Initiation of CIRP Not Mandatory For Maintainability Of An Application Against Personal Guarantors U/S 95, IBC: NCLT, Kochi

The application was filed by the Personal Guarantors of the Corporate Debtor seeking recall of order admitting application against the Applicants/ Personal Guarantors.

An application for commencement of CIRP was filed by the Union Bank of India against the Corporate Debtor, M/s. Green Gateway Leisure Limited which was admitted by the NCLT and moratorium was declared.

This order of the NCLT was challenged before the NCLAT seeking to set aside the order of the Adjudicating Authority approving commencement of CIRP against the Corporate Debtor. The NCLAT set aside this order, subsequent to which, the CIRP ended.

In the meantime, the SBI, one of the Financial Creditors of the Corporate Debtor issued a demand notice invoking Rule 7 of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process of Personal Guarantors to the Corporate Debtor) Rules 2019 and invoked the personal guarantee of the Applicants. The NCLT allowed these applications and appointed a Resolution Professional. Thus, Section 95, IBC r/w Section 2(e) of IBC r/w Notification no. No.4126(E) dated 15^th November, 2019 invoking jurisdiction of the Tribunal against the Personal Guarantor was brought into force and Section 60(1), (2) and (3) got activated against the personal guarantors.

The primary contention of the Applicant was that since the NCLAT set aside the order of the NCLT initiating CIRP against the Corporate Debtor, the application to initiate IRP against the Personal Guarantors could not be allowed in view of Section 60 of the Code, which makes initiation of CIRP against the Corporate Debtor a pre-condition to initiate IRP against the Personal Guarantor.

The Bench observed that NCLAT passed an order setting aside the order of admission of CIRP granting time to the Corporate Debtor to settle the dues of Union Bank of India within six months, and liberty to proceed with Insolvency Resolution Process against the Corporate Debtor in the event of default.

Since the debt of SBI was not cleared they have filed application under Section 7 of IBC before this Tribunal against the Corporate Debtor and the same is now pending before this Tribunal. Hence, as far as SBI is concerned, there is a CIRP pending against the Corporate Debtor

In the case of Lalit Kumar Jain Vs. Union of India and Ors., the Tribunal upheld the constitutional validity of the notification by which Section 2(e) was inserted. It was held-

"It was categorically held that personal guarantors, in view of their intrinsic connection with Corporate Debtors shall be dealt differently through same adjudicating process as Corporate Debtor. The impugned notification, similarly inter alia makes the provisions of the Code applicable in respect of Personal Guarantors to Corporate Debtors, as another such category of persons to whom the Code has been extended."

The NCLT dismissed the application filed by the Applicant/ Personal Guarantor and held that since an application for initiation of CIRP against the Corporate Debtor was filed and pending before the Adjudicating Authority, in such a case, initiation of CIRP against the Corporate Debtor is not a prerequisite for maintainability of an application u/s 95, IBC filed for initiating IRP against the Personal Guarantor of the Corporate Debtor.

Counsel for Applicants: Shri. K. S. Ravi Chandran, PCS.

Counsel for Respondent: Shri Vinod P.V., Advocate.

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