Proceedings against Personal Guarantors in NCLT Current Situation

Presently, the simultaneous commencement of insolvency proceedings by the lender against the corporate debtor and the corporate guarantor(s) faces a roadblock on account of the NCLAT order in the matter of Dr. Vishnu Kumar Agarwal v. Piramal Enterprises Limited ("Piramal matter")

The corporate insolvency resolution process commenced against corporate debtors has either yielded a resolution or resulted in liquidation of such corporate debtors. In most cases there has always been a gap between the amounts recovered by the lenders and the amounts owed to them by the corporate debtor. To cover that gap, lenders are always faced with the dilemma of enforcing guarantees (personal and corporate) provided by third parties for the benefit of the corporate debtor against whom insolvency proceeding has commenced and the timing of such enforcement.

Presently, the simultaneous commencement of insolvency proceedings by the lender against the corporate debtor and the corporate guarantor(s) faces a roadblock on account of the NCLAT order in the matter of Dr. Vishnu Kumar Agarwal v. Piramal Enterprises Limited ("Piramal matter"). The NCLAT held that the creditor can commence an insolvency proceeding against the corporate guarantor de hors any action against the corporate debtor. However, in case the lender has the option to proceed against the corporate debtor and/or corporate guarantors, then in such case the lender will have to choose only one corporate entity amongst them against whom the lender would like to commence insolvency proceeding. The decision of the NCLAT is in appeal before the Supreme Court.

The right to commence insolvency resolution process against the personal guarantor who has provided a guarantee with respect to debt availed by the corporate debtor under the Insolvency and Bankruptcy Code, 2016 (IBC) came into effect on December 1, 2019. Since then, lenders have been pursuing or deliberating to pursue an action against the personal guarantors under the IBC along with the insolvency proceeding against the corporate debtor.

Under the IBC, the personal guarantor or the creditor may apply to the NCLT directly or through a resolution professional for initiating an insolvency resolution process in case of default by the personal guarantor. When an application in this regard is filed, an interim moratorium commences from the date of such application in relation to the debts of the personal guarantor. After filing of such application, the NCLT needs to confirm the appointment of the resolution professional where the application is filed by the resolution professional. Where the application is filed by the debtor or creditor directly, the NCLT shall order the appointment of a resolution professional. Such appointed resolution professional is responsible for preparing a report with respect to the default position of the personal guarantor recommending admission or rejection of the application. Basis the report, NCLT may admit or reject the application for commencement of insolvency resolution process against the personal guarantor. If admitted, then within 180 days from the date of admission, the resolution professional is required to collate and admit claims against the personal guarantor, work with the debtor in preparation of a repayment plan and submit the repayment plan along with his report to creditors for their approval. If the plan is approved by the creditors, the same is filed with the NCLT for its approval. However, if there is no repayment plan or the said plan is not approved by the creditors or by the NCLT then in such case, bankruptcy proceedings are initiated against the personal guarantor which is akin to the liquidation proceeding of a corporate debtor.

The order of the NCLT in the matter of State Bank of India v. Anil Dhirajlal Ambani ("Anil Ambani matter") appointing a resolution professional on the application filed by SBI has been a significant development. Firstly, the NCLT debunked the argument that the lender should wait for the resolution of the corporate debtor to assess whether any amounts would be payable by the personal guarantor to the lender. The NCLT held that in view of the various judgments of the Supreme Court including the judgement passed in State Bank of India v. Ramakrishnan and the explicit wordings under Section 60(2) of the IBC, it is clear that notwithstanding pendency of approval of a resolution plan, the personal guarantor can be proceeded against under the IBC. The NCLT observed that when the law (i.e. provisions of Section 60(2) of the IBC) mandates that a particular proceeding can be initiated, it would be preposterous to think that after initiation of the proceedings the NCLT, before whom it is filed, the NCLT would not act upon such application and would not do anything about it until some subsequent event happens. Had that been the intention of the Legislature, a provision for initiation of proceedings would not have existed in the first place.

Secondly, the judgment of the NCLAT in the Piramal matter was held as not being applicable to the insolvency resolution process against the personal guarantor as the Piramal matter had not considered the issue from the perspective of commencement of action against personal guarantor. The distinction made by the NCLT will enable lenders to negate any reference to the order of the NCLAT in the Piramal matter in other similar matters.

The NCLT order in the Anil Ambani matter did pave the way for lenders to pursue action against the personal guarantors simultaneously with the commencement of the insolvency proceeding against the corporate debtor. However, the proceedings against personal guarantors have hit a road block on account of a recent ruling of the Delhi High Court which has stayed personal insolvency proceedings against a personal guarantor in the matter of Lalit Kumar Jain vs Union Ministry of Law and Justice &Ors (Lalit Kumar matter) in which the constitutionality and validity of notification of the relevant part of IBC and the allied rules enabling intiation of action against the personal guarantor has been challenged. This order has been followed by the Delhi High Court in the case of Anil Ambani and various matters with respect to commencement of NCLT proceedings against personal gurantors that have thereafter been filed and tagged along with the Lalit Kumar matter pending before the Delhi High Court. When approached, the Supreme Court of India did not vacate the stay granted by the Delhi High Court. However, basis a transfer petition filed by IBBI for transfer of the peititions pending before various High Courts on the issue of constitutionality and validity of proceedings against personal guarantor, the Supreme Court of India has now transferred all such petitions to itself without altering the interim order, if any, passed by the High Courts.

Given the prevailing situation, it is critical that there is timely resolution to the Lalit Kumar matter to provide the much needed teeth to the lenders as far as recovery actions with respect to personal guarantees are concerned. In fact, the Government has made its stance apparent by the issuance of directions by the Department of Financial Services in the Finance Ministry to public sector banks to put in place a mechanism for monitoring cases, which may require initiation of insolvency proceedings against personal guarantors of corporate debtors.