Ambiguity in jurisdiction related to Personal Guarantors

Sections 179 and 60 of the Insolvency and Bankruptcy Code (referred to as “Code” hereafter) provides Debt Recovery Tribunal (“DRT”) and National Company Law Tribunal (NCLT) respectively; as the Adjudicating Authorities for dealing with the Insolvency resolution of Personal Guarantors. Section 179 states that subject to Section 60 of the Code, DRTs will have the jurisdiction to consider the insolvency resolution of both partnerships and individuals, while Section 60 provides that where insolvency or liquidation of Corporate Debtor is pending before NCLT, an application for initiating insolvency process against any Corporate or Personal Guarantor of such Corporate Debtor has to be filed or stand transferred to the same NCLT. This has created a confusion as to which Tribunal has the jurisdiction to try matters with respect to initiation of Insolvency Proceedings against the Personal Guarantors. Different NCLT’s has different say on this and the Apex Court has clarified the same. It stipulated that an application pertaining to the insolvency of the corporate guarantor or personal guarantor of such corporate debtor shall likewise be filed or stand transferred before the same NCLT where an insolvency or liquidation procedure of a corporate debtor is ongoing. Further, there is an ambiguity as to can an Insolvency resolution be filed before NCLT when there are no pending CIRP or liquidations pending. This chapter primary deals with these two issues.

Analysis of Sec. 60:

The NCLT will be the adjudicating authority in connection to the CIRP or liquidation procedure for corporates, including corporate debtors and Personal Guarantors under Section 60(1) of the Code. Furthermore, Section 60(2) of the Code provides that where a CIRP or liquidation procedure of the Corporate Debtor is pending, an application relating to insolvency resolution, liquidation, or bankruptcy of a corporate guarantor, or Personal Guarantor of the Corporate Debtor, shall be filed before the NCLT. Section 60(3) of the Code provides for the transfer of existing proceedings against the PG before the Tribunal where Corporate Debtor's CIRP/liquidation proceedings are pending.

It should be emphasised that the NCLT's jurisdiction over PGs (as stated in Section 60(1)) appears to be unqualified and unaffected by any other law. Furthermore, while Section 60(2) begins with non-obstante language, it preserves the operation of Section 60(1) (refer to the use of the words "Without prejudice to Section 60(1)"), confirming that the application for a new PG Proceeding will lie before the NCLT where Corporate Debtor's CIRP/liquidation are pending. However, neither Section 60(1) nor Section 60(2) apply in the case of an existing PG Proceeding. This appears to be handled under Section 60(3) of the Code, which discusses the transfer of existing PG Proceedings to the jurisdictional NCLT. However, while the use of the words 'court/tribunal' indicates that a PG Proceeding may exist before the Debts Recovery Tribunal ("DRT") or the NCLT, it has yet to be determined whether S. 60(3) may be deemed a transitory measure. One could argue that because this clause has been in the Code since its inception, the drafters intended to convey that all PG Proceedings underway before any court prior to the Code's implementation shall be moved to the jurisdictional NCLT.

Furthermore, the Report of the Working Group on Individual Insolvency, published in August 2017, stated (as a Specific Recommendation) that the NCLT is the forum for PGs covered by Sections 60(2) and 60(3) of the Code, and that the DRT is the forum for all other individuals and firms. However, it was not expressly stated if PGs can be brought before the NCLT or merely the DRT (where no CIRP is pending).

It is interesting to note that the Supreme Court in the case of Lalit Kumar Jain v. Union of India and Ors (2021) 9 SCC 321while upholding the constitutional validity of the Notification relating to Personal Guarantors, acknowledged that an application for initiating Insolvency against the Personal Guarantor can be filed before NCLT in the event of an ongoing CIRP or liquidation proceedings against CD. It was clearly held that

“Section 60(2) prescribes that in the event of an ongoing resolution process or liquidation process against a corporate debtor, an application for resolution process or bankruptcy of the personal guarantor to the corporate debtor shall be filed with NCLT concerned seized of the resolution process or liquidation. Therefore, the Adjudicating Authority for personal guarantors will be NCLT, if a parallel resolution process or liquidation process is pending in respect of a corporate debtor for whom the guarantee is given. The same logic prevails, under Section 60(3), when any insolvency or bankruptcy proceeding pending against the personal guarantor in a court or tribunal and a resolution process or liquidation is initiated against the corporate debtor. Thus if A, an individual, is the subject of a resolution process before the DRT and he has furnished a personal guarantee for a debt owed by a company B, in the event a resolution process is initiated against B in an NCLT, the provision results in transferring the proceedings going on against A in the DRT to NCLT.”

The SC observed that the intent behind the said notification was to club the proceedings against the PG and CD before the same NCLT. The open-end question as to which Tribunal has jurisdiction to try insolvency resolution of PG when there is no initiation of Insolvency resolution process against CD remained unanswered.

