal guarantors must now fully engage with the IBC process, addressing their objections before the Adjudicating Authority at the appropriate stage rather than seeking early intervention from High Courts.
- For Legal Practitioners: The judgment clarifies the jurisdictional boundaries between specialized tribunals and High Courts, emphasizing the need to exhaust statutory remedies before seeking judicial review.
Conclusion
The Supreme Court’s judgment in this case underscores the importance of maintaining legal discipline and respecting specialized statutory frameworks. By setting aside the High Court’s premature intervention and restoring the insolvency proceedings, the Court has reinforced the primacy of the IBC’s procedural framework in resolving insolvency matters.
This ruling serves as a reminder that while judicial review remains an important constitutional safeguard, it should be exercised with restraint, particularly where the legislature has established specialized mechanisms for dispute resolution.
This blog post is for informational purposes only and does not constitute legal advice