Author Default-By Harsh Kumar
The Central Government, vide notification dated 15th November 2019 w.e.f. 1st December 2019[1], notified certain provisions of Part III of the Code, extending its applicability to the personal guarantors of the corporate debtor. It is pertinent to note that Part III covers fresh start process, insolvency resolution process and bankruptcy, however, the provisions relating to fresh start have not been notified yet.
After the notification of provisions related to personal guarantors of the corporate debtor and the adjudicating authority rules for personal guarantors to corporate debtors, the already over-burdened National Company Law Tribunal became the centre for adjudication of commercial laws since section 63 of the code expressly bars any civil court or authority to entertain any suit or proceedings in respect of any matter on which NCLT or NCLAT has jurisdiction under the code. The Apex court has also warned High courts in exercising writ jurisdictions under Article 226 regarding corporate insolvency resolution process.[2]
Further, as per the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 w.e.f. from 6th June 2018, after the admission of the Corporate Insolvency Resolution Process against the principal borrower, the moratorium under Section 14 would not apply to the Guarantor or the Guarantor’s assets. The aforementioned amendment further increased the burden on the National Company Law Tribunals. However, after more than three years of the 2018 amendment of the code, confusion and lack of clarity still persists regarding the jurisdiction of National Company Law Tribunal for admitting cases pertaining to personal guarantor of corporate debtor.
Jurisdictional Power of Adjudicating Authority: Personal Guarantor’s Insolvency
The power of adjudication in relation to insolvency of individuals (i.e. personal guarantor) lies with the Debt Recovery Tribunal having territorial jurisdiction over the place where the individual debtor resides or carries on the business as per Section 179 of the code subject to the fulfilment of conditions laid down under section 60(2) of the code. Also, section 79(1) under Part III of the code states that the Adjudicating Authority would be Debt Recovery Tribunal (DRT) constituted under sub-section (1) of Section 3 of the Recovery of Debts and Bankruptcy Act, 1993.
According to the provisions laid down under section 60(2), during the pendency of the corporate insolvency resolution process or liquidation proceedings of a corporate debtor before the National Company Law Tribunal, any application relating to insolvency resolution or liquidation or bankruptcy of a corporate guarantor or personal guarantor of the corporate debtor would be filed before the National Company Law Tribunal.[3] Furthermore, the insolvency resolution process or liquidation or bankruptcy proceedings of a corporate guarantor or personal guarantor pending in any court or tribunal would be transferred to the adjudicating authority dealing with the insolvency resolution process or liquidation proceedings of the corporate debtor.[4]
The aforementioned position was further clarified by Madras High Court in Rohit Nath vs. KEB Hana Bank Ltd. (2021) ibclaw.in 79 HC[5], wherein the main issue for consideration was whether an individual, in his capacity as a guarantor in connection with credit facilities granted by a bank or financial institution to a corporate entity, may be proceeded against by way of insolvency proceedings under section 95(1) of the code before an appropriate Debts Recovery Tribunal. It was held that “since such rules of Rules, 2019 had been notified upon being published in the Gazette of India on November 15, 2019, there can be no doubt that the Adjudicating Authority in respect of a guarantor who has furnished a personal guarantee in connection with credit facilities obtained by a corporate entity, would be the appropriate Debts Recovery Tribunal.”
The position of personal guarantor was illustrated by Madras High Court[6] through an example in the aforementioned judgment:
22. The text of Section 60(2) discloses that Section 60 of the Code would apply to an individual only if there is a corporate insolvency resolution process pertaining to the corporate entity which is the principal debtor that has been filed or commenced. In other words, in case of company ‘A’ being the principal debtor and an individual ‘P’ the guarantor promising repayment of the credit facilities obtained by ‘A’, if a corporate insolvency resolution process is initiated under the provisions of the Code pertaining to company ‘A’, the insolvency resolution process pertaining to guarantor ‘P would per force be before the same adjudicating authority, viz., the National Company Law Tribunal. But, where there is no corporate insolvency resolution process initiated in respect of company ‘A’, insolvency proceedings pertaining to guarantor ‘P’ must necessarily be carried only to the jurisdictional Debts Recovery Tribunal and not to any other forum…..
Hence, as per the aforementioned case law and the bare perusal of provisions of the code, i.e., section 179(1) read with Section 79 clearly establishes the fact and removes any iota of doubt that the adjudicating authority for personal guarantor’s insolvency would be Debt Recovery Tribunal, however, where the insolvency proceedings regarding the corporate debtor is pending before the National Company Law Tribunal, any insolvency application of personal guarantor to such corporate debtor would be filed before the National Company Law Tribunal and not the Debt Recovery Tribunal as per Section 60(2) of the code.
