Bombay High Court Quashes IBBI’s Three-Month Suspension of Liquidator; Holds Show-Cause Notice Based on Extraneous Material Violated Statutory Procedure and Natural Justice Principles
Bombay High Court Sets Aside Liquidator’s Three-Month Suspension; Finds IBBI Investigation Cleared Him but Disciplinary Notice Raised Unrelated Allegations
Facts
Aaj Ka Anand Papers Limited defaulted on its loan obligations, following which SBI initiated proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016. CIRP commenced on 31 March 2022 but failed, and the company entered liquidation on 12 April 2023. Jitender Kumar Jain was appointed liquidator and constituted the Stakeholders’ Consultation Committee (“SCC”), comprising SBI, Bank of Baroda and Edelweiss among the secured creditors.
According to Jain, the promoters and ex-directors repeatedly obstructed the liquidation process, initiated proceedings and lodged complaints against him. One NCLT application was dismissed with costs of ₹1 lakh. The lenders nevertheless supported Jain and requested him to continue as liquidator.
A promoter filed a complaint against Jain on 3 July 2023, alleging violations of the IBC and Regulations, mala fides, unethical gains and misconduct. A further set of grievances dated 10 August 2023, although not submitted in the prescribed form, was also treated by IBBI as a complaint.
An investigation followed. Crucially, the investigation ultimately found no actionable material against Jain. Yet on 9 July 2024, IBBI issued a show-cause notice raising five issues which were unrelated to the complaints that had triggered the investigation. The Court found that the notice was based on material extraneous to the investigation report.
The Disciplinary Committee ultimately found Jain guilty of three contraventions:
- irregular constitution of the SCC;
- failure to present liquidation costs in the 4th, 5th and 6th SCC meetings; and
- delay in issuing notices for the first and second auctions.
By order dated 18 December 2024, Jain’s authorisation for assignment was suspended for three months.
Edelweiss, a secured financial creditor and SCC member, separately challenged the order and supported Jain’s conduct as liquidator.
Issues
The principal issues before the Bombay High Court were whether IBBI could issue a show-cause notice under the then-existing Section 219 IBC on material extraneous to an investigation report that had found no actionable material; whether the disciplinary proceedings violated natural justice by failing to disclose and properly consider the material relied upon; whether IBBI ignored relevant circumstances while finding Jain guilty of the three contraventions; and whether the High Court could interfere with the disciplinary findings within the limited scope of Article 226 judicial review.
The Court also considered the effect of the 6 April 2026 amendment to Section 219, which subsequently inserted the words “or on the basis of material available on record”.
Petitioner Jitender Kumar Jain’s Arguments
Jain contended that the entire disciplinary process suffered from a fundamental jurisdictional and procedural defect. The original complaint was vague and allegedly time-barred, while the subsequent grievances were not even filed in the prescribed form.
More importantly, the investigation into those complaints did not substantiate the allegations. Yet IBBI issued a show-cause notice containing five entirely different allegations.
Jain argued that under Section 219 as it stood at the relevant time, read with Regulation 11 of the Investigation Regulations, IBBI had to consider the investigation report and form a prima facie opinion on its basis before commencing disciplinary action. The undisclosed material upon which IBBI actually relied was never supplied to him.
He further argued that the alleged violations were, at worst, matters of interpretation, negligence or oversight rather than misconduct. He relied upon Inspector Prem Chand v. Government of NCT of Delhi and Abdul Rauf Mohammed Khaja v. State of Maharashtra.
Edelweiss’ Arguments
Edelweiss supported Jain and asserted that, as an SCC member, it had never complained about Jain’s functioning as liquidator.
It maintained that Jain had properly performed his statutory responsibilities and that the promoters were actually obstructing the liquidation process.
The High Court did question Edelweiss’ independent standing to challenge a disciplinary penalty imposed upon Jain. Ultimately, however, the Court considered Edelweiss’ petition relevant insofar as its very filing demonstrated that an SCC member was satisfied with Jain’s functioning.
IBBI’s Arguments
IBBI argued that judicial review of disciplinary proceedings is narrow and the High Court could not sit in appeal over factual findings of the Disciplinary Committee.
