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NCLAT: IBC applies to Personal Guarantors Regardless of the CIRP Status of Corporate Debtor

Introduction

The case Mahendra Kumar Agarwal v. PTC India Financial Services Ltd.[i] addresses a contentious issue: whether a petition filed under s. 95 of the Insolvency and Bankruptcy Code, 2016 (‘IBC’) read with r. 7(2) of the Insolvency & Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtor) Rules, 2019 (‘Rules’) against a Personal Guarantor is maintainable.


In this matter, the National Company Law Appellate Tribunal (‘NCLAT’) affirmed the order passed by the National Company Law Tribunal (‘NCLT’) and held that the jurisdiction to initiate an insolvency proceeding against a Personal Guarantor vest with the NCLT, even when there is no Corporate Insolvency Resolution Process (‘CIRP’) pending against the Corporate Debtor.


Brief Facts

  • In the present case, Mahendra Kumar Agarwal (‘Appellant’) stood as a personal guarantor for the Corporate Debtor namely, M/s Gati Infrastructure Bhamsey Power (P) Limited (‘CD’) to secure a loan from a consortium of lenders including the Respondent as the Financial Creditor (‘FC’) of Rs. 116,07,13,161/-.

  • However, the project got stalled due to the failure of the CD to achieve financial closure of cost overrun debt and to infuse equity. Subsequently, the FC classified the CD’s account as a Non-Performing Asset (‘NPA’) on 31.03.2018.

  • To secure the payment of the outstanding amount, IFCI (Lead Lender of the Consortium) issued recall notices dated 11.02.2019 and 08.03.2019 to the Appellant demanding a sum of Rs. 150,08,42,949 owed to the FC. Subsequently, the FC issued a demand notice dated 12.03.2020 to the Appellant demanding payment of Rs. 1,76,75,60,935 due as on 15.01.2020 and in turn the Appellant failed to make the said payment.

  • Upon filing the application under s. 95 of the IBC, read with r. 7(2) of the Rules, to initiate insolvency proceedings against the Appellant before the NCLT, the petition was admitted. It was held that, according to the interpretation of s. 60 of the IBC, the authority for insolvency resolution and liquidation of a Corporate Person, including a CD and personal guarantor, shall vest with the NCLT having territorial jurisdiction over the location of the registered office of the corporate person.

  • Aggrieved by the said order passed by the NCLT, the Appellant preferred this appeal before the NCLAT. The Appellant argued that ss. 60 and 179 of the IBC clarify the priority of preferences of the Tribunal in insolvency proceedings against personal guarantors, individuals and CDs and asserted that the insolvency proceedings relating to a CD fall under the supremacy of the Tribunal, while those involving a personal guarantor, or an individual are under the authority of the Debt Recovery Tribunal (‘DRT’). The Appellant also claimed that a dispute regarding the non-disbursal of the sanctioned loan caused the loss of property, and the project was pending adjudication before the DRT Delhi which made the present application not maintainable.


Held

  • The NCLAT dismissed the appeal and held that the term ‘Guarantee’ connotes an independent obligation of the guarantor, which is evident from ‘Personal Guarantee,’ and that there is ‘no requirement’ for a ‘Person’ to exhaust remedies against a CD before issuing demand in terms of the personal guarantee. Therefore, creditors can initiate insolvency proceedings against the personal guarantor, even if there are no insolvency proceedings initiated or pending against the CD.

  • The NCLAT clarified that according to s. 60(1) of the IBC, the NCLT has jurisdiction to entertain or initiate insolvency proceedings against personal guarantors, as it provides for a single forum for adjudication of such proceedings against both CDs and personal guarantors, namely the Adjudicating Authority or the NCLT.

  • To determine the maintainability of the petition, the relevant factor is the state of affairs on the date of filing the petition, rather than subsequent events. Furthermore, the requirement under s. 60(2) of the IBC pertains to the ‘pendency’ of insolvency proceedings against the CD, not their ‘admission’.

  • The NCLAT relied on the decision of Lalit Kumar Jain v. Union of India & Ors.[ii], wherein the Apex Court held that even if the Adjudicating Authority affirms the resolution plan of the CD, it does not automatically discharge the personal guarantors from their liabilities under the Contract of Guarantee. It further upheld the validity of ss. 90 to 120-B of the IBC, pertaining to the personal guarantor.

  • The NCLAT observed that the pendency of CIRP proceedings against the CD is not a condition precedent for initiating insolvency proceedings against the personal guarantor, and I also noted that the Appellant has filed a transfer petition before the Apex Court seeking the transfer of the main company petition from NCLT Hyderabad to DRT Delhi, but the Supreme Court dismissed it as withdrawn on 21.01.2022.

Analysis

This decision simply states that creditors can initiate insolvency proceedings against a personal guarantor independently, regardless of the principal borrower’s CIRP status. This reaffirms the principle that a guarantor’s liability is tied to the debtor’s default, allowing creditors to proceed against either or both.

However, the issue of jurisdiction for insolvency proceedings against the personal guarantor has been a point of contention. Prior to this ruling, conflicting opinions existed. For example, in cases like Altico Capital v. Rajesh Patel[iii] & Ors and Insta Capital v. Ketan Vinod Shah[iv], the NCLT required an application against the CD at the DRT before admitting insolvency proceedings against the personal guarantors. The landscape changed with Mahendra Kumar Jajodia v. State Bank of India, Stressed Asset Management Branch[v], where the Supreme Court upheld the NCLAT’s order, stating that s. 60(1) of the IBC is a substantive part of the law, allowing all personal guarantor applications, regardless of the CD’s status, to be heard at NCLT.


S. 60(1) designates jurisdiction for both corporate entities and personal guarantors, emphasizing the need to consider the personal guarantor alongside the CD. S. 60(5) of the IBC empowers the NCLT similarly to the DRT. Although s. 79 designates insolvency matters involving individuals and partnership firms to the DRT, s. 179 assigns jurisdiction for insolvency proceedings against individuals and partnership firms as DRT, subject to s. 60’s primacy over s. 179.


The legislative intent behind the inclusion of s. 60 in the IBC was to unify jurisdiction for both personal guarantors and CDs undergoing insolvency proceedings. This aims to prevent separate and conflicting proceedings, ensuring a smoother resolution process.


In summary, this judgment distinguishes the personal guarantor as an individual and the term ‘individual’ in the context of CIRP jurisdiction. It also affirms lenders’ rights to initiate insolvency proceedings against the personal guarantor without initiating proceedings against the CD, particularly when the CD lacks assets to cover the debt.


End Notes

[i] Mahendra Kumar Agarwal v. PTC India Financial Services Ltd., 2023 SCC OnLine NCLAT 421

[ii] [2021] 127 taxmann.com 368 (SC)

[iii] I.A 1062 of 2021

[iv] 2021 SCC OnLine NCLT 486

[v] 2022 SCC OnLine SC 908


Authored by Kushagra Gahlot, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.

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