Exclusive jurisdiction: NCLT vs. DRT: An unsolved issue?
The issue pertaining to jurisdiction of National Company Law Tribunal where no Corporate Insolvency Resolution Process was pending against the corporate debtor recently came up for consideration before the National Company Law Appellate Tribunal in State Bank of India vs. Mahendra Kumar Jajodia (2022) ibclaw.in 89 NCLAT[7] wherein exclusive jurisdiction was conferred upon the National Company Law Tribunal for the Insolvency Resolution Process of the Personal Guarantor to the Corporate Debtor irrespective of the pendency of the proceedings against the Corporate Debtor before the National Company Law Tribunal. The jurisdiction conferred upon the Debt Recovery Tribunal under section 179 of the code was not taken into consideration by the Hon’ble appellate tribunal and accordingly held that:
11. The Adjudicating Authority erred in holding that since no CIRP or Liquidation Proceeding of the Corporate Debtor are pending the application under Section 95(1) filed by the Appellant is not maintainable. The Application having been filed under Section 95(1) and the Adjudicating Authority for application under Section 95(1) as referred in Section 60(1) being the NCLT, the Application filed by the Appellant was fully maintainable and could not have been rejected only on the ground that no CIRP or Liquidation Proceeding of the Corporate Debtor are pending before the NCLT. In result, we set aside the order dated 05th October, 2021 passed by the Adjudicating Authority. The Application filed by the Appellant under Section 95(1) of the Code is revived before the NCLT which may be proceeded in accordance with the law.
In the aforementioned case, the application was rejected by the adjudicating authority (National Company Law Tribunal) as premature on the ground that the application was filed by the petitioner/financial creditor under section 95(1) of the code for initiation of insolvency resolution process against the guarantor, however, as on date, no CIRP or Liquidation process was pending against the corporate debtor as a result of approval of the resolution plan. Since the condition laid down in Section 60(2) was not satisfied, the application was dismissed as premature. But the same was overturned by the appellate tribunal as stated above.
However, the precedent laid down by the National Company Law Appellate Tribunal is in conflict with the judgment passed by Madras High Court conferring jurisdiction to the Debt Recovery Tribunal. Moreover, it also conflicts with section 95(1) read with section 60(2) of the Code which confers jurisdiction to the National Company Law Tribunal in case of personal guarantor’s insolvency provided proceedings are pending against the corporate debtor before the National Company Law Tribunal.
Conclusion
The jurisdiction to deal with personal guarantor’s insolvency rests with the National Company Law Tribunal provided the conditions specified in section 60(2) of the code is satisfied.
Section 60(2) of the code states that “Without prejudice to sub-section (1) and notwithstanding anything to the contrary contained in this Code, where a corporate insolvency resolution process or liquidation proceeding of a corporate debtor is pending before a National Company Law Tribunal, an application relating to the insolvency resolution or liquidation or bankruptcy of a corporate guarantor or personal guarantor, as the case may be, of such corporate debtor shall be filed before such National Company Law Tribunal.”
Thus, taking into account the judgment of Madras High Court along with section 95(1) read with section 60(2), the National Company Law Tribunal would have the jurisdiction to entertain the proceedings with respect to insolvency of personal guarantor of corporate debtor when corporate insolvency resolution process or liquidation proceedings with regard to the corporate debtor is pending before the Tribunal. However, if no Corporate Insolvency Resolution Process or liquidation proceedings are pending against the corporate debtor before the National Company Law Tribunal, the Debt Recovery Tribunal would have jurisdiction to entertain the application under section 95(1) as per the power conferred in section 179 of the code. The reason for vesting the jurisdiction with National Company Law Tribunal is to avoid multiplicity of proceedings before multiple forums while the Corporate Insolvency Resolution Process or Liquidation proceeding is already pending with the NCLT. Just like the evolution of IBC, 2016 for corporates, the law for personal guarantors is yet to develop with judicial precedents in the future.
Reference:
[1] https://ibclaw.in/notification-no-s-o-4126e-dated-15-11-2019-ibc/
[2] Ghanashyam Mishra & Sons (P) Ltd vs. Edelweiss Asset Reconstruction Co. Ltd (2021) ibclaw.in 54 SC
[3] Section 60(2) of the Insolvency and Bankruptcy Code, 2016.
[4] Section 60(3) of the Insolvency and Bankruptcy Code, 2016.
Author Default
Harshal Chhabra
Shubham Saini
Riya Sagar
Shubhankar Agnihotri
Aprajita Pandey
Siddharth Pardeshi