According to IBBI, once a complaint triggered an investigation under Sections 217–220 IBC, the regulator could consider all material that emerged and was not confined strictly to the allegations contained in the original complaint.
IBBI emphasised its role as the statutory watchdog responsible for maintaining integrity in insolvency proceedings.
It also argued that even an alleged natural-justice violation would not justify interference unless Jain demonstrated actual prejudice. Reliance was placed on P. Gunasekaran, Lucknow K. Gramin Bank v. Rajendra Singh and Chief Commercial Manager v. G. Ratnam.
Analysis of the Law
1. Section 219 IBC Before the 2026 Amendment
This became the decisive statutory issue.
At the relevant time, Section 219 empowered IBBI, upon completion of an inspection or investigation under Section 218, to issue a show-cause notice.
The Court noted that Section 219 was amended only on 6 April 2026 to add the words:
“or on the basis of material available on record”
The addition was significant. Under the statutory framework applicable when Jain’s notice was issued, the Board was required to consider the investigation report and form its prima facie opinion accordingly.
Here, however, the investigation report had found no actionable material against Jain.
The show-cause notice nevertheless raised allegations foreign to the complaints and investigation. The Court therefore held that IBBI had adopted a procedurally irregular course.
2. Extraneous Material Could Not Be Used Without Disclosure
The Court accepted that IBBI, as regulator, possesses substantial supervisory powers and can act against insolvency professionals where warranted.
But if it intended to exercise such power on independent material, it was required at the very least to identify and disclose that material which led it to form the prima facie opinion against the professional.
Instead, the investigation material favoured Jain while the show-cause notice proceeded on a different basis.
The Court held that Jain was entitled to know the material on which the notice was issued.
Three Alleged Contraventions Examined
A. Constitution of the SCC
Jain treated SBI as representative of the class of secured financial creditors who had relinquished their security interests. Bank of Baroda and Edelweiss nevertheless attended the SCC meetings.
The High Court found Jain’s construction of Regulation 31A(3) to be at least a reasonably possible interpretation.
More importantly, neither Bank of Baroda nor Edelweiss had complained about the arrangement.
The Disciplinary Committee ignored both circumstances. The Court held that ignoring such relevant considerations constituted procedural irregularity and violated natural justice.
B. Failure to Present Liquidation Costs
The Court found a concrete defect in IBBI’s reasoning.
The show-cause notice concerned Jain’s alleged failure to present liquidation costs in the 4th, 5th and 6th SCC meetings. Yet the Disciplinary Committee also relied upon the 7th, 8th and 9th meetings, which fell outside the allegation contained in the notice.
The Court expressly termed this an error.
There was another important circumstance: Regulation 31A(6B), relied upon against Jain, came into effect on 12 February 2024, whereas notice for the fourth SCC meeting had already been issued on 10 February 2024.
The Court found IBBI’s description of Jain’s conduct as displaying a “contemptuous attitude” surprising. Where the dispute involved two possible interpretations of the Regulations and no stakeholder had complained, IBBI’s approach was considered excessively stringent. IBBI itself had characterised the violations as “technical”.
C. Delay in Auction Notices
Jain explained that promoters and ex-directors had repeatedly obstructed liquidation and created practical difficulties concerning the corporate debtor’s properties.
The SCC was aware of these problems.
Most significantly, the delays had been condoned by the NCLT. The Disciplinary Committee treated that condonation as irrelevant.
The High Court disagreed. NCLT’s condonation was a crucial consideration which IBBI could not simply disregard.
Natural Justice and Scope of Judicial Review
The High Court was careful to clarify that it was not re-appreciating the disciplinary findings as an appellate court.
Instead, it examined whether:
- relevant material had been ignored; and
- irrelevant considerations had entered the decision-making process.
Applying that standard, the Court concluded that the disciplinary order suffered from procedural irregularity and violation of natural justice, justifying interference under Article 226.
This distinction is important: the judgment does not establish unrestricted merits review of IBBI disciplinary decisions. It permits judicial review where the decision-making process itself is legally defective.
Precedent Analysis
Chairman, LIC v. A. Masilamani
This authority materially assisted Jain.
