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IBC

Personal Guarantors Of NBFC/FSC Cannot Be Proceeded Against Unless Threshold Of Rs. 500 Cr Is Satisfied: NCLT, Jaipur

LIVELAW NEWS NETWORK
26 Feb 2022 2:29 PM GMT
Personal Guarantors Of NBFC/FSC Cannot Be Proceeded Against Unless Threshold Of Rs. 500 Cr Is Satisfied: NCLT, Jaipur
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The Jaipur Bench of the NCLT consisting of Deep Chandra Joshi, Judicial Member and Raghu Nayyar, Technical Member in the case of Shapoorji Pallonji Finance Private Limited v. Rekha Singh held that Personal Guarantors of Non-Banking Finance Company/ Financial Services Provider cannot be proceeded against unless the NBFC/ FSP satisfies the Rs. 500 crore threshold limit under...

The Jaipur Bench of the NCLT consisting of Deep Chandra Joshi, Judicial Member and Raghu Nayyar, Technical Member in the case of Shapoorji Pallonji Finance Private Limited v. Rekha Singh held that Personal Guarantors of Non-Banking Finance Company/ Financial Services Provider cannot be proceeded against unless the NBFC/ FSP satisfies the Rs. 500 crore threshold limit under the notification issued u/s 227, IBC.

The Personal Guarantors filed applications u/s 60(5) of the IBC seeking dismissal of petitions filed by the Financial Creditors against the Personal Guarantors on the ground that the same are not maintainable. The personal guarantors had, through personal guarantee, secured repayment of a loan advanced by the Petitioner/ Shapoorji Pallonji Finance Pvt. Ltd. (SPFC) to Jumbo Finvest (India) Ltd., a NBFC. The debtor failed to repay the amount to SPFC. The Personal Guarantors contended that they cannot be proceeded against since no CIRP can be filed against an NBFC and relied on Clause 29 of the IBC (Second Amendment) Bill, 2018 in this regard.

The issue that came up for consideration was whether IRP can be initiated against Personal Guarantors of a NBFC/ Financial Services Provider before initiation and/or irrespective of CIRP against the NBFC? If so, under what criteria?

The Tribunal noted various provisions of the IBC- Section 3(8) defines a 'Corporate Debtor' as a corporate person who owes debt to any person, and Section 3(7), which defines a 'Corporate Person' as 'not including any financial services provider'. The Tribunal concluded that Jumbo Finvest is a Financial Service Provider u/s 3(17) and then referred to the notification of the Government- 'FSP Threshold Notification' which provides that when a FSP crosses the threshold limit of Rs. 500 crores or more, it classifies as a 'corporate person' under the IBC.

The Principal Borrower/Jumbo Finvest Pvt. Ltd. in the present case was the Financial Service Provider. Financial Service Providers are not typically Corporate Persons.

Section 227 of the IBC empowers the Central Government to notify the Financial Services Providers or categories of Financial Service Providers for proceedings that may be conducted in accordance with the IBC.

In exercise of this power, the Central Government notified the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules ,2019. By an FSP Threshold Notification, under Rule 2, the Government provided that the FSP Rules would apply.

The FSP Notification clarified that insolvency resolution and liquidation proceedings of NBFC with asset size of Rs. 500 crore or more, as per the last audited balance sheet, shall be undertaken in accordance with the IBC r/w FSP Rules. The appropriate regulator in this regard is the RBI.

In the present case, as per the last audited balance sheet of Jumbo Finvest (India) Ltd./ Principal Borrower, its asset size is approx. Rs. 487 Crore and thus is excluded from the ambit of Rule 2 of the FSP Rules, 2019 which states that the IBC would apply to those FSPs which meet the threshold.

Thus, Jumbo Finvest does not qualify in stricto sensu as a Corporate Person under IBC, as the said definition excludes FSP. Further, the FSP Threshold notification does not sweep it back into inclusion as a Corporate Person.

The Tribunal held that IRP can be instituted against the Personal Guarantor of a NBFC/ FSP irrespective of CIRP against the NBFC, provided that the NBFC falls within the category as FSPs having an asset size of more than Rs. 500 crores or more, thus being included in the definition of Corporate Debtor under IBC and being construed as Financial Service Provider whenever the term Corporate Debtor occurs in the IBC. However, in the present case, since Jumbo Finvest falls short of the threshold limit, it can best qualify as Principal Borrower and the question of Personal Guarantor is out of question.

As per Section 5(22) of the IBC, persons who have entered into deed of guarantee can be recognized an personal guarantors under IBC, who can be proceeded against, only if the person or entity for whom they have give guarantee is the Corporate Debtor. In the present case, Jumbo Finvest (India) Ltd. is not a Corporate Debtor, thus the guarantors cannot be considered as Personal Guarantors under IBC.

The Tribunal thus allowed the applications filed by the personal guarantors and dismissed petitions filed u/s 95 of the IBC by the Financial Creditors against the Personal Guarantors.

Counsel for Petitioner: Cyrus Barucha, Shivangshu Naval, Akanksha Noval, Bhakti Popat, Jain Doshi, Aman Shah, Aanchal Choudhary, Rohit Lalwani, Advs and Dinesh Bulli, Mithil Pattani, In Person

Counsel for Respondent/Applicant: Amol Vyas

Click Here ToRead/Download Order

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