The Bombay High Court has set aside an Insolvency and Bankruptcy Board of India (IBBI) disciplinary order suspending an insolvency professional for three months, holding that the show cause notice was based on matters extraneous to the investigation and that relevant material was ignored while imposing the penalty.
The Bench of Justice Manish Pitale and Justice Shreeram V. Shirsat observed that IBBI must be more circumspect while issuing show cause notices because the initiation of disciplinary proceedings itself results in the suspension of an insolvency professional’s authorisation to accept assignments.
The bench was considering writ petitions filed by insolvency professional and Edelweiss Asset Reconstruction Company Limited against an order dated December 18, 2024, passed by IBBI’s Disciplinary Committee.
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The impugned order had suspended Jain’s authorisation for assignment for three months over alleged irregularities committed while functioning as the liquidator of Aaj Ka Anand Papers Limited.
The corporate debtor had obtained loan facilities but defaulted on repayment, following which its account was classified as a non-performing asset. State Bank of India initiated proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016, and the corporate insolvency resolution process was admitted on March 31, 2022.
After the resolution process failed, the National Company Law Tribunal ordered liquidation of the corporate debtor on April 12, 2023. Jain was appointed as liquidator and constituted a Stakeholders’ Consultation Committee comprising SBI and other secured creditors, including Bank of Baroda and Edelweiss.
According to the liquidator, the promoters and former directors of the corporate debtor repeatedly attempted to obstruct the liquidation process. He alleged that frivolous applications and police complaints were filed against him and that the lenders had nevertheless unanimously requested him to continue as liquidator.
One of the promoters filed a complaint against Jain on July 3, 2023, alleging violations of the IBC and the regulations framed under it. A further set of grievances was submitted on August 10, 2023.
IBBI treated both communications as complaints and initiated an investigation. After receiving the investigating authority’s report, the Board issued a show cause notice on July 9, 2024, raising five issues relating to Jain’s conduct as liquidator.
The High Court noted that the five issues contained in the show cause notice were unrelated to the grievances in the complaints that had triggered the investigation.
Following disciplinary proceedings, IBBI held the liquidator guilty of three contraventions: irregular constitution of the Stakeholders’ Consultation Committee, failure to present liquidation costs during certain committee meetings, and delay in issuing notices for the first and second auctions.
The High Court found that the investigation report dated May 10, 2024, had categorically concluded that no actionable material was available against the insolvency professional.
Despite this conclusion, the show cause notice proceeded on five issues that were foreign to the original complaints and the investigation initiated on their basis.
The Court observed that, under Section 219 of the IBC as it stood at the relevant time, IBBI could issue a show cause notice upon completion of an inspection or investigation. The words “or on the basis of material available on record” were introduced in Section 219 only through the amendment dated April 6, 2026.
The show cause notice issued in July 2024 could not, therefore, be justified on the basis of the subsequently amended provision.
While recognising that IBBI, as a regulator, possesses the authority to act against insolvency professionals whenever circumstances warrant, the Court held that the Board must disclose and refer to the material forming the basis of such action.
In the present case, the only identified material—the investigation report—favoured the insolvency professional. If IBBI wished to proceed on some other material, the liquidator was at least entitled to receive that material and an opportunity to respond to it, the Bench said.
The procedure adopted by the Board was consequently found to be irregular, vitiating the show cause notice.
Examining the consequential disciplinary order, the Court clarified that it was not sitting in appeal over IBBI’s factual findings. Its scrutiny was confined to procedural irregularity, consideration of relevant material and compliance with the principles of natural justice.
The Bench found that Jain had placed detailed material before the Disciplinary Committee concerning the promoters’ alleged obstruction of the liquidation process. Several applications had to be filed before the NCLT, while writ proceedings were also initiated before the High Court to secure police assistance.
In an earlier proceeding, the High Court had recorded that the liquidator was being threatened and “browbeaten” by the promoters and former directors. It had also taken note of allegedly bogus and frivolous complaints filed against him.