The Supreme Court had explained that “consider” requires the authority to actually think over and apply its mind to the relevant material.
The High Court applied this interpretation to Regulation 11. Since the investigation report expressly found no actionable material, IBBI could not merely refer to the report while effectively disregarding its conclusion and proceed under Section 220(2).
Inspector Prem Chand; Abdul Rauf Mohammed Khaja; K.K. Dhawan
Jain relied upon these authorities to argue that mere negligence or carelessness does not amount to misconduct.
The High Court, however, did not directly apply them, observing that they arose in service jurisprudence involving an employer-employee relationship. An insolvency professional is not an employee of IBBI; IBBI regulates and supervises the insolvency profession.
P. Gunasekaran and Chief Commercial Manager v. G. Ratnam
The Court accepted the general proposition relied upon by IBBI that writ jurisdiction over disciplinary findings is limited.
But it held that its interference in the present case remained within that narrow jurisdiction because it was examining procedural legality, consideration of relevant material and compliance with natural justice—not conducting an appeal on facts.
Naren Sheth v. Union of India
IBBI’s reliance on Naren Sheth was held misplaced because, unlike the present case, the Court in Naren Sheth was satisfied on the facts regarding the allegations against the insolvency professional.
Amit Gupta v. IBBI
The Court placed particular emphasis on Amit Gupta v. IBBI, 2024 SCC OnLine Bom 989.
Under Clause 23A of the Model Bye-Laws, the mere issuance of a show-cause notice suspends an insolvency professional’s authorisation to accept assignments. Thus, although Jain’s formal punishment was three months’ suspension, he effectively remained suspended for substantially longer because the disability operated from issuance of the show-cause notice itself.
The Court reiterated Amit Gupta’s concern that this has serious and potentially debilitating professional consequences.
Court’s Reasoning
The judgment ultimately rests on four connected propositions.
First, IBBI is a powerful statutory regulator, but it must follow the procedure prescribed by the IBC and Regulations.
Second, the investigation triggered by the promoter’s complaints resulted in a report expressly finding no actionable material against Jain. The subsequent show-cause notice nevertheless proceeded on unrelated material without adequately identifying the basis for doing so.
Third, even when examining the individual disciplinary findings, IBBI had ignored highly relevant considerations: possible alternative interpretations of the Regulations, absence of complaints from SCC members, the timing of amendments to the Regulations, promoter obstruction and NCLT’s condonation of auction delays.
Fourth, because the issuance of a show-cause notice itself has serious professional consequences under Clause 23A, IBBI must exercise particular care before initiating disciplinary proceedings. The Court expressly said the Board needs to be “more circumspect” when issuing such notices.
Conclusion
The Bombay High Court allowed both writ petitions and quashed and set aside IBBI’s disciplinary order dated 18 December 2024.
The Court also dealt with Jain’s request for an appellate mechanism against IBBI disciplinary orders. It held that the grievance had effectively been addressed by the subsequent amendment inserting Section 220(7) IBC, providing an appeal to the NCLAT against orders of IBBI’s Disciplinary Committee.
The challenge to the constitutionality of Regulation 13(3)(ba) of the Investigation Regulations, 2017 was kept open, since serious arguments had not been advanced on that issue.
Key ratio: Where an IBBI investigation finds no actionable material, disciplinary action under the pre-amendment Section 219 cannot validly proceed on extraneous, undisclosed material while ignoring the investigation report and other relevant circumstances. Such defects go to the decision-making process and justify interference in writ jurisdiction for procedural irregularity and violation of natural justice
Case Details
Case: Jitender Kumar Jain v. Union of India & Ors., with Edelweiss Asset Reconstruction Company Limited v. Insolvency and Bankruptcy Board of India & Ors.
Court: High Court of Judicature at Bombay, Ordinary Original Civil Jurisdiction
Case Numbers: Writ Petition (L) No. 2817 of 2025 with Writ Petition (L) No. 5263 of 2025
Coram: Justice Manish Pitale and Justice Shreeram V. Shirsat
Reserved: 7 July 2026
Pronounced: 25 August 2026
Result: Both writ petitions allowed; IBBI Disciplinary Committee’s order dated 18 December 2024 quashed and set aside.
