Failure To Serve Guarantor Insolvency Plea On RP Not Curable If It Prejudices Creditor Rights: NCLAT

The National Company Law Appellate Tribunal (NCLAT) at New Delhi recently held that failure to serve copies of insolvency petitions on the tribunal-appointed resolution professional cannot be treated as a curable procedural lapse when it prejudices creditor rights.

On this basis, the Appellate Tribunal dismissed appeals filed by personal guarantors of a corporate borrower for loans extended by Bank of Baroda, and upheld the rejection of their insolvency petitions.

In insolvency cases involving personal guarantors, a resolution professional is appointed at the threshold stage to examine the insolvency petition and submit a preliminary report, even before the tribunal decides whether to admit or reject the plea.

A bench comprising Judicial Member Justice N Seshasayee and Technical Members Arun Baroka and Indevar Pandey clarified that while a  petition cannot be dismissed only because the resolution professional failed to submit such a report, but it held that the petitions in this case failed due to the guarantors' prolonged non-compliance, which prejudiced creditor rights.

"This Tribunal is conscious that the procedural lapse should not ordinarily be allowed to have consequences which may have penalising effect such as dismissal of the petitions. However, a distinction may have to be made where on the strength by a procedural lapse the defaulting party has gained an advantage in law, then such procedural lapse is required to be viewed more seriously." It said. 

It added that this lapse enabled the guarantors to enjoy the benefit of the moratorium for longer than warranted.

"Very evidently from 16.01.2024 to 17.04.2025 the appellants in both the appeals have been enjoying the moratorium, owing to which the first respondent, the financial creditor, is disabled from enforcing the personal guarantee in the manner known to law. Had these appellants complied with the directions of the Adjudicating Authority dated 16.01.2024, then it is quite possible that the RP would have filed his report in time, which might have enabled the Adjudicating Authority to take a decision on it within a reasonable time.....If the appellants were to be granted a reprieve now, it then would surely confer an unmerited additional advantage of an extended moratorium on the appellants. We consider that the appellant's do not deserve it."

The appeals were filed by Manish Mahendra Somani and Manoj Mahendra Somani, who had stood as personal guarantors of a corporate borrower for loans extended by Bank of Baroda. After defaults, both guarantors filed insolvency petitions against themselves.

On January 16, 2024, the NCLT at Ahmedabad appointed Rajendra Jain as the resolution professional and specifically directed the guarantors to serve copies of their petitions on him so that he could examine the petitions and submit his report.

The guarantors failed to comply with this direction. For more than a year thereafter, no report was filed, and during this period the bank was prevented from enforcing the personal guarantees. On April 17, 2025, the NCLT dismissed the insolvency petitions.

Before the Appellate Tribunal, the guarantors argued that their petitions could not have been dismissed without first obtaining the resolution professional's report examining their insolvency pleas. They contended that failure to serve copies of the petitions was merely a procedural lapse capable of being cured.

Bank of Baroda opposed the appeals, arguing that the guarantors had secured the benefit of a moratorium for nearly 15 months due to their own non-compliance, which disabled the bank from enforcing the personal guarantees.

Dismissing the appeals, the Appellate Tribunal held that procedural lapses cannot be treated lightly when they result in substantive prejudice to creditors.

Referring to the prolonged protection enjoyed by the guarantors, the tribunal recorded, “but, the appellant had enjoyed moratorium for about 15 months, and as rightly contended by the counsel for the first respondent, this has disabled the first respondent from proceeding against appellants. Therefore, there is a compelling need for this tribunal to balance the failure of the appellants to comply with what the Adjudicating Authority had directed to them do vide its Orders dated 16.01.2024, and the impact it had on the substantive right of the first respondent to enforce the personal guarantee against the appellants.”

The tribunal further held that granting relief at this stage would surely confer an unmerited additional advantage of an extended moratorium and accordingly upheld the dismissal of the insolvency petitions