Confusion regarding NCLT’s jurisdiction as personal guarantor insolvency
Jhe National Company Law Courts (NCLT) gained great prominence after the enactment of the Insolvency and Bankruptcy Code, 2016 (Code/IBC), and has become an epicenter of business law decisions across the country. Pursuant to Section 63 of the Code, it is the only judicial forum that has jurisdiction to deal with the process of resolving the insolvency of a business and even the High Courts have been warned by the Supreme Court in the case Ghanashyam Mishra & Sons (P) Ltd. . v. Edelweiss Asset Reconstruction Co. Ltd., (2021) 9SCC 657 not to exercise jurisdiction under Section 226 of the Constitution of India with respect to the process of resolving corporate insolvency (CIRP). However, there is now impending confusion and lack of clarity regarding NCLT’s jurisdiction to hear cases relating to the insolvency of a debtor company’s personal guarantors.
Part III of the Insolvency and Bankruptcy Code 2016 (Code/IBC) deals with the insolvency of individuals and partnerships. Although the IBC was enacted in December 2016, the individual insolvency provisions were not enacted at that time. The legislator realized that although the debtor company is drawn into insolvency, the promoters/directors of this debtor company who gave the personal guarantee freely withdraw. Such issue was also a point of contention in the Essar Steel India Ltd case. Creditors’ Committee c. Satish Kumar Gupta, (2020) 8 SCC 531 in which the Supreme Court ruled that the liability of the personal guarantor does not ipso facto cease after the resolution plan has been approved.
Inspired by this judgment, the State notified by notification of 15.11.2019 the provisions relating to individual insolvency under the IBC. However, the same was true only for the personal guarantors of corporate debtors. Accordingly, the rules and regulations concerning them have also been notified by the central government. Because notification creates a separate class of personal guarantors for a corporate debtor, the constitutionality of the notification and Section 95 of the Code was challenged before the Supreme Court in Lalit Kumar Jain v. Union of India, LL 2021 SC 257 which held that the notification of 15.11.2019 and Section 95 are intra vires the Constitution of India.
Arbitration authority for the insolvency of the personal guarantor
Pursuant to Section 179 of the IBC, jurisdiction to hear matters relating to the personal guarantor’s insolvency resolution process rests with the Debt Recovery Tribunal (DRT) and only if the conditions referred to in Article 60(2) of the Code are met, jurisdiction in the event of the insolvency of the personal guarantor lies with the NCLT.
This issue of invoking NCLT jurisdiction even when no CIRP is pending against the debtor company, was considered by the National Company Law Appellate Tribunal (NCLAT) in the case of State Bank of India v Mahendra Kumar Jajodia, CA(AT)(Ins) No. 60 of 2020 in which the NCLAT completely ignored the jurisdiction of DRT and conferred jurisdiction exclusively on the NCLT with respect to the personal guarantor’s insolvency resolution process even when no CIRP is pending against the corporate debtor and held as follows;
“11… the Motion having been filed under Article 95(1) as referred to in Article 60(1) being the NCLT, the Motion filed by the Appellant was fully admissible and could only be dismissed on the ground that no CIRP or liquidation proceedings of the Debtor Company are pending before the NCLT…”
In the authors’ view, with all due respect to NCLAT, the aforementioned judgment has the effect of removing DRT’s primary jurisdiction over the personal guarantor’s insolvency process. The relevant provisions regarding the jurisdiction of the DRT and the NCLT over the insolvency of the personal guarantor have not been brought to the attention of the NCLAT and only Sections 60(1) and 60(2) of the Code have been brought to the attention of the NCLAT. attention of the NCLAT and not article 79. & 179 of the Code which therefore disregarded the legal provisions relating to the jurisdiction of DRT and NCLT in matters of insolvency of the personal guarantor.
