[NCLAT – New Delhi] Decision on the Applicability of Interim Moratorium to Partnership Firm’s Assets Where a Partner is a Personal Guarantor

Introduction

In Ramesh Kumar Chugh v. Assets Care & Construction Enterprises Ltd.[i], the National Company Law Tribunal, New Delhi (‘NCLAT’) examined whether the interim moratorium initiated under s. 96 of the Insolvency and Bankruptcy Code, 2016 (‘IBC’), which applies to personal guarantors (‘PGs’), extends to the assets of a partnership firm where the guarantor was a partner.

Facts

• Mr. Ramesh Kumar Chugh (‘Appellant’) was a PG for an operational debt owed by M/s. Sahil Home Loomtex Pvt Ltd (‘SHLPL’) and a partner in Sheena Exports (‘SE’), which had taken loans from multiple banks.

• The operational creditor (OC) had filed a company petition under s. 95 of the IBC against the Appellant for repayment of the debt owned by SHLPL. Subsequently, interim moratorium under s. 96 of the IBC was initiated, and an Interim Resolution Professional (IRP) was appointed.

• Following defaults by SE, the banks assigned these loans, along with their underlying securities, in favour of Assets Care & Construction Enterprises Ltd. (‘Respondent’). Due to non-repayment, the Respondent initiated the auction of three properties owned by SE.

• The Appellant argued that the auction notices issued by the Respondent conflicted with the interim moratorium under s. 96 of the IBC, and the auction cannot take place due to the dissolution of the partnership firm, thereby shifting the liabilities onto its individual partners as per s. 45 of the Partnership Act, 1932 (‘Act’).

• The Appellant further contended that s. 48 of the Act provides for the settlement of partnership debts post-dissolution for repayment of debts. However, since the interim moratorium under s. 96 of the IBC had been initiated; the Appellant argued that s. 178 of the IBC should apply, giving priority to the debts of the partnership firm over the personal debts of its partners under the IBC’s waterfall mechanism.

• The National Company Law Tribunal (‘NCLT’) dismissed the application of the Appellant, and being aggrieved by the same, the Appellant filed this appeal under s. 61 of the IBC.

Held

• The NCLAT observed that under s. 96(1)(a) of the IBC, the interim moratorium applies to all debts of the PG, and as per s. 96(1)(b) of the IBC, any legal action related to such debts is stayed. The NCLAT also interpreted the term ‘creditors of the debtor’ under s. 96 (1) (b) (ii) of the IBC, which restricts all other creditors from initiating any legal action with respect to debt for which application under s. 95 of the IBC has been initiated.

• The NCLAT upheld the NCLT’s decision and relied on the Hon’ble Supreme Court’s decision in Dilip B. Jiwrajka v. Union of India[ii], observing that the interim moratorium under s. 96 of the IBC applies to the debt, not the debtor, and stays only legal actions concerning the specific debt for which an application under s. 95 of the IBC was filed.

• The NCLAT, after going through the partnership deed of SE, observed that the firm was not responsible for the losses incurred by any of its partners through separate business. Thus, it was held that the moratorium does not extend to the assets of the partnership firm as s. 95 of the IBC application relates to a personal guarantee by a partner, and the personal guarantee and the partnership’s assets are treated separately.

• The NCLAT further opined that while s. 238 of the IBC ensures its provisions prevail over other laws. This does not mean extending the personal guarantee-related moratorium under s. 96 to partnership assets.

• The NCLAT found no merit in the Appellant’s claim and dismissed the appeal, upholding the NCLT’s decision.

Our Analysis

This decision of the NCLAT is significant as it clarifies the limited scope of the interim moratorium under s. 96 of the IBC, reinforcing that it applies only to debts covered by the personal guarantee and not to unrelated assets of the debtor. The NCLAT emphasized that while legal proceedings related to the personal guarantee are stayed, the creditors can still continue recovery actions against separate assets not covered by the personal guarantee.

This decision reinforces that the dissolution of a partnership firm does not automatically subject its assets to the moratorium, as the firm’s liabilities and assets remain distinct from those of its individual partners. By distinguishing personal obligations from partnership liabilities, the NCLAT upheld the principle that IBC protections cannot be invoked to shield separate assets from legitimate recovery proceedings. The decision provides greater legal certainty for financial institutions and creditors by reinforcing that IBC protections cannot obstruct lawful asset recovery unless explicitly provided for under insolvency proceedings.

End Notes

[i] 2024 SCC OnLine NCLAT 1164 dated 15.10.2024.

[ii] MANU/SC/1274/2023.

Authored by the Metalegal Editorial Board, the views expressed are personal and do not constitute legal advice or opinion.