[Dhaval Hemesh Sheth is a second-year student at National Law University, Delhi.]
On 27 January 2022, the National Company Law Appellate Tribunal (‘NCLAT’) in the matter of State Bank of India v. Mahendra Kumar Jajodia (‘Mahendra Kumar case’) ruled that an application filed under section 95(1) of the Insolvency and Bankruptcy Code, 2016 (‘Code’) before the National Company Law Tribunal (‘NCLT’) for initiating insolvency resolution process (‘IRP’) against the personal guarantor to the corporate debtor (‘CD’) cannot be rejected solely because no liquidation or corporate insolvency resolution process (‘CIRP’) proceedings of the CD are pending before the NCLT. This decision comes after several contradictory decisions by NCLTs and High Courts on this issue.
Part III of the Code provides the framework for insolvency and resolution of individuals and partnership firms. Barring personal guarantors to CDs, provisions pertaining to partnership firms and individuals have not been notified yet. The provisions relating to the insolvency and bankruptcy process of personal guarantors to CDs came into force on 1 December 2019 vide a central government notification. Section 179, subject to provisions of section 60, vests the jurisdiction in Debt Recovery Tribunals (DRTs) to entertain insolvency matters of partnership firms and individuals. Section 60 of the Code clearly states that in relation to insolvency resolution and liquidation of corporate persons, including personal guarantors to CDs, NCLT shall be the adjudicating authority (‘AA’). Therefore, when provisions of section 60 are attracted, section 179 is rendered inapplicable. However, due to contradictory judgements on the applicability of section 60 to personal guarantors, there is no clarity regarding the jurisdiction of the NCLT and the DRT with respect to personal guarantors.
Conflicting judgements by NCLTs, DRTs and High Courts
In Insta Capital Pvt. Ltd. v. Ketan Vinod Kumar Shah, (‘Insta Capital case’, order pronounced on 10 August 2021) the NCLT, Mumbai bench was faced with the question as to whether the pendency of a CIRP or liquidation proceeding of the CD before NCLT is a pre-requisite to initiate an IRP against the personal guarantor. The tribunal held that section 60(2) of the Code contains a non-obstante clause which specifies that only when a CIRP or liquidation proceeding of a CD is pending before the NCLT, an application initiating IRP against personal guarantor can be maintainable before such NCLT. The tribunal further observed that filing applications initiating IRP against personal guarantor without CD undergoing CIRP will be tantamount to “vesting of jurisdiction on two course[s]: one is NCLT and another is DRT.” In the matter of Mr. Rohit Nath v. KEB Hana Bank (AIR 2021 Mad 241), the Madras High Court held that a DRT can initiate insolvency proceedings against the personal guarantor to CD, who was not undergoing a CIRP or liquidation proceeding before the NCLT. These decisions established that DRT is the AA in insolvency matters of personal guarantors when the CDs are not undergoing CIRP/liquidation proceedings.
The NCLT, Delhi Bench, in PNB Housing Finance Ltd. V. Mr. Mohit Arora and Ors. (‘PNB Housing case’, order pronounced on 29 September 2021) was faced with the same question, and the tribunal took a different view. The tribunal observed that sections 60(1), 60(2) and 60(3) lay down three different situations that give NCLT the power to entertain IRP applications against personal guarantors.
The relevant sub-sections of section 60 are perused for an in-depth analysis of this issue:
“Section 60: Adjudicating Authority for corporate persons.
- (1) The Adjudicating Authority, in relation to insolvency resolution and liquidation for corporate persons including corporate debtors and personal guarantors thereof shall be the National Company Law Tribunal having territorial jurisdiction over the place where the registered office of the corporate persons located.
(2) Without prejudice to sub-section (1) and notwithstanding anything to the contrary contained in this Code, where a corporate insolvency resolution process or liquidation proceeding of a corporate debtor is pending before a National Company Law Tribunal, an application relating to the insolvency resolution or [liquidation or bankruptcy of a corporate guarantor or personal guarantor, as the case may be, of such corporate debtor] shall be filed before suchNational Company Law Tribunal.
(3) An insolvency resolution process or [liquidation or bankruptcy proceeding of a corporate guarantor or personal guarantor, as the case may be, of the corporate debtor] pending in any court or tribunal shall stand transferred to the Adjudicating Authority dealing with insolvency resolution process or liquidation proceeding of such corporate debtor.”[Emphasis by the NCLT]
Section 60(1) depicts a situation wherein CIRP or liquidation process has not been initiated, whereas u/s 60(2), the CIRP/liquidation process has already been initiated and is pending before the NCLT. Section 60(3) is concerned with the transfer of proceedings from the DRT to the NCLT when CIRP/liquidation proceedings are initiated before the NCLT. With respect to section 60(1), the tribunal noted that the phrase ‘in relation to’ indicates that filing of insolvency and bankruptcy applications in relation to the CD for invoking CIRP is sufficient to attract the provisions of section 60(1) and therefore, in such a situation, the jurisdiction shall lie with the NCLT. In conclusion, the tribunal held that when the application(s) for initiation of CIRP is filed before the NCLT, then initiation of CIRP of the CD is not a pre-requisite for maintainability of an application u/s 95 of the code for initiating IRP against the personal guarantor before the NCLT.
