NCLT Kochi: Creditors Can't Initiate Insolvency Proceedings Against Personal Guarantor Without Establishing Independent Default By CD

The National Company Law Tribunal ('NCLT') Kochi, comprising Justice T Krishna Valli (Judicial Member) and Mr. Shyam Babu Gautam (Technical Member) dismissed the application to initiate insolvency proceedings against the Personal guarantors under Section 95 of Insolvency and Bankruptcy Code, 2016 ('IBC'). It held that creditors cannot initiate insolvency proceedings against personal guarantors solely based on the initiation of the Corporate Insolvency Resolution Process ('CIRP') without showcasing distinct and independent default by the corporate debtor. Background Facts: On 19.11.2018, Piramal Capital and Housing Finance Limited (Applicant) sanctioned a ₹55 crore loan to Asten Realtors Private Limited (Corporate Debtor). The loan agreement included the Corporate Debtor as the principal borrower, with Mr. Kakkanattil Ibrahimkutty Mohammed Rafi Mather and Mr. Kakkanattil Abdul Rahiman Siraj Mather as personal guarantors. They provided an irrevocable, absolute, and unconditional guarantee for the loan repayment. The Corporate Debtor defaulted on the repayment of the loan on 05.01.2023. Consequently, on 17.03.2023, the Applicant invoked the Guarantee, demanding ₹55.07 crore within seven days. The Corporate Debtor and Personal Guarantors failed to comply, resulting in the account being classified as a Non-Performing Asset (NPA) per RBI guidelines. The Applicant then issued a Form B Demand Notice on 10.06.2023, demanding ₹56.81 crores, including interest and other charges. Despite acknowledging the notice, no payments were made by the Corporate Debtor or the Personal Guarantors. The Applicant filed an application under Section 95(1) of the IBC to initiate insolvency proceedings against the Personal Guarantors for default of ₹56.81 crores as of 31.05.2023. The record of default, dated 25.03.2023, was submitted to the Information Utility. On 16.01.2024, NCLT Kochi appointed Mr. T. Narayana Swamy as the Resolution Professional, directing him to file a report under Section 99 of the IBC. Contentions of the Personal Guarantors: The Personal Guarantors argued that invocation of the guarantee is unnecessary since the principal borrower entered CIRP on 25.01.2023, and the Corporate Debtor did not default on payments owed to the petitioner before entering CIRP, thus, financial debt cannot be considered due or payable. They asserted that no default existed against the transaction because the default date claimed by the petitioner occurred during the period of the principal borrower's insolvency proceedings. They also contended that guarantors typically have the right of subrogation to recover losses from the principal borrower. However, due to the principal borrower's insolvency, the said right cannot be exercised, rendering it unjust to enforce obligations on the guarantor. NCLT Verdict: The NCLT Kochi dismissed the application and held that creditors cannot initiate insolvency proceedings against personal guarantors solely based on the initiation of CIRP without showcasing distinct and independent default by the corporate debtor. The Tribunal noted that under Section 128 of the Indian Contract Act, 1872, a guarantor's liability is coextensive, joint, and several with that of the principal borrower unless otherwise stated in the contract. It observed that judicial precedents affirm that the creditors can initiate insolvency proceedings against both the corporate debtor and its personal guarantor simultaneously or in any preferred sequence for the debt in default. It also noted that the CIRP against the Corporate Debtor was initiated by some homebuyers in November 2022 and the said petition was reserved for orders on 21.12.2022, and the CIRP commenced on 25.01.2023. Further, the Corporate Debtor made its last payment on 31.12.2022, with no default occurring until that date. It pointed out that the Applicant's debt became due on 05.01.2023, post the CIRP petition was reserved for orders, with the asserted default date being 25.03.2023. The Tribunal held that: While it is true that a guarantor's liability is co-extensive with that of the Principal Borrower, this liability is fundamentally derived from the default of the Principal Borrower. In the absence of a default by the Principal Borrower, the guarantor cannot be held liable. The timing and circumstances of the default are critical in determining the point at which the guarantor becomes liable. Therefore, creditors cannot start insolvency proceedings against Personal Guarantors solely based on CIRP initiation without proving the Corporate Debtor's default. The established judicial precedents require a clear and distinct default by the Principal Borrower to initiate proceedings and enforce the guarantor's liability. NCLT Kochi also relied upon the Supreme Court's decision in Dilip B. Jiwrajka vs. Union of India & Ors wherein it held that the resolution...

NCLT Kochi: Creditors Can't Initiate Insolvency Proceedings Against Personal Guarantor Without Establishing Independent Default By CD

Sachika Vij

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NCLT Kochi: Creditors Can't Initiate Insolvency Proceedings Against Personal Guarantor Without Establishing Independent Default By CD

Sachika Vij

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