Insolvency of personal guarantors – which NCLT is right?!

Application seeking initiation of insolvency against personal guarantors (of a corporate debtor) can be filed before the National Company Law Tribunal (“NCLT”). The question is which NCLT will have appropriate jurisdiction. The Supreme Court of India (“Supreme Court”) has resolved (!) this issue in the matter of Mahendra Kumar Jajodia versus State Bank of India¹ (“Jajodia case”).

Brief Background:

State Bank of India ("SBI”) filed an application under the Insolvency and Bankruptcy Code, 2016 ("Code”) seeking initiation of Corporate Insolvency Resolution Process (“CIRP”) against the guarantor. The application came to be rejected by the NCLT, Kolkata being premature in nature since no CIRP, or liquidation process was pending against the Corporate Debtor. The National Company Law Appellate Tribunal, New Delhi (“NCLAT”) set aside the decision of NCLT, Kolkata and revived the application filed by SBI before NCLT.

The Supreme Court upheld the decision of the NCLAT. It observed that an application under the Code², against the personal guarantor of the corporate debtor, cannot be rejected on the ground that no CIRP or liquidation proceedings qua the corporate debtor are pending before the NCLT.

Relevant Law:

1) By way of the Insolvency and Bankruptcy Code (Amendment) Act, 2018, personal guarantors were added as a separate class of individuals against whom insolvency proceedings could be initiated.
2) Subsequently, Part III of the Code³ was made applicable to personal guarantors of principal borrowers, by a notification dated 15th November 2019⁴.
3) The Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 (“Personal Guarantors Rules”), came into effect from 1^st December 2019. As a result, creditors could initiate insolvency proceedings against personal guarantors (as if they were corporate guarantors).
4) As per Section 60 of the Code:

(a) CIRP and liquidation for corporate persons is to be adjudicated by the authority (as prescribed in section 60 of the Code);
(b) Forum in relation to CIRP or liquidation process for corporate persons, including corporate debtors and personal guarantors, will be the jurisdictional NCLT having jurisdiction over registered office of the corporate debtor [Section 60(1) of the Code];
(c) Application relating to insolvency resolution or liquidation or bankruptcy of a corporate guarantor, or personal guarantors of the Corporate Debtor, shall be filed before the NCLT where the CIRP or liquidation proceeding of the Corporate Debtor is pending [Section 60(2) of the Code]; and
(d) Stipulates for transfer of existing proceedings against the personal guarantors before any court/tribunal to the jurisdictional NCLT of the Corporate Debtor [Section 60(3) of the Code].

The Conundrum:

Before the decision in the Jajodia case, the lenders were faced with the dilemma of:

1) Whether the CIRP of a Corporate Debtor is a mandatory pre-requisite before initiating proceedings against its personal guarantors?
2) Which is the correct forum to adjudicate upon an application under Section 95(1) of IBC against the personal guarantors.

Opposing Views:

This dilemma was attributed due to the following divergent views of various courts:

Further, the Supreme Court held that the moment there is a proceeding against the corporate debtor pending under the Code, any bankruptcy proceeding against the individual personal guarantor will, if already initiated before the proceeding against the corporate debtor, be transferred to NCLT⁸.

The Supreme Court also held that the forum for personal guarantors will be NCLT, if a parallel resolution process or liquidation process is pending in respect of a corporate debtor for whom the guarantee is given⁹.

Supreme Court Findings and Observations:

Keeping the foregoing in mind, it was argued in the Jajodia case that:

1) Personal Guarantor Rules¹⁰ stipulate that the appropriate adjudicating authority for matters relating to insolvency of individuals and partnership firms falling under Part III of the Code¹¹ is the DRT.
2) It was further argued that the words “without prejudice” occurring in section 60(2) of the Code when read together with section 60(1), 60(3) and 60(4) of the Code clearly leads to the conclusion that an application relating to the CIRP or bankruptcy of personal guarantors of a corporate debtor can be filed before the NCLT only during the pendency of a CIRP or liquidation process of a Corporate Debtor.

Per contra, the Supreme Court has affirmed the view of the NCLAT wherein it has been held that in a particular case where no CIRP or liquidation proceeding of the corporate debtor is pending before NCLT, an application for seeking initiation of corporate insolvency against personal guarantors can be filed in the NCLT having territorial jurisdiction over the place where the registered office of the corporate person is located.

Conclusion:

It is a settled law that the liability of the guarantor is co-extensive with that of the principal debtor and the Supreme Court has allowed creditors like banks and other financial service providers to proceed against personal guarantors.

Creditors can now initiate insolvency of a personal guarantee in the event of default by the corporate debtor, even without going against the corporate debtor itself. The Jajodia case empowers the jurisdictional NCLT to initiate insolvency resolution process against the personal guarantors, making personal guarantee more than just a paper security.

Relying upon the decision of the Jajodia case the Hon’ble High Court of Delhi (“DHC”) has reaffirmed that that the appropriate ‘Adjudicating Authority’ for matters pertaining to insolvency of personal guarantors of a corporate debtor would be the NCLT, and not the Debt Recovery Tribunal. DHC further held that filing an application for insolvency of a personal guarantor before the NCLT would be maintainable even if no corporate insolvency resolution process is pending against the corporate debtor before the NCLT¹².

The Supreme Court’s decision in the Jajodia case has brought some relief to the creditors who can now initiate insolvency proceedings against personal guarantors before the NCLT in the absence of insolvency proceeding against the of the Corporate Debtor.

Authors:

Jayesh H
Co-Founder, Juris Corp
Email: jayesh.h@jclex.com

Sharmistha Ghosh
Principal Associate, Juris Corp
Email: sharmistha.ghosh@jclex.com

Palak Nenwani
Associate, Juris Corp
Email: palak.nenwani@jclex.com

_{¹ 2022 SCC OnLine SC 908
² Section 95 Application by creditor to initiate insolvency resolution process (1) A creditor may apply either by himself, or jointly with other creditors, or through a resolution professional to the Adjudicating Authority for initiating an insolvency resolution process under this section by submitting an application.
³ PART III - Insolvency Resolution And Bankruptcy For Individuals And Partnership Firms.
⁴ F. No. 30/21/2018-Insolvency Section.
⁵ Altico Capital India Ltd. v. Rajesh Patel & Ors I.A. 1062/ 2021 in C.P. 293/ 2020; Insta Capital Pvt. Ltd. v. Ketan Vinod Kumar Shah, 2021 SCC Online NCLT 486
⁶ Rohit Nath v. KEB Hana Bank Ltd., 2021 SCC Online Mad 2734
⁷ PNB Housing Finance Ltd. v. Mr. Mohit Arora and Ors., 2021 SCC Online NCLT 488; PNB Housing Finance Ltd. v. Goldy Gupta, 2021 SCC Online NCLT 487
⁸ State Bank of India v. V. Ramakrishnan and anr., (2018) 17 SCC 394
⁹ Lalit Kumar Jain v. Union of India and Ors., (2021) 9 SCC 321
¹⁰ Section 79(1) and 179 of the Code read with Rule 3(1)(a) and 7(2) of Personal Guarantor Rules
¹¹ This part applies to matters relating to fresh start, insolvency and bankruptcy of individuals and partnership firms
¹² Axis Trustee Services Limited v. Brij Bhushan Singal & Anr., 2021 SCC OnLine Del 4501}

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