Abatement Of Proceedings Initiated Under Section 95 Of Insolvency And Bankruptcy Code, 2016 On Death Of Personal Guarantor

This article critically analyses the reasoning applied by the Tribunals while determining the application of substitution of legal representatives in the case of death of a Personal Guarantor (“PG”) in the insolvency proceedings under Part III of the Code.

1. The reasons applied by the Adjudicating Authority in Apogee Enterprises:

In the present case, the issue before the Adjudicating Authority for consideration was whether insolvency proceedings initiated under Part III of the Code abate upon the death of a personal guarantor? While adjudicating and dismissing the application, the Adjudicating Authority relied upon the following principles of law:[i]

The proceeding under Section 95 of the Code is not a money recovery proceeding because that will go contrary to the scheme of the Code;(Re: Alchemist Asset)

In the case of a personal obligation imposed on a person under the contract and on the demise of such person, his estate does not become liable and therefore, the legal representatives who represent the estate of a deceased would obviously not be liable and cannot be directed to discharge the contractual obligations of the deceased. (Re: Vinayak Dube)

There is no provision for substituting the legal representatives in the ongoing proceedings under Section 95 Code in the event of death of a PG;(Re: Bank of Baroda)

2. Legal Analysis

Point no. 1(a) refers to the settled principle of law promulgated and reiterated by the Supreme Court in various judgments wherein it has categorically held that the proceeding under the Code is not a money recovery proceeding. However, it is pertinent to point out that the said principle of law has been laid down by the Supreme Court in several cases wherein the proceedings were initiated under Part II of the Code and none were initiated under Part III of the Code. It can be safely stated that the proceedings initiated under Part II and Part III is systemically distinctive. For example:

In Part III proceedings, the moratorium triggered on filing of the application under Section 95 of the Code applies on the 'debt' and not the debtor. However, the moratorium imposed in the Part II proceedings is applicable on initiation of any legal action or proceedings against the 'corporate debtor'.

Part III proceedings do not embody the provisions for the revival of the guarantor. On a contrary, Part II proceedings are centric to the revival of the corporate debtor and only in case it becomes impossible to revive, the liquidation proceeding against the entity is necessitated.

The discharge of the corporate debtor of its liabilities does not entail discharge of the PG and the guarantor can be proceeded against independently for recovery of the balance dues.

In a CIRP against corporate debtor, it is mandatory that from the date of the appointment of the interim resolution professional, the management of the affairs of the corporate debtor vests in the resolution professional. However, under Part III, there is no such vesting of the affairs of the personal guarantor to the resolution professional, except only when it may be included in the repayment plan to authorize the resolution professional to carry on the debtor's business or trade on his behalf or in his name, which further requires approval from the creditors.

On perusal of Part III, it appears that the provisions therein, predominantly and unequivocally, provide for recovery of dues from the guarantors. Therefore, the applicability of this reasoning on Part III proceedings requires better enunciation and needs to be tested whether Part III can be kept entirely out of the purview of a recovery proceeding.This facet anchors the analysis of the next point under discussion i.e. point no. 1 (b).

Point no. 1 (b): On sifting through the observations made by the Supreme Court in Vinayak Dube, it clearly appears that the Supreme Court has made distinctive observations between proprietary and personal rights and duties of an individual. It has held that the legal representatives are liable for the debts of their predecessors limited to the extent of the estate of the deceased inherited by them. Therefore, the representatives of a promisor are bound to perform the promisor's contract to the extent of the assets of the deceased falling in their hands. But when the contract involves exercise of individual's special skills, qualification or competency, then it has to be performed by the individual himself and not by his/her representative.[ii] In Vinayak Dube, the controversy in the case was in a narrow compass of a development agreement and involved the issue as to whether the legal representatives can be held liable to perform the personal obligations of the deceased which was based on the personal skills, competence, and qualification of the deceased or should it be limited to the monetary part. The Supreme Court was pleased to uphold the monetary liability of the legal representatives out of the estate inherited by them.

Similarly, personal guarantee is a contract to discharge the monetary liability towards the creditor in case the original debtor defaults. It is impalpable to accept that a personal guarantee contract in a loan facility involves some personal skills, competence or qualification. Therefore, considering the observations enunciated by the Supreme Court in Vinayak Dube, and that Part III of the Code prima facie provides for the recovery of the dues of the creditors, makes a strong case for substitution of the representatives in the event of death of a personal guarantor under Section 95 proceedings.

