Personal Guarantors Cannot Misuse Insolvency Process To Defeat Creditor Recovery: NCLT Chennai

The National Company Law Tribunal (NCLT), Chennai, has recently ruled that personal guarantors cannot misuse the insolvency process to delay or obstruct legitimate recovery actions by creditors.

In an order passed on October 10 by a coram of Judicial Member Jyoti Kumar Tripathi and Technical Member Ravichandran Ramasamy, the tribunal noted that the Interim Resolution Professional (IRP) had “mechanically recommended” acceptance of the personal guarantor's application without considering his conduct or the ongoing recovery proceedings.

It observed: “While the IRP has mechanically recommended acceptance of the petition, his report does not take into account the conduct of the Applicant, the pending SARFAESI proceedings, or the Applicant's attempt to use the Code as a shield against recovery, which is contrary to the legislative intent. Section 94 cannot be invoked as a safe harbour for a guarantor to indefinitely delay or defeat legitimate recovery proceedings of the creditor.”, it said. 

The case involved one KC Mohanan, personal guarantor to We Two Engineering Pvt. Ltd., a Kochi based equipment manufacturing company which had defaulted on loans worth nearly 23 crores. After the default, the company's account was classified as a Non-Performing Asset (NPA) by the South Indian Bank Limited, and the personal guarantee of Mohanan was invoked.

Following multiple demand and auction notices for recovery, Mohanan, as the guarantor sought initiation of insolvency against himself, claiming inability to repay Rs 18 crore.

The IRP-Madhu Desikan recommended admission of the petition, but the bank opposed it, arguing that the guarantor had attempted to conceal assets, misstate liabilities, and mislead creditors. They contended that Mohanan had made partial payments and released certain mortgaged properties but continued to default deliberately.

The creditor argued that the petition was not a genuine effort at resolution but a tactic to stall ongoing recovery proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).

The tribunal found that the IRP had failed to assess the applicant's conduct and the ongoing recovery actions. Referring to the NCLAT's decision in Syed Sirajis Salikin Khadri, it emphasized that the insolvency process is meant for genuine resolution and cannot be used as a tool to delay enforcement. Dismissing the plea, the tribunal held that the personal guarantor did not satisfy the conditions for initiating insolvency proceedings.