Insolvency Resolution Process of Personal Guarantors- Jurisdiction of National Company Law Tribunal

Introduction

The Insolvency and Bankruptcy Code, 2016 (IBC) allows creditors to initiate insolvency proceedings against personal guarantors (“PGs”) of corporate debtors (“CDs”), independent of any ongoing corporate insolvency resolution process (“CIRP”) against the CD itself. This was recently affirmed by the Supreme Court in the Mahendra Kumar Jajodia case (Mahendra Kumar Jajodia v. SBI, Civil Appeal No. 1871-1872/2022, Supreme Court). The NCLT Mumbai Bench, in the cases of Altico Capital India Ltd. v. Rajesh Patel & Ors (Altico Capital India Ltd. v. Rajesh Patel & Ors. I.A. 1062/ 2021 in C.P. 293/ 2020). and Insta Capital Pvt. Ltd. v. Ketan Vinod Kumar Shah, (Insta Capital Pvt. Ltd. v. Ketan Vinod Kumar Shah 2021 SCC Online NCLT 486, para 18.) declined to accept insolvency resolution applications against personal guarantors under Section 60(2) of the Insolvency and Bankruptcy Code. They reasoned that filing such applications before the NCLT, without the Corporate Debtor being in CIRP or liquidation, would essentially give the NCLT the jurisdiction of the Debt Recovery Tribunal.

Furthermore, in the case of Rohit Nath v. KEB Hana Bank Ltd., (Rohit Nath v. KEB Hana Bank Ltd. 2021 SCC Online Mad 2734, para 23) the Madras High Court addressed a civil revision petition filed by a personal guarantor (PG) against an ongoing PG proceeding at the Debt Recovery Tribunal (DRT). The court, upon dismissing the petition, interpreted Section 60(2) of the Insolvency and Bankruptcy Code to indicate that it applies to PGs only when the Corporate Debtor is undergoing a corporate insolvency resolution process (“CIRP”). Additionally, it emphasized that in cases where no CIRP has been initiated against the Corporate Debtor, PG proceedings should be exclusively directed to the relevant DRT and not to any other forum.

The NCLT, Delhi in the case of PNB Housing Finance Ltd. v. Mr. Mohit Arora and Ors., (PNB Housing Finance Ltd. v. Mr. Mohit Arora and Ors. 2021 SCC Online NCLT 488, paras 31 and 32) a financial creditor filed an application under Section 95 of the Insolvency and Bankruptcy Code to initiate insolvency resolution against the personal guarantor (“PGs”) of a corporate debtor. Multiple applications for initiating a corporate insolvency resolution process (CIRP) against the corporate debtor were already pending before the NCLT Delhi, although not yet admitted. The NCLT Delhi interpreted Section 60(1) to mean that once an application for initiating CIRP or liquidation against the corporate debtor is filed and pending before the NCLT, Section 60(1) becomes applicable. This grants the NCLT jurisdiction to entertain insolvency resolution proceedings against the PG. The NCLT Delhi followed this reasoning in the case of PNB Housing Finance Ltd. v. Goldy Gupta (PNB Housing Finance Ltd. v. Goldy Gupta, 2021 SCC Online NCLT 487, para 20) as well. Notably, the NCLT Delhi did not consider the previous judgments of the NCLT Mumbai Bench and the Madras High Court, which had taken a different view, even though the petitioners had referred to those cases in their submissions.

Prior to the 2019 amendments, PGs could only be pursued under other laws. The IBC now empowers creditors to file insolvency applications directly against PGs before the National Company Law Tribunal (“NCLT”), even if no CIRP has been initiated against the CD. The NCLT, Kolkata initially dismissed a creditor's application against a PG, citing lack of a pending CIRP against the CD as a prerequisite. However, the National Company Law Appellate Tribunal (“NCLAT”) overturned this, holding that PG proceedings are maintainable independent of the CD's insolvency status. The Supreme Court upheld the NCLAT order, clarifying that Sections 60(1) and 60(2) of the IBC allow for separate but consolidated insolvency proceedings against the CD, corporate guarantors and PGs before the same NCLT bench. This judgment re-establishes the independence of the contract of guarantee and deters PGs, often the CD's promoters/directors, from escaping liability. It consolidates insolvency proceedings for effectiveness while preserving creditors' right to independently pursue the CD, corporate guarantors and PGs. The IBC amendments and judicial pronouncements have thus strengthened the insolvency framework by enabling creditors to directly initiate PG proceedings, bringing them into the resolution process and providing an additional layer of security.

Analysis of Section 60 of IBC

Section 60(1) of the Insolvency and Bankruptcy Code, 2016 (IBC) designates the National Company Law Tribunal (NCLT) as the adjudicating authority for corporate insolvency resolution process (CIRP) or liquidation proceedings involving corporate debtors and personal guarantors (PGs).

Section 60(2) mandates that applications related to insolvency resolution, liquidation or bankruptcy of a corporate guarantor or PG of the corporate debtor must be filed before the NCLT where the corporate debtor's CIRP or liquidation is pending.

Furthermore, Section 60(3) requires the transfer of any existing proceedings against the PG from any court or tribunal to the NCLT having jurisdiction over the corporate debtor's insolvency case.

These provisions aim to consolidate all insolvency-related proceedings against the corporate debtor, its corporate guarantors and PGs before a single NCLT bench for effective resolution. They also establish the NCLT's exclusive jurisdiction over PG insolvency matters, regardless of whether a CIRP is ongoing against the corporate debtor.

