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The ‘when’ & ‘where’ of invoking personal guarantees

posted 1 year ago

The Supreme Court’s stay of the National Company Law Appellate Tribunal’s decision in the case of SBI Stressed Assets Management Branch v. Mahendra Kumar Jajodia, has received a lot of attention. In this case, the NCLAT had held that irrespective of pendency of any proceedings against the corporate debtor, the National Company Law Tribunal will have jurisdiction to entertain an application against personal guarantor.

The personal guarantor has gone on to assail the NCLAT’s order before the SC; the SC stayed the operation of the NCLAT order basis sections 60(2) and (3) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) and observations made in Lalit Kumar Jain v. Union of India in this regard. However, a conclusive decision is yet to be rendered.

Two legal issues that arise in this context are worth examining. The first is whether a personal guarantor can be proceeded against under IBC when a corporate insolvency resolution process (“CIRP”) is not pending.

Despite some conflicting judgements of the NCLT on the first issue, the matter has been largely settled by the Hon’ble Supreme Court in Lalit Kumar Jain. In this case, the court held that a personal guarantor’s liability does not cease even after the approval of a resolution plan, and may be proceeded against.

This implies that proceedings against personal guarantors need not be linked to the CIRP of the principal debtor. Therefore, this should imply that even if a CIRP is not pending for the principal debtor, either because it has concluded or because it has not been filed, a personal guarantor can be proceeded against under the Code, which is consistent with the NCLAT’s conclusion in Mahendra Kumar Jajodia. The SC, in its interim order, also does not consider this a ground to stay the NCLAT’s order.

The second and real question that remains to be decoded is which would be the appropriate forum for proceedings against personal guarantors when a CIRP is not pending–the NCLT or the Debt Recovery Tribunal. The root of this controversy lies in the interpretation of section 60 of the IBC. Section 60(1) provides that the NCLT where a corporate debtor is registered (as there are several benches of NCLT across regions), shall be the Adjudicating Authority for insolvency resolution and liquidation of corporate debtors including that of personal guarantors.

Thereafter, Section 60(2) states that where insolvency resolution or liquidation process of a corporate debtor is pending before NCLT, the same NCLT will have jurisdiction over such corporate debtors’ corporate guarantor or personal guarantor. Lastly, section 60(3) provides for transfer of proceedings against personal guarantor to the relevant NCLT which is dealing with insolvency resolution of the corporate debtor.

On other hand, Section 179 of IBC, provides that subject to Section 60 of IBC, the DRT shall be the Adjudicating Authority for individuals. Clearly, personal guarantors are individuals.

The personal guarantor rules of 2019 also provide that for the purposes of section 60 of IBC the jurisdiction shall vest with the NCLT but in other cases i.e. in cases where a CIRP or liquidation is not pending against the corporate debtor of the personal guarantor or a CIRP has not been initiated against the corporate debtor, the jurisdiction shall vest with the DRT.

The NCLAT while looking at these provisions, has taken an interpretation that as Section 60(1) which states that NCLT shall have jurisdiction over personal guarantors, and is an overriding provision, the same would mean that NCLT shall have jurisdiction to entertain personal guarantor applications, irrespective of whether an insolvency proceedings or liquidation is pending against them or not.

Legally, it is a bit of a vexed question–Section 60(1) suggests as if NCLT has jurisdiction over personal guarantors irrespective of pendency of insolvency resolution or liquidation against the corporate debtor. However, a purposive interpretation of Sections 60(1) read with Sections 60(2), (3) read with Section 179 and the personal guarantor rule indicates otherwise.

It expected that the SC’s decision in this appeal will provide more clarity on the position that an application for initiation of an insolvency process against a personal guarantor can be filed in the absence of any pending CIRP or liquidation against the corporate debtor.

More importantly, it is hoped that the SC will conclusively decide whether in the absence of any pending CIRP or liquidation process against the corporate debtor, the appropriate forum for such applications against the personal guarantor will be the NCLT or the DRT.

This article was originally published in The Hindu Business Line on 4 April 2022 Co-written by: Misha, Partner; Shreya Prakash, Senior Associate.

Disclaimer

This is intended for general information purposes only. The views and opinions expressed in this article are those of the author/authors and does not necessarily reflect the views of the firm.

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