Confusion Regarding The Jurisdiction Of NCLT Qua Personal Guarantor's Insolvency

Background

The Part III of the Insolvency and Bankruptcy Code, 2016 (Code/IBC) deals with the insolvency of individuals and partnership firms. Though the IBC was enacted in December 2016 the provisions relating to individual insolvency were not enacted at that point of time. The Legislature realized that though the Corporate Debtor is dragged into insolvency but the promoters/directors of such Corporate Debtor who have given the personal guarantee are walking out freely. Such an issue was also a point of contention in the case of Essar Steel India Ltd. Committee ofCreditors v. Satish Kumar Gupta, (2020) 8 SCC 531 wherein the Supreme Court held that the liability of the personal guarantor does not extinguish ipso facto after the approval of the resolution plan.

Taking a cue from this judgment, the Central Government vide its notification dated 15.11.2019 notified the provisions relating to individual insolvency under the IBC. However, the same was only restricted to the personal guarantors to corporate debtors. Accordingly, the Rules and Regulations regarding the same were also notified by the central government. Since the notification carves out a separate class of personal guarantors to a Corporate Debtor, the constitutionality of the notification and Section 95 of the Code was challenged before the Supreme Court in the case of Lalit Kumar Jain v. Union of India, LL 2021 SC 257 which held that the notification dated 15.11.2019 and Section 95 are intra vires of the Constitution of India.

Adjudicating Authority for Personal Guarantor Insolvency

As per Section 179 of the IBC, the jurisdiction to entertain cases pertaining to the Insolvency Resolution Process of the personal guarantor is with Debt Recovery Tribunal (DRT) and only on satisfying conditions as mentioned under Section 60(2) of the Code, the jurisdiction qua the personal guarantor insolvency is with the NCLT.

This question regarding the invoking the jurisdiction of NCLT even when no CIRP is pending against the Corporate Debtor, came up for consideration before the National Company Law Appellate Tribunal (NCLAT) in the case of State Bank of India Vs.Mahendra Kumar Jajodia, CA(AT)(Ins) No. 60 of 2020 wherein the NCLAT completely ignored the jurisdiction of DRT and conferred the jurisdiction exclusively to the NCLT qua the Insolvency Resolution Process of the personal guarantor even when no CIRP is pending against the corporate debtor and held as follows;

"11… the Application having been filed 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…"

In the opinion of the authors with due respect to NCLAT, the abovementioned judgment has the effect of taking away the primary jurisdiction of DRT regarding the Insolvency Process of the personal guarantor. The relevant provisions concerning the jurisdiction of DRT and NCLT regarding the personal guarantor insolvency were not brought to the attention of NCLAT and only Section 60 (1) & 60(2) of the Code were brought to the attention of the NCLAT and not Section 79 & 179 of the Code which therefore overlooked the legal provisions regarding the jurisdiction of DRT and NCLT qua the personal guarantor insolvency.

Exclusive Jurisdiction of DRT qua the Personal Guarantor Insolvency

As per Section 79 (1) of the IBC the Adjudicating Authority under Part-III of the Code will be the DRT. Furthermore, Section 179 of the Code states that the Adjudicating Authority regarding the personal insolvency will be the DRT having territorial jurisdiction over the place where the individual debtor actually and voluntarily resides and carries on business. Therefore, there is only one conclusion from the bare reding of the above-mentioned provision is that the DRT will be the Adjudicating Authority for personal guarantor's insolvency.

In Mahendra kuamr Jajodia (Supra), NCLAT has taken a view that NCLT will have jurisdiction against Personal Guarantor of Corporate Debtor irrespective of any pending CIRP against the corporate debtor, a contrary view is taken by the Madras High Court in the case of Rohit Nath versus KEBHana Bank, AIR 2021 Mad 241wherein it held that;

"10. Since such rules of Rules, 2019 had been notified upon being published in the Gazette of India on November 15, 2019, there can be no doubt that the Adjudicating Authority in respect of a guarantor who has furnished a personal guarantee in connection with credit facilities obtained by a corporate entity, would be the appropriate Debts Recovery Tribunal."

Exception to Exclusive Jurisdiction of DRT Qua Personal Guarantor Insolvency

In our view, the jurisdiction to deal with personal guarantor insolvency vest with the NCLT on satisfying specific condition as mentioned under Section 60 (2) of the Code which read as follows;

"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 such National Company Law Tribunal."

This section makes it very clear that only in cases where CIRP or liquidation of the Corporate Debtor is pending before a particular NCLT, the insolvency of the personal guarantor will also be filed before that particular NCLT and if no CIRP is pending then the jurisdiction will lie with the DRT as per Section 179 of the Code. This interpretation is further substantiated by the provision of Section 60 (4) of the Code which states that NCLT shall be vested by all powers of DRT under Part-III for exercising jurisdiction under Section 60 (2) of the Code.

Therefore, it is only in cases where the CIRP of the corporate debtor is pending, the NCLT will have the jurisdiction for the personal guarantor of the very same corporate debtor. The reason for vesting the NCLT with the jurisdiction of personal guarantor insolvency is only for a specific reason to avoid the multiplicity of proceedings since the CIRP of the Corporate Debtor is already pending before the NCLT and therefore instead of filing of the personal guarantor insolvency before the DRT, the same should be filed before the NCLT only.

This was further elucidated through a hypothetical scenario by The Hon'ble Madras High Court in the case of Rohit Nath (Supra) as follows;

"23…In other words, in case of company 'A' being the principal debtor and an individual 'P' the guarantor promising repayment of the credit facilities obtained by 'A', if a corporate insolvency resolution process is initiated under the provisions of the Code pertaining to company 'A', the insolvency resolution process pertaining to guarantor 'P" would per force be before the same adjudicating authority, viz., the National Company Law Tribunal But, where there is no corporate insolvency resolution process initiated in respect of company 'A', insolvency proceedings pertaining to guarantor 'P' must necessarily be carried only to the jurisdictional Debts Recovery Tribunal and not to any other forum."

Furthermore, Rule 3 (1) (a) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rule, 2019 also states that for the purpose of Section 60 of the Code the Adjudicating Authority will be the NCLT and in all other cases the Adjudicating Authority will be the DRT.

Therefore, the inevitable conclusion of the abovementioned provisions and precedents is that the jurisdiction regarding the personal guarantor insolvency exclusively lies with the DRT and only in a specific scenario as mentioned in Section 60 (2) of the Code the jurisdiction will lie with the NCLT. A three-judge bench of the Hon'ble NCLAT in the case of Rahul Ramesh Shah Vs. PNB Housing Finance Ltd is now again ceased of the very same question of law which may bring out the requisite clarity and cleared the looming conundrum regarding the same.

P Nagesh is a Senior Advocate and Akshay Sharma is a Delhi based Advocate. Views are personal.