Covid-Era Insolvency Protection Applies Only To Companies, Not Personal Guarantors: NCLAT Reaffirms

The National Company Law Appellate Tribunal (NCLAT) at New Delhi, has recently reiterated that that the Covid-era suspension under the Insolvency and Bankruptcy Code does not protect personal guarantors from insolvency proceedings.

The appellate tribunal ruled that the suspension applies only to companies and does not bar creditors from initiating insolvency proceedings against individuals who have furnished personal guarantees

A bench comprising Chairperson Justice Ashok Bhushan and Technical Member Barun Mitra held that the moratorium imposed during corporate insolvency has no application to personal guarantors.

The tribunal observed, “the moratorium under Section 14 of the IBC does not preclude the financial creditor to initiate action under Section 95 against the personal guarantor.”

It further held, “In any view of the matter, Section 10A prohibits filing of application under Sections 7, 9 & 10 of the IBC and provisions of Section 10A does not in any manner bar proceedings against the personal guarantor under Part III of the IBC.”

The case arose from a Rs. 90 crore term loan granted to Saha Infratech Pvt. Ltd. by ECL Finance Ltd. between 2017 and 2019. The loan was backed by personal and corporate guarantees. After default, insolvency proceedings against the company commenced on February 28, 2020. The debt was later assigned to Assets Care & Reconstruction Enterprise Ltd.

ECL invoked the personal guarantees in March 2022 and issued a demand notice in November 2022 claiming over Rs 229 crore.

A Section 95 (personal guarantor insolvency) plea was thereafter admitted by the NCLT Delhi.

Challenging this order, the personal guarantors argued that once corporate insolvency proceedings had begun, the lender could not proceed against them personally. They contended that the alleged default fell within the Covid-protected period.

They also argued that the amount claimed was excessive. The guarantors pointed out that only about Rs. 55 crore was admitted in the company's insolvency. They further said that recoveries had already been made from co-guarantors.

The creditor opposed the appeal, stating that defaults had occurred prior to the Covid period and that proceedings against guarantors are independent of CIRP.

Rejecting the challenge, the appellate tribunal reiterated that insolvency proceedings against personal guarantors are not barred by either the corporate insolvency moratorium or the Covid-era suspension.

While reaching this conclusion, the bench also relied on its earlier ruling in Amit Jain vs. Siemens Financial Services Pvt. Ltd.(2022], which had taken the same view on the limited scope of the Covid suspension.

On the dispute over the amount claimed, the tribunal agreed with the NCLT that the precise liability of the guarantors is to be determined at a later stage. Since it was undisputed that the outstanding dues exceeded the statutory threshold of Rs. 1 crore, the tribunal found no reason to interfere and dismissed the appeals

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