Moving onto the next reasoning at Point no. 1 (c), which enshrines that the legal representatives cannot be impleaded in the proceedings under Section 95 because there is no related statutory provision available in the Code. The aforesaid reasoning appears debatable in view of the observations given by the Supreme Court in the matter titled Greater Noida Industrial Development Authority v. Prabhjit Singh Soni & Anr. (Civil Appeal Nos. 7590-7591 of 2023)(“Greater Noida”), wherein it was held that:

“The law which emerges from the decisions above is that a Tribunal or a Court is invested with such ancillary or incidental powers as may be necessary to discharge its functions effectively for the purpose of doing justice between the parties and, in absence of a statutory prohibition, in an appropriate case, it can recall its order in exercise of such ancillary or incidental powers.

In light of the discussion above, what emerges is, a Court or a Tribunal, in absence of any provision to the contrary, has inherent power to recall an order to secure the ends of justice and/or to prevent abuse of the process of the Court. Neither the IBC nor the Regulations framed thereunder, in any way, prohibit, exercise of such inherent power. Rather, Section 60(5)(c) of the IBC, which opens with a non-obstante clause, empowers the NCLT (the Adjudicating Authority) to entertain or dispose of any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor or corporate person under the IBC. Further, Rule 11 of the NCLT Rules, 2016 preserves the inherent power of the Tribunal.”

The inherent power conferred upon NCLT by virtue of the Rule 11 of National Company Law Tribunal Rules, 2016 (“Rules”) is the cornerstone enabling the Tribunal to uphold the objective of the Code and ensure discharging its functions effectively for the purpose of doing justice between the parties. Rule 11 enshrines that “Nothing in these rules shall be deemed to limit or otherwise affect the inherent powers of the Tribunal to make such orders as may be necessary for meeting the ends of justice or to prevent abuse of the process of the Tribunal.”The stakes of the creditors involved in a proceeding under Section 95 gets coverage in the category of“…balancing the interest of all stakeholders…” which conspicuously is embodied in the preamble of the Code. Additionally, Rule 53 of the Rules provides that “Where a party to a proceeding pending before a Bench dies or is adjudged insolvent or, in the case of a company, being wound up, the proceeding shall not abate and may be continued by or against the executor, administrator or other legal representative of the parties or by or against the assignee, receiver or liquidator, as the case may be.” On bare perusal of Rule 53, it appears that it does not engender any limitation with regards to its applicability to Part III, or for that matter to any part of the Code.The rule seems applicable to all proceedings, initiated under the Code. Had there been any provision to the contrary under Part III against substitution of legal representatives, the inapplicability of Rule 53 by the Tribunal would have stood vindicated.

Thus, a cumulative consideration of the observations made by the Supreme Court in the judgment of Vinayak Dube, Greater Noida and the Rules conferring inherent powers to NCLT, the impleadment of the legal representatives on death of a personal guarantor under Section 95 proceedings, emerges as a reasonable remedy for the parties.

Another facet that may arise in future and require indulgence of the forums is the time/stage of death of the personal guarantor and its impact on the ongoing proceedings. Let us illustrate this facet further with a hypothetical situation. Suppose the death of the personal guarantor occurs after the Adjudicating Authority passes an order approving the repayment plan i.e. at the stage of implementation of the repayment plan. Would that entail abating of the insolvency proceedings initiated under Section 95 of the Code. Resultantly, can the repayment plan be said to have ended prematurely. If the answer to both these questions is in affirmative, then as per Section 118(4) of the Code, the creditor(s) whose claims have not been fully satisfied, is entitled to apply for a bankruptcy order under chapter IV. The said application can be initiated under Section 123 (5) of the Code against the legal representative(s) of the personal guarantor. However, in case the death occurs before such approval order is passed, the creditor is left rudderless and incapacitated.

3. Sequitur:

Despite the provisions contained in chapter III and chapter IV of Part III abutted to each other, the unavailability of any remedy available under chapter III on death of a guarantor/debtor to the parties seems deleterious to the objective of the Code. The inclusion of a provision in chapter IV of Part III regarding continuation of proceedings of bankruptcy against legal representatives on death of the debtor and non-inclusion of any such relief under chapter III of Part III comes across as an ambiguity, which may be clarified either by promulgating a provision to that effect by the legislature in chapter III or by the Adjudicating Authority exercising its inherent powers to that effect.

The author is an Advocate .Views are personal