IBBI disciplinary order against liquidator quashed after Bombay High Court finds show-cause notice relied on material outside investigation report

Aaj Ka Anand Papers Limited was admitted to the Corporate Insolvency Resolution Process (CIRP) on 31 March 2022 and subsequently ordered into liquidation on 12 April 2023.

Jitender Kumar Jain was appointed liquidator and constituted the Stakeholders’ Consultation Committee (SCC), which included SBI, Bank of Baroda and Edelweiss Asset Reconstruction Company Ltd.

A promoter/ex-director filed a complaint against Jain before the Insolvency and Bankruptcy Board of India (IBBI), followed by further written grievances.

The investigation report dated 10 May 2024 found no actionable material against Jain.

Despite this, the IBBI issued a show-cause notice dated 9 July 2024 alleging five different contraventions concerning the constitution of the SCC, presentation of liquidation costs, and delays in issuing auction notices.

The Disciplinary Committee thereafter found Jain guilty of three contraventions and suspended his authorisation for assignment for three months by order dated 18 December 2024.

Jain challenged the show-cause notice and disciplinary order. Edelweiss, a member of the SCC, separately challenged the same order and supported Jain’s conduct as liquidator.

Whether the IBBI could issue the show-cause notice under Section 219 of the Insolvency and Bankruptcy Code, 2016, on matters extraneous to the complaints and investigation report, particularly when the investigation report found no actionable material against Jain.

Whether the show-cause notice and disciplinary proceedings violated the principles of natural justice by failing to disclose the material relied upon and by disregarding relevant material and defences submitted by Jain.

Whether the Disciplinary Committee correctly treated Jain’s conduct concerning the SCC, liquidation costs and auction notices as regulatory contraventions warranting suspension.

Whether Edelweiss, as an SCC member and secured financial creditor, had standing to challenge the disciplinary order imposed upon Jain.

The Court applied Sections 217–220 of the Insolvency and Bankruptcy Code, 2016, and the Insolvency and Bankruptcy Board of India (Inspection and Investigation) Regulations, 2017, particularly Regulations 8–12.

Under Section 219, as it stood before the 6 April 2026 amendment, the IBBI could issue a show-cause notice upon completion of an inspection or investigation; Regulation 11 required the Board to consider the investigation report and form a prima facie opinion that sufficient cause existed for action under Section 220.

The Court held that “consider” requires the authority to genuinely examine and think over the report, relying on Chairman, LIC of India v. A. Masilamani, (2013) 6 SCC 530.

The Court also applied the principles of natural justice, including the right to know the material relied upon and the obligation of the disciplinary authority to consider relevant evidence and defences.

It referred to Union of India v. P. Gunasekaran, (2015) 2 SCC 610, and Chief Commercial Manager, South Central Railway v. G. Ratnam, (2007) 8 SCC 212, regarding the limited scope of judicial review.

The Court also considered Regulation 31A of the Liquidation Process Regulations, 2016, concerning the SCC, and Clause 23A of the Model Bye-Laws, under which authorisation for assignment is suspended upon initiation of disciplinary proceedings.

The Court found that the investigation was initiated on the basis of vague complaints, but the investigation report expressly concluded that no actionable material existed against Jain.

The subsequent show-cause notice relied on five matters wholly unrelated to the complaints and was therefore based on material extraneous to the investigation report.

Since Section 219, as then applicable, did not contain the later-added words “or on the basis of material available on record,” the IBBI was required to follow the statutory investigation-based procedure and disclose the material supporting any prima facie opinion.

The Disciplinary Committee ignored Jain’s explanation that his constitution of the SCC was based on a reasonably possible interpretation of Regulation 31A(3), and that the other financial creditors had attended SCC meetings without objection.

It considered the 7th, 8th and 9th SCC meetings even though the show-cause notice concerned only the 4th, 5th and 6th meetings.

It further failed to account for the fact that the relevant provision concerning liquidation costs was introduced after notice of the 4th meeting had already been issued, and treated an arguable regulatory interpretation as a serious violation.

Regarding the auction delays, the Committee disregarded the obstruction by the promoters, the SCC’s awareness of the circumstances, and the NCLT’s condonation of the delays.

These omissions amounted to failure to consider relevant material and violated natural justice.

The Court therefore interfered within the permissible limits of writ jurisdiction, without reappreciating the merits as an appellate court.

Although Edelweiss was not directly penalised and therefore could not strictly claim to be an aggrieved party, the Court nevertheless considered its petition in view of its interest as an SCC member and its support for the liquidator.

The disciplinary order dated 18 December 2024 was quashed and set aside for violation of natural justice and failure to consider relevant material.

Both writ petitions were allowed and disposed of.

The Court did not decide the challenge to the constitutionality of Regulation 13(3)(ba) of the Investigation Regulations, 2017, as serious arguments were not advanced on that issue.

The prayer seeking directions for creation of an appellate body was not granted because the subsequent amendment inserting Section 220(7) of the IBC provided an appeal to the National Company Law Appellate Tribunal.