The Conflicting opinions of NCLT’s:

The NCLT, Mumbai bench dealt as which forum is the appropriate adjudicating authority for insolvency proceedings of a personal guarantor in the event that an application seeking insolvency / liquidation of the corporate debtor is filed before the NCLT, but such an application is still pending in the cases of Altico Capital India Ltd. v. Rajesh Patel & Ors[1] and Insta Capital Pvt v Ketan Vinod Kumar Shah. The NCLT ruled that, the no insolvency resolution of personal guarantor's be maintained unless the corporate debtor is also undergoing insolvency or liquidation. According to NCLT, filing for the personal insolvency of guarantors without the corporate debtor going through insolvency or liquidation would be equivalent to giving NCLT jurisdiction over DRT which originally have jurisdiction to try.

The Hon'ble Madras High Court addressed a civil revision petition brought by a PG against an ongoing PG Proceeding before the DRT in the matter of Rohit Nath v. KEB Hana Bank Ltd. The High Court construed Section 60(2) of the Code to suggest that Section 60 would only apply to PGs when the Corporate Debtor is undertaking CIRP, rejecting the petition. It was further underlined that PG Proceedings must necessarily be brought only to the jurisdictional DRT and not to any other court where no CIRP has been initiated against the Corporate Debtor.

NCLT Delhi in the case of PNB Housing Finance Ltd. v. Mr. Mohit Arora and Ors, dealt with a situation where a creditor had submitted an application under Section 95 of the Code to start an insolvency resolution process against Personal Guarantor and several pending CIRP applications had been made against the corporate debtor (notably, the CIRP had not yet been started because the application was not admitted). It was held that the provisions of Section 60(1) of the Code would become applicable the moment an application for the initiation of CIRP or liquidation against the Corporate Debtor is filed and is pending before the NCLT, giving NCLT the authority to consider insolvency resolution proceedings against the PG.

NCLT Kolkata rejected an application seeking to initiate insolvency resolution process against personal guarantor solely for the reason being non-invocation of CIRP proceedings against Corporate Debtor in the case of SBI v Mahendra Kumar Jajodia.

On an appeal, the Hon’ble NCLAT held that the whole idea of Section 60 is to ensure that all proceedings related to a CD has to be consolidated and tried before the same NCLT and thus it does not probit filings of proceedings under section 95, even when no CIRP has been invoked against the Corporate Debtor. According to the NCLAT, section 60(2) use of the terms "a" and "such" before NCLT makes it plain that the subsection's goal is to have both proceedings CIRP against the CD and IRP against the personal guarantor heard by the same NCLT. The tribunal stated that only when CIRP/liquidation proceedings are ongoing before the NCLT is section 60(2) applicable. However, notwithstanding the absence of any NCLT proceedings, section 60(2) does not prevent the beginning of an IRP under section 95 of the code. It further held that even when a case is not covered under section 60(2) of the Code, an application to initiate PG proceedings can be filed before NCLT as Section 60(1) is a substantive provision.

The open-end question again remained unanswered as to where shall an application for initiating insolvency resolution process against CD be filed in absence of pending CIRP/Liquidation proceedings against CD. Is it before the NCLT or DRT. NCLAT solely reasoned that an application cannot be rejected on the ground that no CIRP/liquidation proceedings pending before NCLT.

On an appeal to Supreme Court, it was held that NCLAT was correct in holding that it is not necessary that there has to be an initiation of CIRP/liquidation to proceed against the guarantors. It clarified that the NCLT which is competent to pass an order for initiation of CIRP/Liquidation against the CD can entertain any application for initiation of CIRP against Personal Guarantors under section 60 (1) irrespective of any pending CIRP/Liquidation proceedings against CD or applications for initiation of CIRP /Liquidation against the Corporate Debtor[2].

The Supreme Court did not really decide the open-end question as to if the NCLT has the jurisdiction for initiating insolvency resolution process of PG or is it DRT. It has passed an order stating that the appeal is not maintainable[3]. The order did not contain situations where Sec.60(1) will not be applicable. Hence as observed in the case of Insta Capital[4], such a situation is tantamount to vesting jurisdiction in both DRT and NCLT. Further, notably, under Section 128 of Indian Contract Act, the liability of a guarantor is co-extensive with that of the principal borrower. There were Judgements of Supreme Court wherein it was held that the creditor can involve personal guarantor even before going against the corporate debtor meaning, there is no necessary to initiate CIRP against CD in order to proceed against PG. But there is lack of clarity as to where there application for invoking guarantee has to be filed, is it NCLT or DRT. This question remained unanswered.

References:

[1] I.A. 1062/ 2021 in C.P. 293/ 2020

[2] Emphasis derived from Appropriate forum for Insolvency of Personal Guarantors – Is the last word out? by By Dhananjay Kumar & Abhishek Mukherjee, available at https://corporate.cyrilamarchandblogs.com/2022/05/appropriate-forum-for-insolvency-of-personal-guarantors-is-the-last-word-out/#_ftnref12

[3] Order copy is available on https://main.sci.gov.in/supremecourt/2022/6511/6511_2022_37_18_34352_Order_21-Mar-2022.pdf

[4] Insta Capital Pvt v Ketan Vinod Kumar Shah 2021 SCC Online NCLT 486