NCLT Mumbai Reaffirms Insolvency Process Can Proceed Against Guarantors Without CIRP Of Corporate Debtor

The National Company Law Tribunal (NCLT) at Mumbai recently reaffirmed that insolvency proceedings against personal guarantors under the Insolvency and Bankruptcy Code can be initiated even if no CIRP is pending against the corporate debtor, relying on the Supreme Court's ruling in State Bank of India v. Mahendra Kumar Jajodia(2022).

A coram of Judicial Member Sushil Mahadeorao Kochey and Technical Member Prabhat Kumar reiterated that the tribunal's jurisdiction is independent of any insolvency action against the borrower.

It observed, “Under Section 60(1) of the Insolvency and Bankruptcy Code, 2016, the National Company Law Tribunal (NCLT) is the Adjudicating Authority for insolvency and bankruptcy proceedings relating to personal guarantors to corporate debtors. The Tribunal's jurisdiction is independent and not contingent upon the pendency or initiation of CIRP against the corporate debtor.”

Indian Bank had extended aggregated credit facilities of Rs 4.70 crore to Kushan Nandy & Kiran Shroff Pictures Private Limited, secured by a guarantee executed by its directors. Following violations of sanctioned terms and default, the loan account was classified as NPA in 2018 and a demand notice under Section 13(2) of the SARFAESI Act was issued to the borrower and guarantors.

The bank later issued a demand notice under Rule 7(1) of the 2019 Rules, calling upon personal guarantor Kushan Nandy to pay dues of Rs 9.92 crore including interest, and thereafter filed the present Section 95 application seeking initiation of insolvency resolution proceedings.

The bank submitted that default had occurred and statutory notices were duly issued. Nandy argued that the plea was not maintainable as no CIRP had been initiated against the principal borrower and therefore, according to him, jurisdiction lay with the DRT and not the NCLT.

The tribunal rejected the objection, holding that an application under Section 95 is maintainable even without any pending CIRP or liquidation proceedings against the corporate debtor. It further observed that proceedings before the DRT do not bar a Section 95 petition because the two processes operate in distinct legal domains. Once such a petition is filed, the interim moratorium under Section 96 automatically stays all other proceedings, including those before the DRT, in respect of the same debt.

The bench also treated the SARFAESI demand notice as valid invocation of the guarantee and relied on it to determine the date of default. Concluding that a prima facie financial debt existed and default had occurred, the NCLT admitted the petition and commenced the Insolvency Resolution Process against personal guarantor Kushan Nandy.

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