India: Insolvency Of Personal Guarantor Is Independent Of The Corporate Insolvency Resolution Process Of The Corporate Debtor

Facts

State Bank of India Stressed Asset Management Branch (SBI) filed a petition to initiate insolvency of a personal guarantor (Guarantor) under Section 95(1) of the Insolvency and Bankruptcy Code, 2016 (IBC) before the National Company Law Tribunal, Kolkata Bench (NCLT). The NCLT rejected the petition on the premise that the petition was premature since the company (CD) whose debt was guaranteed by the Guarantor was not in corporate insolvency resolution process (CIRP). SBI filed an appeal before the National Company Law Appellate Tribunal (NCLAT) where the issue for consideration was whether the initiation of CIRP of a CD before the national company law tribunal (Tribunal) was a condition precedent to initiate proceedings of CIRP of a corporate debtor of personal insolvency of a personal guarantor, in this case, the Guarantor. The NCLAT by way of its judgment dated 27 January 2022, in Company Appeal (AT) Insolvency Nos. 60 and 61 of 2022 reversed the findings of the NCLT.  

Findings

The NCLAT in its judgment noted that Section 60(1) and Section 60(2) of the IBC are provisions that operate in separate spheres. The NCLAT held that Section 60(1) merely designates the Tribunal as the authority that would hear cases of CIRP and liquidation for corporate debtors and corporate guarantors and also the authority which would hear cases of insolvency of personal guarantors. The specific Tribunal would be based on where registered office of the corporate debtors and/or corporate guarantors were located.

In so far as Section 60(2) of the IBC was concerned, the NCLAT noted that it seeks to consolidate proceedings in respect of personal guarantors and corporate debtors. The scope of Section 60(2) is that if CIRP proceedings are pending against a corporate debtor before a particular Tribunal, the proceedings for personal insolvency in respect of such personal guarantor would also have to be filed before the same Tribunal. By implication, it was held that the Tribunal within whose jurisdiction the personal guarantor resided would not be the Tribunal that would hear such a petition.

The NCLAT held that on a joint reading of Sections 60(1) and 60(2) of the IBC, to initiate a personal insolvency proceeding against the Guarantor, CIRP proceedings were not required to be initiated against the corporate debtor.

Khaitan comment

This judgment brings clarity as to the commencement of personal guarantor proceedings and the Tribunal that would have jurisdiction over the same. The observation of the NCLT that the commencing of CIRP proceedings as a pre-condition to initiation of personal guarantor proceedings runs contrary to the principle of a guarantee being an independent contract not dependent on the principal contract. 

The Guarantor has a right of appeal to the Supreme Court of India as per this judgment.

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