ADJUDICATING AUTHORITY FOR PERSONAL GUARANTORS TO CORPORATE DEBTOR- A TIME TO REVISIT[1]
BACKGROUND:
Vide its judgment in the matter of Rohit Nath v. KEB Hana Bank Limited, 2021 SCC OnLine Mad 27, the Division Bench of the Hon’ble High Court of Madras had held that in cases where CIRP or Liquidation Proceedings of a corporate debtor are pending, an application for insolvency resolution of the personal guarantor shall be filed before such NCLT where CIRP or Liquidation proceedings of the corporate debtor are pending, however, in cases where no CIRP or Liquidation proceedings against the corporate debtor are pending, an application for insolvency resolution of the personal guarantor shall be filed before appropriate DRT in view of Section 179(1) of the IBC. However, contrary to the said view, the Hon’ble NCLAT, Principal Bench, New Delhi in the matter of State Bank of India v. Mahendra Kumar Jajodia, MANU/NL/0081/2022[2], has held that even where no Corporate Insolvency Resolution Process (CIRP) or Liquidation proceeding of a corporate debtor is pending, an application for insolvency resolution of the personal guarantor to the corporate debtor can be filed before NCLT under Section 60(1) of the IBC. These divergent views have created an anomaly and confusion as to the appropriate Adjudicating Authority.
QUESTION INVOLVED:
The present article attempts to find answer to the question whether NCLT or DRT is the appropriate adjudicating authority as far as application for insolvency resolution of the personal guarantors to the corporate debtors is concerned.
NOTIFICATION NO. S.O. 4126(E) DATED 15.11.2019:
Vide notification dated 15.11.2019, the Central Government brought into force various provisions such as Sections 2(e); Sections 78 (except with regard to fresh start process) and 79; Sections 94 to 187; Section 239(2)(g) -(i); Section 239(m)-(zc); Section 240(zn)-(zs) and Section 249 only insofar as they relate to personal guarantors. It is interesting to note that Section 78 to Section 187 relates to Part III of IBC which deals with Insolvency resolution and Bankruptcy for Individuals and Partnership Firms.
ADJUDICATING AUTHORITY-RELEVANT PROVISIONS:
Section 60 of the IBC provides for Adjudicating Authority (AA) for Corporate Persons. In terms of Section 60(1), the AA in relation to insolvency resolution and liquidation for corporate persons including corporate debtors and personal guarantors thereof shall be the National Company Law Tribunal having territorial jurisdiction over the place where the registered office of the corporate person is located.
Section 79(1) defines Adjudicating Authority to mean DRT. Section 179(1) states that subject to the provisions of Section 60, the Adjudicating Authority, in relation to insolvency matters of individuals and firms shall be the Debts Recovery Tribunal having territorial jurisdiction over the place where the individual debtor actually and voluntarily resides or carries on business or personally works for gain and can entertain an application under this Code regarding such person.
Rule 3(a) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 defines Adjudicating Authority to mean NCLT for the purpose of Section 60 and for purposes other than section 60, DRT. Same definition has been provided under Rule 3(a) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Bankruptcy Process for Personal Guarantors to Corporate Debtors) Rules, 2019.
ADJUDICATING AUTHORITY-JUDICIAL PRECEDENTS:
In addition to judgments in Rohit Nath (supra) and Mahendra Kumar Jajodia (supra), there are few other judgments which have dealt with this issue. The issue whether a Financial Creditor can initiate insolvency resolution process against a personal guarantor in the absence of any resolution process/liquidation process against the corporate debtor was considered by the Hon’ble NCLT, Mumbai Bench-IV in the matter of Insta Capital Private Limited v. Ketan Vinod Kumar Shah[3]. Placing reliance on Section 60(2) of the IBC, the Mumbai Bench has held that an application for insolvency for resolution against the personal guarantor is not maintainable unless CIRP/liquidation is ongoing against the Corporate Debtor. It was further observed that filing of applications seeking resolution of personal guarantors without the Corporate Debtor undergoing CIRP, would tantamount to vesting of jurisdiction on two courts- one is NCLT and another is DRT. With these observations, the Mumbai Bench has dismissed the application filed by the financial creditor. Similar observations can be found in the matter of Altico Capital India Ltd. v. Rajesh Patel, IA 1062 of 2021 decided by NCLT Mumbai.
However, contrary to these judgments, the Hon’ble NCLT Kochi Bench in the matter of E. Iqbal & others v. State Bank of India[4], has observed that in a situation where application(s) in relation to the Corporate Debtor for initiation of CIRP is pending at NCLT then, initiation of CIRP of the Corporate Debtor is not a prerequisite for maintainability of an application under Section 95 of the IBC filed for initiating Insolvency Resolution Process against the Personal Guarantor of that Corporate Debtor before the NCLT. Similar observations have been made by the NCLT, Delhi Bench in the matter of PNB Housing Finance Limited v. Goldy Gupta, Partner of Star Raison Landmarks[5].
