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Why So Much Confusion Around The Jurisdictional Issue Under Personal Insolvency

Mukesh Chand
29 May 2022 4:35 AM GMT
Why So Much Confusion Around The Jurisdictional Issue Under Personal Insolvency
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This article analysis the issues and confusion revolving around the issue of 'Adjudicating Authority' for personal guarantor to corporate debtors and whether the Debt Recovery Tribunals have jurisdiction to entertain applications for insolvency of personal guarantors to Corporate Debtors.

IBBI January-March 2022 issue of "Insolvency and Bankruptcy News" for the first time show the tentative figures relating to applications filed under section 94 and 95 of the Insolvency and Bankruptcy Code, 2016 (the Code). It shows that there are about 926 applications filed for personal insolvency under section 94 and 95 of the Code. At first look there is nothing unusual about these figures but a look at the breakup presents to you a very intriguing picture. Let's have a look at the breakup of such applications. The figures show that out the above 926 applications 908 applications are pending before the National Company Law Tribunals (NCLTs) and the remaining 18 applications are pending before the Debt Recovery Tribunals (DRTs). It is this figure of 18 applications which are shown as pending before DRTs which is interesting. Interesting, because as of now only the provisions dealing with the insolvency of 'personal guarantors to corporate debtor' have been brought into effect and for that purpose NCLTs have been vested with exclusive jurisdiction under section 60 of the Code, hence the question about the said 18 applications pending with DRTs. If these are the applications filed under section 94 and 95 of the Code in respect of the personal guarantor to corporate debtor (as those are the only provisions in force as of now), then the question arise whether DRTs have any jurisdiction in such applications or the Code has conferred concurrent jurisdiction on two different forums or these are the applications dealing with insolvency of individuals other than personal guarantor to corporate debtors. The later appears to be not possible as the provisions of the Code dealing with insolvency of individuals other than the 'personal guarantor to corporate debtors' have not brought into effect and the related provisions of the Provincial Insolvency Act have not been repealed yet, under which the jurisdiction lies with the civil courts. So, it is presumed that the above 18 applications also pertain to insolvency of personal guarantor to corporate debtors. If that be the case, then the DRTs appears to be handling such matters without jurisdiction, because as of now provisions dealing with insolvency of individual (other than personal guarantor to Corporate debtors) have not been brought into force, and at least the notifications and provisions of the Code and Rules do not seem to be conferring such jurisdiction on DRTs.

Let's see whether there is any ambiguity in the legal provisions leading to dual jurisdiction on the issue. The most relevant documents in this regard is the Notification dated 15th November, 2019 issued under provisions of sub-section (3) of section 1 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016). Through this notification, the Central Government brought into effect the following provisions of the Code only in so far as they relate to personal guarantors to corporate debtors, namely:―

  • clause (e) of section 2;
  • section 78 (except with regard to fresh start process) and section 79;
  • sections 94 to 187 [both inclusive];
  • clause (g) to clause (i) of sub-section (2) of section 239;
  • clause (m) to clause (zc) of sub-section (2) of section 239;
  • clause (zn) to clause (zs) of sub-section (2) of section 240; and (7) section 24.

Thus, there is no ambiguity in this Notification as it very clearly mentions that the applicable provisions have been made effective only in so far as they relate to personal insolvency of the individuals who are "guarantors to corporate debtors".

Let's see if there is any ambiguity in the provisions of the Code, as far as the 'Adjudicating Authority for personal insolvency of guarantor to Corporate Debtor' is concerned. Section 79 of the Code, provides that unless the context otherwise requires: -

  • 'Adjudicating Authority' means the Debt Recovery Tribunal constituted under sub-section (1) of section 3 of Recovery of Debts Due to Banks and Financial Institution Act, 1993.

If one goes by the plain reading of the above provisions, it gives an impression that this section is conferring exclusive jurisdiction to DRTs to handle application for personal insolvency of individuals. But the provisos are itself qualified by section 79 as it is subject to the context and this context is provided under section 60 of the Code. The Section 60 of the Code prescribes the Adjudicating Authority for corporate persons.

Sub-section (1) of Section 60 provides that "the Adjudicating Authority, in relation to insolvency resolution and liquidation for corporate persons including corporate debtors and personal guarantors thereof shall be the National Company Law Tribunal having territorial jurisdiction over the place where the registered office of a corporate person is located".

The sub-section (2) further clarifies that "Without prejudice to sub-section (1) and notwithstanding anything to the contrary contained in this Code, where a corporate insolvency resolution process or liquidation proceeding of a corporate debtor is pending before a National Company Law Tribunal, an application relating to the insolvency resolution or liquidation or bankruptcy of a corporate guarantor or personal guarantor, as the case may be, of such corporate debtor] shall be filed before the National Company Law Tribunal.