Analysing the Stance Taken by the NCLAT in the Mahendra Kumar case
The NCLAT in this judgement observed that the use of words ‘a’ and ‘such’ before NCLT in section 60(2) clearly indicate that the purpose and object of the sub-section are that both proceedings (CIRP against CD and IRP against personal guarantor) should be before the same NCLT. The tribunal noted that section 60(2) is only applicable when CIRP/liquidation proceedings are pending before the NCLT. However, section 60(2) does not prohibit the initiation of IRP u/s 95 of the code even if there are no proceedings pending before the NCLT.
The tribunal further observed that section 60(2) begins with the phrase ‘Without prejudice to sub-section (1)’ thereby rendering the provisions u/s 60(2) as supplemental to sub-section (1) of section 60. Section 60(1) is the substantive provision for the AA and in a situation wherein the provisions of section 60(2) are not attracted, the application for initiating IRP can be filed u/s 60(1) of the Code. In conclusion, the tribunal held that the pendency of CIRP/liquidation proceedings before the NCLT is not a pre-requisite for initiating IRP against the personal guarantor before NCLT.
The Supreme Court in Lalit Kumar Jain v. Union of India ((2021) 9 SCC 321) laid down the legislative intent of the provisions of the Code that are applicable to the personal guarantors. The court observed that the purpose of these provisions was to provide a common adjudicating forum for insolvency matters involving CDs and personal guarantors to the CDs. This is further indicated by section 60(4) which vests all powers of DRT in NCLT and also vests NCLT with powers under part III of the code. A common adjudicating forum for CDs and their personal guarantors has several benefits. It allows the AA to consider the nature of all assets of the CD and personal guarantors. It also assists the Committee of Creditors in framing a feasible resolution plan because they can recover some dues of the CD from the personal guarantors. In conclusion, the legislative intent behind these provisions was to avoid two separate processes and uncertain outcomes by achieving unified adjudication through the NCLT.
In the PNB Housing case, the NCLT provides an in-depth interpretation of Section 60(1) of the code. According to this interpretation, the NCLT shall be the AA for insolvency and liquidation matters ‘in relation to’ corporate persons, including CDs and personal guarantors. The phrase ‘in relation to’ delineates that even if a CIRP/liquidation process has not been initiated before the NCLT, an application against the personal guarantor would be maintainable. It is pertinent to note that to attract the applicability of section 60(1), it is necessary to file an application to initiate CIRP/liquidation of the CD before the NCLT. However, the NCLAT in Mahendra Kumar case did not discuss the requirement of filing an application to initiate CIRP/liquidation while interpreting section 60(1). The tribunal merely held that an application against the personal guarantor cannot be rejected solely because a CIRP/Liquidation proceeding was not pending before the NCLT. The tribunal reasoned that the application against the personal guarantor can be filed before the NCLT u/s 60(1) when provisions of section 60(2) are not attracted.
The author disagrees with the reasoning of the Hon’ble tribunal on two grounds. First, the judgement does not provide clarity as to when the creditors should approach the NCLT or the DRT. Moreover, this judgement has not specified those situations wherein section 60(1) will not be applicable, creating ambiguity regarding the jurisdiction of the NCLT and the DRT. Therefore, as observed in Insta Capital case, such a stance is tantamount to vesting jurisdiction in both the NCLT and the DRT. Secondly, this decision allows the creditors to file applications against personal guarantors before the NCLT even when no applications are filed before the same NCLT for initiating CIRP of the CD. Therefore, this decision is not in consonance with the legislative intent which was to provide a unified adjudicative forum and prevent separate insolvency processes. On the other hand, the reasoning adopted by the NCLT in the PNB Housing case is in consonance with the objective of the code as it involves consolidation of cases of a corporate person and adjudication of the same by a single forum.
The author believes that the NCLAT in the Mahendra Kumar case did not provide any clarity despite contradictory judgements on the issue and their ambiguous interpretation of section 60(1) of the code is not in consonance with the legislative intent of the provisions of the Code and elicits a high likelihood of ‘forum shopping’. The requirement of filing an application for initiation of CIRP of the CD to attract applicability of section 60(1) as held in the PNB Housingcase resolves the ambiguity pertaining to the jurisdiction of the NCLT and the DRT with regard to the personal guarantors and also achieves the objective under the Code.
– Dhaval Hemesh Sheth