The observations made by the Hon’ble Supreme Court in the matter of Lalit Kumar Jain v. Union of India & Ors[6], are of utmost relevance in this regard. After a detailed analysis of various provisions, amendments, committee reports, the Hon’ble Supreme Court has observed that even the unamended Section 60 contemplated that the adjudicating authority in respect of personal guarantors was to be the NCLT. As far as the 2018 Amendment Act is concerned, it has been observed by the Court that the said amendment clearly shows that all matters that were likely to impact, or have a bearing on a corporate debtor’s insolvency process were sought to be clubbed together and brought before the same forum.
AUTHORS’ ANALYSIS:
The IBC, in its original avatar, has included personal guarantors within the ambit of individuals under Section 2(e) of the IBC. In June, 2017, the Insolvency and Bankruptcy Board of India (IBBI) had constituted a Working Group to recommend the strategy and approach for implementation of provisions relating to insolvency and bankruptcy of individuals and partnership firms, under Part III of the IBC. Taking note of the then existing provisions of the IBC, the Working Group opined that the IBC does not contemplate categories of individuals or partnership within Part III of the IBC. The Working Group was of the view that the only distinction created by the IBC is that the Adjudicating Authority for Insolvency and Bankruptcy of personal guarantor of a corporate debtor is National Company Law Tribunal (NCLT) in cases where a corporate insolvency process has been initiated or is pending against the corporate debtor of personal guarantor, however, in cases where a corporate insolvency process is not pending against the corporate debtor, the jurisdiction in respect of Insolvency and Bankruptcy of personal guarantor is Debt Recovery Tribunal (DRT). It was also opined by the Working Group that for other individuals and partnership firms, the jurisdiction is vested with the DRT. The Working Group, consequently, considered preparing a single draft each of rules and regulations applicable to insolvency and bankruptcy of individuals and partnership firms. The Working Group, however, recognised the interwoven connection between the corporate debtor and a guarantor and therefore, opined that such guarantors would require different treatment. The Working Group was also of the view that once provisions of Chapters III to V of Part III of the IBC are notified excluding Section 179-183, it would be clear that the IBC would become operational only in respect of individuals who have given personal guarantees to corporate debtors and in conformity with the legislative intent, are subjected to the jurisdiction of the Adjudicating Authority, namely, NCLT.
The observations made by the Insolvency Law Committee in its report of March, 2018 are also relevant in as much as it was observed therein that Section 60 of the IBC requires that the Adjudicating Authority for the corporate debtor and personal guarantors should be the NCLT which has territorial jurisdiction over the place where the registered office of the corporate debtor is located. It was also observed that this creates a link between the insolvency resolution or bankruptcy processes of the corporate debtor and the personal guarantor such that the matters relating to the same debt are dealt in the same tribunal.
In the meantime, vide Act 8 of 2018, the Legislature has brought about a trifurcation of categories which were comprehended in Section 2(e) before amendment. Subsequent to substitution with retrospective effect from 23.11.2017, personal guarantor was made a separate and distinct category under Section 2(e) while other individuals were put under different category under Section 2(g). This express amendment gives an indication that the legislature intended to treat personal guarantor differently from other individuals.
By an order dated 04.05.2018, the IBBI has formed a Reconstituted Working Group (RWG) to recommend the strategy and approach for implementation of provisions relating to insolvency and bankruptcy in respect of (i) personal guarantors to corporate debtors; (ii) partnership firms and proprietorship firms; and (iii) other individuals. The RWG noted that there are many common factors and linkages between the corporate debtor and personal guarantor to such corporate debtor. Considering personal connection of the guarantor(s) with the corporate debtor(s), the RWG proposed a separate set of rules and regulations and phased implementation of the provisions of the IBC dealing with insolvency and bankruptcy of the three classes of individuals.
The validity of the notification dated 15.11.2019 was upheld by the Hon’ble Supreme Court in Lalit Kumar (supra) with observations that the intent of the legislature was to treat personal guarantors differently from other categories of individuals and the intimate connection between such individuals and corporate entities to whom they stood guarantee, as well as the possibility of two separate processes being carried on in different forums, with its attendant uncertain outcomes, led to carving out personal guarantors as a separate species of individuals, for whom the Adjudicating authority was common with the corporate debtor to whom they had stood guarantee. The Hon’ble Court further observed that the fact that the process of insolvency in Part III is to be applied to individuals, whereas the process in relation to corporate debtors, set out in Part II is to be applied to such corporate persons, does not lead to incongruity. It was also observed that the reason behind having a common adjudicating authority in respect of personal guarantors and corporate debtor was to enable NCLT to consider the whole picture, as it were, about the nature of the assets available, either during the corporate debtor’s insolvency process, or even later and also to facilitate the CoC in framing realistic plans, keeping in mind the prospect of realizing some part of the creditors’ dues from personal guarantors.
