NCLT Kochi Rules Against Insolvency For Guarantors Based On CIRP Without Independent Default By CD

NCLT Kochi Rules Against Insolvency For Guarantors Based On CIRP Without Independent Default By CD

The National Company Law Tribunal (NCLT) in Kochi bench, consisting of Justice T. Krishna Valli (Judicial Member) and Mr. Shyam Babu Gautam (Technical Member), has dismissed an application seeking to initiate insolvency proceedings against personal guarantors under Section 95 of the Insolvency and Bankruptcy Code, 2016 (IBC).

The National Company Law Tribunal (NCLT) Kochi, comprising Justice T. Krishna Valli (Judicial Member) and Mr. Shyam Babu Gautam (Technical Member), has dismissed an application to initiate insolvency proceedings against personal guarantors under Section 95 of the Insolvency and Bankruptcy Code, 2016 (IBC). The tribunal held that creditors cannot commence insolvency proceedings against personal guarantors solely based on the initiation of the Corporate Insolvency Resolution Process (CIRP) without demonstrating a distinct and independent default by the corporate debtor.

In the case at hand, on November 19, 2018, Piramal Capital and Housing Finance Limited (the Applicant) sanctioned a ₹55 crore loan to Asten Realtors Private Limited (the Corporate Debtor). The loan agreement identified the corporate debtor as the principal borrower, with Mr. Kakkanattil Ibrahimkutty Mohammed Rafi Mather and Mr. Kakkanattil Abdul Rahiman Siraj Mather acting as personal guarantors. They provided an irrevocable, absolute, and unconditional guarantee for the loan repayment.

The corporate debtor defaulted on the loan repayment on January 5, 2023. Subsequently, on March 17, 2023, the applicant invoked the guarantee, demanding ₹55.07 crore within seven days. As the corporate debtor and personal guarantors failed to comply, the account was classified as a non-performing asset (NPA) according to RBI guidelines. The applicant then issued a Form B Demand Notice on June 10, 2023, demanding ₹56.81 crore, including interest and other charges. Despite acknowledging the notice, neither the corporate debtor nor the personal guarantors made any payments.

The applicant subsequently filed an application under Section 95(1) of the IBC to initiate insolvency proceedings against the personal guarantors for a default amounting to ₹56.81 crore as of May 31, 2023. The record of default, dated March 25, 2023, was submitted to the Information Utility. On January 16, 2024, NCLT Kochi appointed Mr. T. Narayana Swamy as the Resolution Professional and directed him to file a report under Section 99 of the IBC.

The personal guarantors argued that invoking the guarantee was unnecessary since the principal borrower entered the Corporate Insolvency Resolution Process (CIRP) on January 25, 2023. They claimed the corporate debtor had not defaulted on payments owed to the petitioner before entering CIRP, meaning the financial debt could not be considered due or payable. They asserted that no default existed against the transaction because the default date claimed by the petitioner occurred during the period of the principal borrower's insolvency proceedings.

Additionally, the guarantors contended that they typically have the right of subrogation to recover losses from the principal borrower. However, due to the principal borrower's insolvency, this right cannot be exercised, making it unjust to enforce obligations on the guarantor.

The NCLT Kochi dismissed the application, holding that creditors cannot initiate insolvency proceedings against personal guarantors solely based on the initiation of CIRP without demonstrating a distinct and independent default by the corporate debtor.

The Tribunal noted that under Section 128 of the Indian Contract Act, 1872, a guarantor's liability is coextensive, joint, and several with that of the principal borrower unless otherwise stated in the contract. It was observed that judicial precedents affirm that creditors can initiate insolvency proceedings against both the corporate debtor and its personal guarantor simultaneously or in any preferred sequence for the debt in default.

It was also noted that a CIRP against the corporate debtor was initiated by some homebuyers in November 2022, with the petition reserved for orders on December 21, 2022, and the CIRP commencing on January 25, 2023. The corporate debtor made its last payment on December 31, 2022, with no default occurring until that date. The applicant's debt became due on January 5, 2023, after the CIRP petition was reserved for orders, with the asserted default date being March 25, 2023.

While it is true that a guarantor's liability is co-extensive with that of the principal borrower, this liability is fundamentally derived from the default of the principal borrower. In the absence of a default by the principal borrower, the guarantor cannot be held liable. The timing and circumstances of the default are critical in determining the point at which the guarantor becomes liable.

Therefore, creditors cannot start insolvency proceedings against personal guarantors solely based on CIRP initiation without proving the corporate debtor's default. Established judicial precedents require a clear and distinct default by the principal borrower to initiate proceedings and enforce the guarantor's liability.

NCLT Kochi also relied upon the Supreme Court's decision in Dilip B. Jiwrajka vs. Union of India & Ors, wherein it was held that the resolution professional appointed under Section 97 plays a facilitative role, collating facts relevant to the insolvency resolution process application under Section 94 or Section 95. The report submitted to the adjudicatory authority is recommendatory regarding whether to accept or reject the application.

In conclusion, despite the Resolution Professional's recommendation to admit the insolvency proceedings, the Tribunal rejected the application to initiate insolvency proceedings against the personal guarantors under Section 95 of the IBC.