The Appellant (Mahendra Kumar Agarwal) was a Personal Guarantor in respect of a loan advanced by PFS to Gati Infrastructure Bhamsey Power Pvt. Ltd. (“Gati”). When Gati defaulted in repayment of the loan, PFS filed an application under Section 95 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) before National Company Law Tribunal, Hyderabad (“NCLT”), praying for initiation of insolvency proceedings against the Appellant, which was admitted by NCLT’s Order dated 21 July 2022 (“NCLT Order”). The Appellant filed an appeal before the NCLAT challenging the NCLT Order on the grounds that:
- In terms of Section 60 (2) of the IBC, insolvency proceedings against the personal guarantor can be filed before the NCLT only if insolvency proceedings are admitted against the corporate debtor. Since no insolvency proceeding was admitted against Gati, the Impugned Order was unsustainable in law. It was only the Debt Recovery Tribunal that had jurisdiction in relation to insolvency of individuals (under Section 179 of the IBC).
- There were conflicting judgments on this issue. The judgments of NCLT/NCLAT which hold that insolvency proceedings against personal guarantors can be initiated without pendency of insolvency proceedings against the corporate debtor were per-incuriam since they did not consider Rule 3(1)(a) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 (“Rules”) and the judgment of the Madras High Court in Rohit Nath v. KEB Hana Bank: 2021 SCC OnLine Mad 2734.
- In any event, the provisions relating to insolvency proceedings of individuals are under challenge before the Hon’ble Supreme Court and till such challenge is decided, the NCLAT should stay the insolvency proceedings against the Appellant.
PFS argued that:
- Under section 60 (1) of the IBC, NCLT alone has the jurisdiction to entertain insolvency proceedings against a personal guarantor, irrespective of the fact whether insolvency proceedings have been initiated against the corporate debtor. The DRT has jurisdiction to deal with insolvency proceedings of those individuals who are not being sued in the capacity of being personal guarantors;
- The liability of the personal guarantor is co-extensive with that of the corporate debtor (section 128 of the Contract Act, 1872) and as such, there is no requirement in law to initiate proceedings against the corporate debtor before initiating proceedings against the personal guarantor;
- In any event, insolvency proceedings were pending against Gati at the time when the application was filed before the NCLT (though subsequently the said proceedings were withdrawn) and when the appeal was filed before the NCLAT. For judging maintainability of a petition what is relevant are the facts on date of filing the petition and not subsequent facts. The requirement under section 60 (2) was ‘pendency’ and not ‘admission’ of insolvency proceedings against the corporate debtor.
- Lastly, the mere pendency of challenge of any provision of the IBC before the Supreme Court was of no relevance since as on date, the provisions remained valid and binding.
By a detailed judgment dated 1 August 2023, the NCLAT accepted PFS’s case set out above, dismissed the appeal and upheld the NCLT Order.
The judgment supports a crucial right of the lenders to initiate insolvency proceedings only against personal guarantors without first having to initiate insolvency proceedings against corporate debtors. In cases where the corporate debtor is not financially viable, no purpose would be solved by incurring costs and initiating insolvency proceedings against the corporate debtor before any action can be taken against the personal guarantors.
The matter was argued by Pragya Chauhan (Partner).
Our Disputes Team Lead Partner – Sidharth Sethi, Partner – Pragya Chauhan, and Senior Associate – Avinash Das.