And finally, sub-section (3) clarify that "an insolvency resolution process or liquidation or bankruptcy proceeding of a corporate guarantor or personal guarantor, as the case may be, of the corporate debtor pending in any court or tribunal shall stand transferred to the Adjudicating Authority dealing with insolvency resolution process or liquidation proceeding of such corporate debtor".

From the plain reading of the provisions of Section 60 of the Code, it is amply clear that whatever be the situation whether application against the relevant corporate debtor is filed or not, adjudicating authority for Corporate Debtor, Corporate Guarantor and the personal guarantor to Corporate Debtor shall be the NCLT. The use of the terms "shall be" clearly reflect intention of the legislature that for the purpose of the insolvency resolution and liquidation of corporate persons including corporate debtors and personal guarantors to the corporate debtor, the Adjudicating Authority shall be the National Company Law Tribunal. Thereafter, it goes on to clarify the territorial jurisdiction of NCLTs in three different situations covered under sub-section (1), (2) and (3) of Section 60.

Further, in sub-section (1) of section 60 the use of the term 'corporate person' makes it clear that it is intended to cover a situation where CIRP Process is not initiated and in such a situation the relevant application will be filed with the NCLT having jurisdiction over the place where registered office of the corporate personal is situated. In case, the application (in the absence of Corporate Insolvency Resolution Process (CIRP) of CD) is being filed against the corporate guarantor it will be filed before the NCLT having jurisdiction over the place where registered office of the corporate guarantor is located and in case the application is being filed for personal guarantor, it will be the place where registered office of the corporate debtor is located (who is included with in the broader terms of corporate person). The Sub-section (2) of section 60 of the Code, covers the situations and cases where CIRP of the Corporate Debtor is already initiated. In such a case, any application for initiation of corporate insolvency of the Corporate Guarantor or the personal guarantor to the Corporate Debtor, as the case may be, has to be filed where such CIRP of the Corporate Debtor is pending. Sub-section (3) of section 60 of the Code, covers situations where the insolvency resolution process or liquidation or bankruptcy proceeding of a corporate guarantor or personal guarantor, as the case may be, was initiated first but later on CIRP of the corporate debtor is also initiated, then as per the requirement of sub-section (3) of section 60 of the Code, the pending application(s) in any court or tribunal shall stand transferred to the Adjudicating Authority dealing with insolvency resolution process or liquidation proceeding of such corporate debtor. While this sub-section suffers from drafting mistake as it uses the term 'bankruptcy' instead of 'insolvency', however, use of the term 'tribunal' in this sub-section makes is amply clear that the application already initiated for insolvency resolution process or liquidation or bankruptcy proceeding of a corporate guarantor or personal guarantor, as the case may be, shall be transferred to the Tribunal where CIRP of the Corporate Debtor is initiated subsequently.

Thus, there is no ambiguity even in the legal provisions dealing with the insolvency of the personal guarantor to the Corporate Debtor and in all three situations as envisaged above under sub-section (1), (2) and (3) of section 60 of the Code, the Adjudicating Authority shall be the National Company Law Tribunal only though the place may differ. Further in the case of Lalit Kumar Jain vs Union Of India the Hon'ble Supreme Court, already ruled out two forum theory by clarifying that "...... the possibility of two separate processes being carried on in different forums, with its attendant uncertain outcomes, led to carving out personal guarantors as a separate species of individuals, for whom the Adjudicating authority was common with the corporate debtor to whom they had stood guarantee. The fact that the process of insolvency in Part III is to be applied to individuals, whereas the process in relation to corporate debtors, set out in Part II is to be applied to such corporate persons, does not lead to incongruity. On the other hand, there appear to be sound reasons why the forum for adjudicating insolvency processes – the provisions of which are disparate- is to be common, i.e through the NCLT".

The legal provisions and the position as clarified by the Hon'ble Supreme Court, leaves no scope for ambiguity or confusion that so far as the corporate debtor, corporate guarantor and the personal guarantor to corporate debtor is concerned, there will be a common adjudicating authority which is NCLT. The observations of the Hon'ble Supreme Court, leaves no scope doubt, whatsoever, that it is the NCLT only which is vested jurisdiction to deal with the insolvency of the 'personal guarantor to a corporate debtor' and that of the corporate debtor, under the Code.