The Court held that this background was directly relevant to the allegations concerning delays and the performance of the liquidation process. IBBI’s failure to consider it amounted to a serious procedural infirmity and violation of natural justice.
On the allegation of irregular constitution of the Stakeholders’ Consultation Committee, the liquidator had treated SBI as the representative of the class of secured financial creditors who had relinquished their security interests.
Bank of Baroda and Edelweiss, although not separately treated as representatives, attended the committee meetings. Neither creditor had raised an objection to the arrangement.
The High Court found that the interpretation adopted by the liquidator regarding Regulation 31A(3) of the IBBI (Liquidation Process) Regulations, 2016, was at least a possible interpretation. This aspect, along with the absence of objections from the financial creditors, was ignored by IBBI.
The Bench said that where more than one interpretation of the relevant regulations was reasonably possible, adopting one such interpretation could not automatically be regarded as a serious contravention of the IBC or its regulations.
The second charge concerned the liquidator’s alleged failure to present liquidation costs during the fourth, fifth and sixth meetings of the Stakeholders’ Consultation Committee.
The Court found that IBBI had wrongly considered the proceedings of the seventh, eighth and ninth meetings even though the show cause notice was confined to the fourth, fifth and sixth meetings.
It also noted that Regulation 31A(6B), requiring presentation of liquidation costs to the committee, was introduced with effect from February 12, 2024. The notice convening the fourth committee meeting had already been issued on February 10, 2024.
Against this background, the Court expressed surprise at the Disciplinary Committee’s conclusion that the liquidator had displayed a “contemptuous attitude” towards stakeholder participation.
Even if the interpretation adopted by the liquidator was incorrect, the case involved two possible views on the regulations. Further, none of the stakeholders had complained about the conduct in question.
The Court consequently found the Disciplinary Committee’s approach excessively stringent, particularly when IBBI itself had described the contraventions as technical violations.
On the delay in issuing the first and second auction notices, the liquidator had explained that problems created by the promoters and former directors—including issues relating to occupation and parking at the corporate debtor’s properties—had to be resolved before the first auction could be conducted.
The members of the Stakeholders’ Consultation Committee were aware of these issues and had deliberated upon them.
For the second auction, the liquidator had also placed material explaining why a fresh notice could not be issued within 15 days of the failure of the first auction. Significantly, the delays had been condoned by the NCLT.
The High Court held that the NCLT’s condonation of delay was a crucial factor. IBBI erred in treating it as irrelevant while finding the liquidator guilty of delay.
The Court further highlighted that although the disciplinary order imposed a three-month suspension, the liquidator had effectively suffered suspension for a longer period.
Under Clause 23A of the IBBI Model Bye-Laws and Governing Board of Insolvency Professional Agencies Regulations, an insolvency professional’s authorisation for assignment stands suspended immediately upon initiation of disciplinary proceedings.
Referring to its earlier decision in Amit Gupta v. Insolvency and Bankruptcy Board of India, the Bench reiterated that the mere issuance of a show cause notice has serious repercussions because it prevents an insolvency professional from accepting new assignments.
The drastic and debilitating consequence of a show cause notice makes proper consideration of the investigation report under Regulation 11 of the IBBI Inspection and Investigation Regulations particularly important, the Court said.
Allowing the petitions, the High Court quashed and set aside the IBBI Disciplinary Committee’s order dated December 18, 2024.
The Court also noted that Edelweiss’s decision to challenge the disciplinary order demonstrated that, as a member of the Stakeholders’ Consultation Committee, it was satisfied with the manner in which the liquidator had conducted the proceedings.
On the request to establish an appellate mechanism against orders of IBBI’s Disciplinary Committee, the Bench noted that the recent insertion of Section 220(7) in the IBC had addressed the issue by providing an appeal before the National Company Law Appellate Tribunal.
The Court did not decide the challenge to the constitutional validity of Regulation 13(3)(ba) of the Inspection and Investigation Regulations, as detailed arguments had not been advanced on the issue. The question was kept open.
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