Exclusive jurisdiction of DRT in the event of insolvency of the personal guarantor
Pursuant to Section 79(1) of the IBC, the procuring authority under Part III of the Code will be the DRT. In addition, Article 179 of the Code stipulates that the judicial authority in matters of personal insolvency will be the DRT with territorial jurisdiction in the place where the individual debtor resides and actually and voluntarily exercises his activity. Therefore, there is only one conclusion from the uncovering of the aforementioned provision, and that is that the DRT will be the contracting authority in the event of the insolvency of the personal guarantor.
In Mahendra Kuamr Jajodia (Supra), NCLAT held that NCLT shall have jurisdiction against the corporate debtor’s personal guarantor regardless of any pending CIRP against the corporate debtor, a contrary view is taken by the Madras High Court in the case of Rohit Nath vs. KEBHana Bank, AIR 2021 Mad 241where he held that;
“10. Since these Rules of Rules, 2019 had been notified when published in the India Gazette on 15th November 2019, there is no doubt that the contracting authority in respect of a guarantor who has provided a personal guarantee in connection with credit facilities obtained by a legal person, would be the appropriate debt collection court.”
Exception to DRT’s exclusive jurisdiction as personal guarantor insolvency
In our view, jurisdiction to deal with the insolvency of a personal guarantor lies with the NCLT if it satisfies the specific condition referred to in section 60(2) of the Code, which reads as follows;
“Without prejudice to paragraph (1) and notwithstanding anything to the contrary contained in this Code, where a process of corporate insolvency resolution or a proceeding to wind up a debtor company is pending before a National Company Law Courta request relating to the resolution of the insolvency or the liquidation or the bankruptcy of a corporate or personal guarantor, as the case may be, of this corporate debtor will be filed before this National Court of Company Law.”
This section makes it very clear that only in cases where the CIRP or the liquidation of the debtor company it is on standby before a particular NCLT, the personal guarantor’s insolvency will also be filed before that particular NCLT and if no CIRP is pending then jurisdiction will fall to the DRT in accordance with Article 179 of the Code. This interpretation is further supported by the provision of Section 60(4) of the Code which states that NCLT is vested with all the powers of DRT under Part III to exercise its jurisdiction under Section 60(2 ) of the Code.
Therefore, it is only in cases where the CIRP of the corporate debtor is pending that the NCLT will have jurisdiction over the personal guarantor of that same corporate debtor. The reason for assigning jurisdiction over the insolvency of the personal guarantor to the NCLT is only for a specific reason to avoid the multiplicity of proceedings since the CIRP of the debtor company is already pending before the NCLT and therefore at the Instead of filing personal guarantor insolvency before the DRT, the same must be filed before the NCLT only.
This was further elucidated through a hypothetical scenario by the Honorable Madras High Court in the case of Rohit Nath (Supra) as follows;
“23…In other words, in the event that company “A” is the principal debtor and an individual “P” the guarantor promising the reimbursement of the credit facilities obtained by “A”, if a procedure for the resolution of the insolvency of the company is initiated under the provisions of the Code relating to company “A”, the insolvency resolution process relating to the guarantor “P” would necessarily be before the same jurisdictional authority, namely the National Court of Corporate law. company ‘A’, the insolvency proceedings concerning the guarantor ‘P’ must necessarily be brought only before the jurisdictional debt collection court and not before another body.”
In addition, Rule 3(1)(a) of the Insolvency and Bankruptcy (Application to Contracting Authority of Insolvency Resolution Process for Personal Guarantors of Corporate Debtors) Rules 2019 also provides that For the purposes of Article 60 of the Code, the contracting authority will be the NCLT and in all other cases the contracting authority will be the DRT.
Therefore, the inevitable conclusion from the aforementioned provisions and precedents is that the insolvency jurisdiction of the personal guarantor belongs exclusively to the DRT and that in a specific scenario as mentioned in Article 60 (2) of the Code, the jurisdiction will belong at the NCLT. A three-judge bench of the Honorable NCLAT in the matter of Rahul Ramesh Shah vs. PNB Housing Finance Ltd is now again ceased from the same question of law which can bring the requisite clarity and unravel the impending conundrum regarding the same.
P Nagesh is a Senior Barrister and Akshay Sharma is a Delhi-based Barrister. Views are personal.