Despite clear provisions of the Notification, the Code, there were many so called 'self-styled experts' who were still arguing for jurisdiction of DRTs where CIRP of the relevant CD was not initiated but this position is now finally settled by the Hon'ble Supreme Court, which dismissed the appeal filed against the judgement of National Company Law Appellate Tribunal in the matter of State Bank of India Vs MahendraKumar (Company Appeal (AT) Insolvency No. 60 of 2022 ), which laid down that "Application having been filed under Section 95(1) and the Adjudicating Authority for application under Section 95(1) as referred in Section 60(1) being the NCLT, the Application filed by the Appellant was fully maintainable and could not have been rejected only on the ground that no CIRP or Liquidation Proceeding of the Corporate Debtor are pending before the NCLT".

It is worth noting that all such applications, including the one under challenge, was filed before the NCLT.

Despite the above clear provisions and the judgements, if there is any confusion still left among the so called 'experts', that will get clarified if we compare the position under the draft rules dealing with the Insolvency of Personal Guarantor to Corporate Debtor as suggested by the Committee and the actual rules that were issued by the Government on the issue.

The Working Committee vide its report submitted in the year 2018, suggested the following as far as jurisdiction of NCLT in case of personal insolvency was concerned.

Extract of the Draft Rule 3 as proposed by the Committee

3. Definitions. — (1) In these Rules, unless the context otherwise requires-

(a) "Adjudicating Authority" means-

(i) the National Company Law Tribunal constituted under the Companies Act, 2013 (18 of 2013) if section 60 (2) or 60 (3) is applicable; or

(ii) the Debt Recovery Tribunal constituted under section 3(1A) of the Recovery of Debts and Bankruptcy Act, 1993 (51 of 1993) in all other cases as applicable.

Thus, the Committee in fact suggested that Adjudicating Authority for personal insolvency will be NCLT only for the situations mentioned in sub-section (2) and (3) of section 60 of the Code. But, this suggestion was not carried out while issuing the final Rules for Personal Insolvency of Guarantor to Corporate Debtors.

Extract of the Rule 3 Rules as notified by the Central Government vide MINISTRY OF CORPORATE AFFAIRS NOTIFICATION New Delhi, notification dated the 15th November, 2019:

3. Definitions. ― (1) In these rules, unless the context otherwise requires, -

(a) "Adjudicating Authority" means- (i) for the purpose of section 60, the National Company Law Tribunal constituted under section 408 of the Companies Act, 2013 (18 of 2013); or

(ii) in cases other than sub-clause (i), the Debt Recovery Tribunal established under sub-section (1A) of section 3 of the Recovery of Debts and Bankruptcy Act, 1993 (51 of 1993);

The Rules, thus clearly lay down that for the entire section 60, the Adjudicating Authority will be NCLT. It is thus, amply clear from the two extract as mentioned above, that while the Committee proposed that "Adjudicating Authority" will be the National Company Law Tribunal constituted under the Companies Act, 2013 (18 of 2013) if section 60 (2) or 60 (3) is applicable; but the same was not accepted and in the final Rules as notified by the Central Government, as mentioned above, National Company Law Tribunal was made the Adjudicating Authority for the entire section 60 of the Code, without any conditionality and exceptions.

In the light of the legal provisions as mentioned above, legislative intent as reflected in the provisions of the Code and also the Rules framed there under and also the observation of the Hon'ble Supreme Court clarifying why for the purpose of insolvency of the personal guarantor to corporate debtor and for insolvency of the corporate debtor a common authority is kept as the Adjudicating Authority, it is only NCLTs which have jurisdiction over corporate insolvency and insolvency of individuals (who are personal guarantor to corporate debtor). That being the position and the provisions of the Code for insolvency of individuals other than the personal guarantor to corporate debtor having not been brought into effect, it is submitted, DRTs have no jurisdiction to entertain and decide the applications under section 94 and 95 in so far as they pertain to personal guarantor to corporate debtor.

It is quite intriguing as to how IBBI and MCA have not taken note of this and looked into the issue of what type of applications are being admitted by DRT under the Code, because notification which could confer jurisdiction on DRT in case of individuals and partnership firms have not been issued. May be, it is on account of DRT being administered by Ministry of Finance (DFS) and NCLT by Ministry of Corporate Affairs (MCA) that the issue has been left to be addressed by itself. Obviously, MCA cannot issue any clarifications to DRTs and IBBI not being the relevant authority in this regard, it cannot issue any clarification either. It is for the DFS, to get the issue examined and issue the relevant clarifications to DRT so that applicant approach the correct forum for section 94 and 95 applications for 'insolvency of personal guarantors to corporate debtors'.

Writer is a leading expert on IBC matters and written extensively on corporate insolvency since 2016. He has been guiding team in leading Banks and FIs on IBC matters and has done pioneer work in personal insolvency. Views are personal.

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