With greatest respect, in our view, the judgment in Rohit Nath (supra) does not lay down the correct law for various reasons such as it failed to consider the judgment of the Hon’ble Supreme Court in Lalit Kumar (supra). While it has considered Section 60(1) and Section 179(1) but it did not discuss the impact of ‘subject to’ used in Section 179(1). A reading of Section 179(1) shows that it is subject to the provisions of Section 60 which means that wherever application of any of the provisions of Section 60 is attracted, Section 179(1) would have no application. Thus, Section 60(1) read with Section 179(1) makes it clear that where no CIRP or Liquidation proceedings against the corporate debtor is pending, an application for insolvency resolution of the personal guarantor to such corporate debtor must be filed before NCLT.
Reading of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 also make it clear that for the purposes of Section 60, the Adjudicating Authority would be NCLT and not DRT. Indeed, one may argue that the reason behind enforcing Section 79(1) read with 179 of the IBC was to empower DRT to deal with application for insolvency resolution of the personal guarantor to corporate debtor, however, at the same time, Section 179 itself is subordinate to Section 60 and therefore, in our view, while the legislature has brought into force Section 179 of the IBC but that by itself will not nullify the impact of Section 60.
Another reason why NCLT is the adjudicating authority for insolvency resolution of the personal guarantor to the corporate debtor is Section 60(4) of the IBC which vests upon NCLT all the powers of the DRT as contemplated under Part III of the IBC for the purpose of Section 60(2) of the IBC. While it is true that a personal guarantor per se is an individual and therefore, ought to have been governed by the provisions of the Part III and DRT should have been empowered to deal with applications for insolvency resolution of such personal guarantors but as iterated above, the legislature always considered the personal guarantors as a distinct class different from other individuals who are not the personal guarantors and therefore, the object of the Act would be met only when a common forum is recognised for dealing with the insolvency resolution or liquidation or bankruptcy of the corporate debtor and personal guarantor to such corporate debtor.
One cannot be oblivious of the fact that from the inception of the Code, Section 60(1) of the IBC recognised NCLT as the Adjudicating Authority for insolvency resolution or bankruptcy process of the personal guarantors to the corporate debtor. Neither Section 3 which falls in Part I of the IBC nor Section 79 which falls in Part III of the IBC defines ‘personal guarantor’. It is only Section 5(22) of the IBC which falls in Part II of the IBC defines ‘personal guarantor’. This may again be a reason that legislature always thought of treating personal guarantors as an intrinsic part of corporate debtor which is governed by the Part II of the IBC.
Vide Amendment Act, 2018, the legislature amended Section 2(e) of the IBC and divided it into three parts and recognised personal guarantors to corporate debtors as a category separate and distinct from the individuals who have not given their personal guarantees but no such corresponding amendment has been made in Part III of the IBC to expressly include personal guarantor within the domain of Part III which again shows that legislature never intended to subject personal guarantors to the jurisdiction of the DRT which is the Adjudicating Authority for the Part III. As recognised by the Hon’ble Supreme Court in Lalit Kumar (supra), vide notification dated 15.11.2019, only the procedure prescribed in Part III has been applied on the personal guarantor for the reason that the procedure prescribed in Part II dealing with the CIRP of the corporate debtor could not have been applied on personal guarantors who are, by their built, individuals.
Conclusion:
We are of the view that where CIRP or liquidation process of the corporate debtor is not pending, the Adjudicating Authority for the purpose of dealing with applications for insolvency resolution or bankruptcy process of the individuals would be NCLT as provided under Section 60(1) of the IBC. The phrase ‘subject to’ used in Section 179(1) of the IBC cannot be brushed aside to confer jurisdiction on DRT as doing that would violate the clear mandate of Section 60(1) of the IBC. Thus, for all means and purposes, NCLT is the Adjudicating Authority for insolvency resolution or liquidation process of the corporate debtor or corporate guarantor to such corporate debtor and insolvency resolution or bankruptcy process for personal guarantors to such corporate debtors.
[1] Author- Prashant Tripathi, Partner of P&T Law Offices. Prashant Tripathi is the Partner of P&T Law Offices and is a Delhi Based Lawyer who deals with Matters related to SARFAESI, DRT, Insolvency and Bankruptcy Law.
Co-Author- Parul, 4th Year Law Student. Parul is a 4th Year BA.LLB Student of Banasthali Vidyapith, Rajasthan. She is greatly interested in Commercial Litigation and till now she has done various Internships in IBC Team of Tier 1 Firms.
[2] Operation of the Order stayed by Hon’ble Supreme Court in Civil Appeal No(s)-1871-1872/2022 vide order dated 21.03.2022.
[3] Insta Capital Private Limited v. Ketan Vinod Kumar Shah, 2021 SCC OnLine NCLT 486
[4] E. Iqbal & others v. State Bank of India, MANU/NC/0843/2022
[5] PNB Housing Finance Limited v. Goldy Gupta, Partner of Star Raison Landmarks, MANU/NC/2526/2021
[6] Lalit Kumar Jain v. Union of India & Ors, MANU/SC/0352/2021
| Name of Author 1: Advocate Prashant Tripathi
Partner of Pani & Tripathi Law Offices, New Delhi Email Id: prashanttripathi1207@gmail.com |
Name of Author 2: Parul
Class: B.A.LLB 4th year College: Banasthali Vidyapith University, Rajasthan Email id: parulsardana42217@gmail.com |
