18 February 2022

IBC UPDATE | PROCEEDINGS AGAINST PERSONAL GUARANTOR - NCLT VS DRT

National Company Law Appellate Tribunal (NCLAT) in a very recent case of State Bank of India v. Mahendra Kumar Jajodia held that initiation of Corporate Insolvency Resolution Process (CIRP) against a corporate debtor is not a pre-requisite to initiate Insolvency Resolution Process (IRP) against a personal guarantor of a debt. This update briefly analyses this case.

Brief Facts: The Appellant in the present case, State Bank of India (SBI), in its capacity as financial creditor, filed an appeal against the Order of the National Company Law Tribunal, Kolkata Bench (NCLT) which refused to entertain an application under Section 95(1) of the Insolvency and Bankruptcy Code, 2016 (IBC) against a personal guarantor on the ground that the same is pre-mature, as CIRP against the corporate debtor had not yet been initiated.

Issue to be adjudicated: Does Section 60(2) of IBC in any way preclude filing of insolvency proceedings under Section 95 of IBC against a personal guarantor even if no CIRP proceedings are pending against the corporate debtor?

Held: NCLAT was of the opinion that the NCLT erred in holding that since no CIRP of the corporate debtor is pending, the application under Section 95(1) of IBC filed by the Appellant is not maintainable, and therefore set aside the Order of the NCLT. It was held that the application filed under Section 95(1) read with Section 60(1) of the IBC could not have been rejected only on the ground that no CIRP was pending against the corporate debtor.

NCLAT relied on an interpretation of the provisions of Section 60 of the IBC stating that the language used therein only signifies that where a CIRP against a corporate debtor proceeding is pending before a NCLT, IRP proceedings against the guarantor of such corporate debtor must lie before the NCLT, with the idea that both the proceedings would be entertained by the same NCLT. It was held that Section 60(2) of the IBC does not in any way prohibit filing of proceedings under Section 95 of IBC even if no such proceedings are pending before the NCLT.

Accordingly, the application filed by SBI under Section 95(1) of IBC was revived before the NCLT.

MHCO COMMENT:

NCLAT has provided a wide interpretation of the law set out in IBC and has deviated from the settled position of previous judgments. Further, it seems that NCLAT has missed reading Sections 79(1) and 179 of IBC, which deal with the jurisdiction of Debt Recovery Tribunals (DRT) with respect to personal guarantors. However, by this judgment, NCLAT has cleared the conundrum where without initiating CIRP against the principal borrower, a financial creditor can initiate IRP against the personal guarantors. This judgment is likely to have long lasting ramifications pertaining to the jurisdiction of DRT vis-a-vis jurisdiction of NCLT. It will be interesting to see how the Supreme Court reacts to similar cases as this will have a direct impact on the jurisdiction of DRT and the same did not seem to be the intent of the legislator while drafting IBC.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.