Key legal issues
The Supreme Court's stay of the National Company Law Appellate Tribunal's (NCLAT's) decision in SBI Stressed Assets Management Branch v Mahendra Kumar Jajodia has received a lot of attention. In this case, the NCLAT held that, irrespective of any pending proceedings against the corporate debtor, the National Company Law Tribunal (NCLT) would have jurisdiction to consider an application against the personal guarantor.
The personal guarantor condemned the NCLAT's order before the Supreme Court, which stayed the NCLAT's order based on sections 60(2) and 60(3) of the Insolvency and Bankruptcy Code 2016 (IBC) and relevant observations made in Lalit Kumar Jain v Union of India. However, a conclusive decision is yet to be made.
Two legal issues that arise in this context are worth examining. The first is whether it is possible to appeal against a personal guarantor under the IBC when a corporate insolvency resolution process (CIRP) is not pending.
Despite some conflicting judgements of the NCLT on this issue, the matter was largely settled by the Supreme Court in Lalit Kumar Jain. In this case, the Court held that a personal guarantor's liability does not cease, even after the approval of a resolution plan, and it is possible to proceed against them.
This implies that proceedings against personal guarantors do not need be linked to the CIRP of the principal debtor. Therefore, this should imply that even if a CIRP is not pending for the principal debtor, either because it has concluded or because it has not been filed, it is possible to proceed against a personal guarantor under the IBC (which is consistent with the NCLAT's conclusion in Mahendra Kumar Jajodia). The Supreme Court, in its interim order, also did not consider this a ground to stay the NCLAT's order.
The second and more significant issue that remains to be decoded is which forum would be the most appropriate for proceedings against personal guarantors when a CIRP is not pending – the NCLT or the Debt Recovery Tribunal (DRT). The root of this controversy lies in the interpretation of section 60 of the IBC. Section 60(1) provides that the NCLT with which a corporate debtor is registered (as there are several benches of the NCLT across regions) shall be the adjudicating authority for insolvency resolution and liquidation of corporate debtors, including that of personal guarantors.
Further, section 60(2) states that where an insolvency resolution or liquidation process of a corporate debtor is pending before the NCLT, the NCLT will have jurisdiction over such corporate debtors' corporate guarantor or personal guarantor. Lastly, section 60(3) provides for the transfer of proceedings against a personal guarantor to the NCLT that is dealing with the corporate debtor's insolvency resolution.
On the other hand, section 179 of IBC provides that, subject to section 60 of IBC, the DRT shall be the adjudicating authority for individuals, which is what personal guarantors are.
The Personal Guarantor Rules of 2019 also provide that, for the purposes of section 60 of IBC, jurisdiction lies with the NCLT, but in other cases (ie, where a CIRP or liquidation is not pending against the corporate debtor of the personal guarantor or a CIRP has not been initiated against the corporate debtor), jurisdiction lies with the DRT.
While examining these provisions, the NCLAT stated that, as section 60(1) provides that the NCLT has jurisdiction over personal guarantors, and is an overriding provision, the NCLT also has jurisdiction to consider personal guarantor applications, irrespective of whether an insolvency proceeding or liquidation process is pending against them.
This issue here is that, while section 60(1) suggests that the NCLT has jurisdiction over personal guarantors irrespective of pendency of insolvency resolution or liquidation against the corporate debtor, a purposive interpretation of section 60(1) read with sections 60(2), 60(3) and 179 and the Personal Guarantor Rules indicates otherwise.
It is expected that the Supreme Court's decision in this appeal will provide more clarity on the position that an application for initiation of an insolvency process against a personal guarantor can be filed in the absence of any pending CIRP or liquidation against the corporate debtor.
More importantly, it is hoped that the Court will conclusively decide whether, in the absence of any pending CIRP or liquidation process against the corporate debtor, the appropriate forum for such applications against the personal guarantor will be the NCLT or the DRT.
For further information on this topic please contact Misha or Shreya Prakash at Shardul Amarchand Mangaldas & Co by telephone (+91 11 4159 0700) or email ([email protected] or [email protected]). The Shardul Amarchand Mangaldas & Co website can be accessed at www.amsshardul.com.
An earlier version of this article was first published by Business Line.