Locus Objection Cannot Be Decided Before Adjudicating Authority Examines Personal Guarantor Insolvency Plea: NCLAT

The National Company Law Appellate Tribunal (NCLAT) at Delhi has recently held that objections questioning a financial creditor's locus to initiate insolvency proceedings against personal guarantors cannot be adjudicated before the adjudicating authority takes up the insolvency application for a decision on whether it should be accepted or rejected.

A bench comprising Officiating Chairperson Justice Yogesh Khanna and Technical Members Barun Mitra and Ajai Das Mehrotra observed that “the issue of locus and maintainability cannot be adjudicated prior to the stage of Section 100 of the IBC.”

The tribunal relied on the Supreme Court's ruling in Dilip B. Jiwrajka v. Union of India (2024), which held that no judicial determination takes place until the adjudicating authority decides under Section 100 whether to accept or reject the application.

The appeals were filed by Vinod Doulatani and Haresh Doulatani against orders passed by the NCLT Mumbai appointing a Resolution Professional in insolvency applications filed by IIFL One Value Fund-Series B against them under Section 95 of the Insolvency and Bankruptcy Code, 2016.

The NCLT had appointed the Resolution Professional under Section 97, issued an interim moratorium under Section 96 and directed the RP to examine the applications, including questions concerning limitation and invocation of the personal guarantees, and submit a report under Section 99.

The appellants argued that IIFL had no locus to initiate the proceedings because the personal guarantees had been executed in favour of IDBI Trusteeship Services Ltd., the debenture trustee, and not directly in favour of IIFL.

They contended that the debenture trustee could invoke the guarantees and initiate proceedings only on written instructions from debenture holders representing at least 75% of the outstanding debentures. According to them, IIFL held only 24.51% of the voting share, while Rare Asset Reconstruction Ltd. held 65.77% and Renaissance Fiscal Services Pvt. Ltd. held 4.49%.

The appellants further argued that IIFL had neither obtained the requisite majority instructions nor secured authorisation from the debenture trustee. They contended that the NCLT ought to have decided this objection before appointing the RP.

The NCLAT, however, held that the question of locus and maintainability could not be adjudicated at this stage. Relying on Dilip B. Jiwrajka, it noted that no judicial adjudication takes place during the stages under Sections 95 to 99 of the IBC and that the RP's report is recommendatory in nature.

The tribunal also referred to Bank of Baroda v. Farooq Ali Khan, Canara Bank v. Uma Kumari Singh, CL Sharma v. Bank of Maharashtra and Central Bank of India v. Deepen Arun Parekh in support of the position that adjudicatory issues are to be considered when the adjudicating authority exercises its jurisdiction under Section 100.

It distinguished Prabhaben Ravjibhai Harkani v. Bank of Baroda, noting that the decision concerned an application under Section 94 of the IBC filed by a debtor, whereas the present proceedings arose from creditor-initiated applications under Section 95.

The appellate tribunal accordingly declined to interfere with the NCLT's orders and dismissed both appeals. Pending applications were also disposed of.