India: Personal Guarantor Insolvency Is Not Dependent On The Status Of Insolvent Corporate Debtor Status – Clarity For Lenders Actions

The Supreme Court has refused to interfere with the order passed by the National Company Law Appellate Tribunal (NCLAT) in SBI v. Mahendra Kumar Jajodia and has upheld what should be obvious but where there was room for confusion.   

Issue

In Mahendra Kumar Jajodia, NCLAT held that under section 60(1) of the Insolvency and Bankruptcy Code, 2016 (IBC), the authority for insolvency proceedings of a personal guarantor to a corporate debtor is the National Company Law Tribunal. NCLAT put to rest any doubt and firmly held that even if a corporate debtor is not under insolvency or liquidation proceedings under the IBC, the personal guarantor insolvency is maintainable and can commence/continue before the NCLT.

Whilst there are provisions which require personal insolvency to be before the same NCLT where the insolvency or liquidation proceedings of the corporate debtor is pending, NCLAT clarified that the purpose of this is to ensure proceedings are before the same forum and to avoid the issues of forum shopping. This does not mean, however, that if a corporate resolution process or liquidation is not pending that an application for personal insolvency cannot be made before NCLT. The Supreme Court refused to entertain appeals filed against this and consequently, Mahendra Kumar Jajodia conclusively determine this issue at this stage.

Conclusion

To conclude, the NCALT as affirmed by the Supreme Court has paved the way to commence insolvency of personal guarantors even if insolvency or liquidation proceedings of the corporate debtors are not pending. Lately, several personal guarantors have attempted to take benefit of the absence of insolvency proceedings of the relevant corporate debtor to oppose proceedings against them. Obviously, this goes against the very essence of a guarantee under the Indian Contract Act, 1872 which enables relief against guarantors irrespective of proceedings against primary debtors. The ability to commence insolvency against a personal guarantor is just the enforcement of the above statutory right when a guarantor has not paid when called upon to do so. 

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