Recourse to Appropriate Proceedings against Personal Guarantor of Corporate Debtor

[Akansha Uboveja is a fifth-year B.A., LL.B. (Hons.), student at Hidayatullah National Law University, in Raipur]

Recently, the National Company Law Appellate Tribunal (NCLAT) in Nitin Chandrakant Naik v. Sandhiya Industries LLP clarified the position of personal guarantors in corporate insolvency resolution proceedings (CRIP) initiated against a corporate debtor under the Insolvency and Bankruptcy Code, 2016 (the Code). It opined that in case a financial creditor intends to proceed against the personal guarantor, it must take recourse to appropriate proceedings and not directly through the CIRP initiated against the corporate debtor. Further, it emphasized on the role of resolution professionals while prepare the information memorandum (IM).   

Factual Background

In the present case the promoters and suspended directors of the Simrut Foods & Hospitality Private Limited (corporate debtor) had given their personal properties as security so as to facilitate securing a loan for the corporate debtor. In the CIRP, the committee of creditors (CoC) approved a plan which included the transfer of personal properties of the promoters and suspended directors. The National Company Law Tribunal, Mumbai Bench (NCLT) approved the said resolution plan through an order dated 13 November 2019 (impugned order). Aggrieved by the approval of the resolution plan, this appeal has been filed before the NCLAT by the promoters and suspended directors of the corporate debtor on the following grounds:

  1. Resolution plan has to be with respect to the property of the corporate debtor and not against that of directors or shareholders as per regulation 37 of the Insolvency Resolution Process for Corporate Persons Regulation, 2016 (CIRP Regulations).
  2. Further, if the financial creditors intend to proceed against the guarantor, the same has to be undertaken under the Indian Contract Act, 1872, the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act), or the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, as the Part III of the Code was not notified on the date on which the resolution plan was approved. Part III of the Code was notified on 15 November 2019 which, to a limited extent, made it possible to enforce resolution relating to personal guarantors of the corporate debtor, whereas the resolution plan in this case was approved on 13 November 2019.
  3. Lastly, the resolution professional did not include the personal properties of the promoters and suspended directors of the corporate debtor in the IM the prepared and thereby did not get them valued. They directly included them in the resolution plan, which indicates a foul play on the part of resolution professional.    

Judgment

On the basis of the law that stood before the effectiveness of Part III of the Code, the NCLAT allowed the present appeal, quashed the impugned order, and made several observations and findings as discussed below.

CRIP against corporate debtor cannot be treated as resolution process against personal guarantors

Referring to the judgment in State Bank of India v. V. Ramakrishnan (SBI case), the NCLAT opined that therein the financial creditor initiated proceedings against the guarantor under the SARFAESI Act and the Indian Contract Act, 1872, and were in the possession of their property before the moratorium under section 14 of the Code was directed. However, in the present case, though the financial creditors have resorted to proceedings under the SARFAESI Act against guarantors, the same was undertaken during the period of the CIRP. Hence, if the moratorium under section 14 of the Code during CIRP did not apply to personal guarantors of the corporate debtor, personal properties of the corporate debtor cannot be realized without resorting to appropriate proceeding. 

Further, it was observed that the argument that in the resolution plan itself there can be provision to move against personal guarantor is a fallacy. In order to move against personal guarantors, the financial creditors need to take recourse to appropriate proceedings, i.e., the previous law governing the same and now the notified Part III of the Code. In the SBI case, the Supreme court only specified those previous laws which are ‘Presidency Towns Insolvency Act, 1909’, ‘the Provincial Insolvency Act, 1920’ and ‘Recovery of Debts Due to Banks and Financial Institutions Act, 1993’. Thus, what is necessary is that the appropriate recourse has to be adopted by the financial creditors and not that the properties of guarantors could be simply included in the resolution plan and disposed of.

Inclusion of properties in the IM is a statutory duty of resolution professionals.

The NCLAT clarified that it is the foremost step in any CIRP that the interim resolution professionals have to collect all information relating to the finances, assets and operations of the corporate debtor as mandated under section 18 of the Code. This helps in determining the financial position of the corporate debtor. Further, regulation 36 of the CIRP Regulations provides that the details such as of the assets and liabilities of the corporate debtor are to be included in IM. Along with that, the details of the guarantees given to secure the debt, including specifying which of the guarantors is a related party, has to be included in IM in terms of clause (f) of regulation 36 of the CRIP Regulations. However, in casu, such personal properties of the promoters and suspended directors of the corporate debtor were neither included in IM nor did they get valued. Thereby, the resolution professionals failed to oblige their statutory duty by allowing the direct inclusion of those properties in the resolution plan so as to transfer the same.           

Critical Analysis of the Decision

No short-cut, but recourse to proper mechanism as laid down by the law.

The judgment clarified the position that a CIRP initiated against corporate debtor is simply against that of the properties of the corporate debtor. The assets of the corporate debtors and those of the personal guarantors are different. Hence, what a financial creditor needs to do is to take proper recourse to the appropriate authority to initiate proceedings against personal guarantors as specified above. Thus, the property of personal guarantors cannot be dealt through a CIRP of the corporate debtor.

The liability of personal guarantor: pre and post enforcement of Part III of the Code 

This judgment has further added to the principle laid down by the Supreme Court in Lalit Kumar Jain vs. Union of India, where the Court upheld the validity of the Centre’s notification dated 15 November 2019 which enforced Part III of the Code. As noted by the NCLAT, all the cases arose before the enforcement of Part III of the Code are governed by different laws, whereas Part III of the Code provides for a uniform adjudicating authority. The same was highlighted in Lalit Kumar by the Supreme Court.     

Obligations of resolution professionals and IM

The Insolvency and Bankruptcy Board of India in its report ‘Insolvency Professional: A Key to Resolution Information Brochure’ specifies a code of conduct for resolution professionals, which include integrity, objectivity, independence and impartiality. While observing such principles, they must adhere to the statutory and moral norms. In the present case, where the personal properties of guarantors were not included in IM and were directly consumed in the resolution plan, it clearly indicates the failure on part of resolution professionals to discharge their statutory duty.

Conclusion

This ruling of the NCLAT shed some light on the recourse which is available with financial creditors when it comes to proceeding against personal guarantors of the corporate debtor. It has also put a hold on a practice where financial creditors can collusively try to erase the difference between the property owned by the corporate debtor and personal guarantor. However, now that Part III of the Code is brought into life, it is definitely expected to curb such practice, as it laid down a uniform procedure to adjudicate insolvency in a common forum.  

Akansha Uboveja

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