The Insolvency and Bankruptcy Code, 2016 (IBC) grants the National Company Law Tribunal (NCLT) unqualified jurisdiction over personal guarantors (PGs) under Section 60(1). This jurisdiction is not subject to any other provision of the Code. While Section 60(2) begins with a non-obstante clause, it preserves the operation of Section 60(1) by using the phrase "Without prejudice to Section 60(1)". This confirms that in cases where a corporate insolvency resolution process (CIRP) is pending against the corporate debtor, a new application for insolvency proceedings against the PG must be filed before the NCLT having jurisdiction over the corporate debtor. However, neither Section 60(1) nor 60(2) covers the situation where insolvency proceedings against a PG are already pending. This scenario appears to be addressed by Section 60(3), which mandates the transfer of existing PG proceedings from any court or tribunal to the NCLT having jurisdiction over the corporate debtor. The use of the term "court/tribunal" in Section 60(3) suggests that PG proceedings may be pending before either the Debts Recovery Tribunal (DRT) or the NCLT. It remains to be determined whether Section 60(3) should be interpreted as a transitory provision. One view is that since Section 60(3) has been part of the IBC since its inception, the drafters intended for all PG proceedings pending before any court prior to the Code's enactment to be transferred to the jurisdictional NCLT. Alternatively, it can be argued that Section 60(3) envisaged the transfer of PG proceedings initiated before any NCLT (as the adjudicating authority under Section 60(1)) to the jurisdictional NCLT of the corporate debtor upon the commencement of a CIRP, even in the absence of a pending CIRP at the time of initiation.

The Supreme Court, in the case of State Bank of India v. V. Ramakrishnan and anr., (State Bank of India v. V. Ramakrishnan and anr. (2018) 17 SCC 394, para 24) highlighted that if there is an ongoing proceeding against the Corporate Debtor under the Insolvency and Bankruptcy Code, any Personal Guarantor (PG) Proceeding initiated before the Corporate Debtor's Corporate Insolvency Resolution Process (CIRP) will be transferred to the National Company Law Tribunal (NCLT). If the PG Proceeding is initiated after the commencement of the CIRP, the application for initiating such PG proceeding must be filed exclusively in the NCLT with jurisdiction over the Corporate Debtor. While this ruling supported the idea that a PG Proceeding can be initiated independently before the CIRP begins, it did not definitively clarify whether such proceedings can be initiated before the NCLT or only before the Debt Recovery Tribunal (DRT).

The Report of the Working Group on Individual Insolvency, published in August 2017, recommended that the National Company Law Tribunal (NCLT) is the appropriate forum for personal guarantors (PGs) falling under Sections 60(2) and 60(3) of the Insolvency and Bankruptcy Code (IBC) (Report of the Working Group on Individual Insolvency, (Regarding strategy and approach for implementation of the provisions of the Insolvency & Bankruptcy Code, 2016 to deal with the insolvency of Guarantors to Corporate Debtors and Individuals having business).For all other cases involving individuals and firms, the Debt Recovery Tribunal (“DRT”) is the relevant forum. However, the report did not provide clear guidance on whether the jurisdiction for PGs lies exclusively with the NCLT or also with the DRT in situations where no corporate insolvency resolution process (CIRP) is pending.

In the case of Lalit Kumar Jain v. Union of India and Ors. ("Lalit Kumar Case"), (Lalit Kumar Jain v. Union of India and Ors. (2021) 9 SCC 321, paras 105 and 108) the Supreme Court upheld the constitutional validity of the notification dated November 15, 2019, which brought into effect certain provisions of the Insolvency and Bankruptcy Code, 2016 (IBC) relating to personal guarantors to corporate debtors. In its judgment, the Supreme Court noted that Section 60(2) of the IBC prescribes filing an application for initiating insolvency proceedings against personal guarantors with the National Company Law Tribunal (NCLT), only in the event of an ongoing corporate insolvency resolution process (CIRP) or liquidation process against the corporate debtor. The Court held that Section 60(2) requires the filing of such applications with the NCLT having jurisdiction over the CIRP or liquidation proceedings of the corporate debtor, and not in any other circumstance. This interpretation by the Supreme Court clarifies that the NCLT's jurisdiction over insolvency proceedings against personal guarantors is limited to cases where a CIRP or liquidation is already pending against the corporate debtor under the IBC.

The Supreme Court highlighted that the Notification aimed to consolidate proceedings before the NCLT but did not directly address the NCLT's jurisdiction for PG Proceedings without a CIRP.

Conclusion

The Supreme Court's ruling in the Lalit Kumar Jain case (Lalit Kumar Jain v. Union of India and Ors. (2021) 9 SCC 321) affirmed that the intent behind the provisions of the Insolvency and Bankruptcy Code (IBC) is to consolidate proceedings against the corporate debtor and personal guarantor before the same National Company Law Tribunal (NCLT). However, the Court's view in this matter provides relief to creditors by granting them the liberty to initiate proceedings against personal guarantors before the NCLT, even in the absence of a corporate insolvency resolution process (CIRP) against the corporate debtor. This allows creditors to maximize recovery from the personal guarantor's assets. The Supreme Court's interpretation aligns with the NCLAT's judgment in State Bank of India v. Athena Energy Ventures Limited (State Bank of India v. Athena Energy Ventures Limited Company Appeal (AT) (Ins) No. 633 of 2020, para 19) and the Insolvency Law Committee (ILC) Report, (Report of the Insolvency Law Committee, Ministry of Corporate Affairs, February 2020, Page 32), which recognize creditors' right to simultaneously initiate insolvency proceedings against the principal borrower and the guarantor. Although these relate to substantive rights rather than jurisdictional issues, they reinforce the creditors' ability to pursue personal guarantors independently.

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