Under section 60(2) of the Insolvency and Bankruptcy Code, 2016 (Code), the adjudicating authority for personal insolvency proceedings against a personal guarantor of a corporate debtor (CD), which is undergoing CIRP under the Code, is NCLT. Rules provide that NCLT is the adjudicating authority for section 60 of the Code and for other cases, the Debt Recovery Tribunal (DRT) is the adjudicating authority (and this includes insolvency proceedings against individuals). Consequently, there is a question on which forum is the appropriate adjudicating authority for insolvency proceedings of a personal guarantor in the event the borrower/principal debtor has not been admitted and the CIRP commenced under the Code. Given the logjam in the NCLTs, this is an important question given that there are several cases where applications have been made for commencement of CIRP before NCLTs, but they have not been admitted. Can filings for personal guarantor insolvency before NCLTs then be made?
Dealing with the question, NCLT, Mumbai in Insta Capital Private Limited v. Ketan Vinod Kumar Shah clarified that the personal insolvency applications against a personal guarantor can be filed before NCLT only if the borrower/principal debtor is admitted and undergoing CIRP before that NCLT. If the borrower is not undergoing CIRP then the NCLT may refuse personal insolvency of a personal guarantor to such borrower.
However, in September 2021, NCLT, Delhi in PNB Housing Finance v. Mr. Mohit Arora took a contrary view which will assist banks and should be noted. The NCLT has held that if an application to commence CIRP against a personal debtor/borrower is filed and is pending before a NCLT (i.e. but application is yet to be admitted) then insolvency proceedings against a person guarantor of such personal debtor/borrower can be filed before the NCLT. The NCLT has conceptually relied on section 60 of the Code which gives NCLT authority for corporate debtors and personal guarantors. Filing of personal insolvency against a personal guarantor is to be filed before the same NCLT as the corporate debtor.
Undoubtedly, the NCLT, Delhi judgment in PNB Housing Finance is encouraging to all creditors, however, there are currently two contrary judgements on this. This should be noted by all financial creditors.
The above is a generic analysis and should not be regarded as a substitute for specific advice based on the facts of a client's objectives and specific commercial agreements reached. Please do reach out to us at mail@zba.co.in for any queries.
