Assets Of Partnership Firm Not Property Of Personal Guarantor, Not Covered By Interim Moratorium Merely Because S.95 Application Was Filed: NCLAT New Delhi

Brief Facts

A petition under section 95 was filed by White Line Exterprises (operational creditor) against Mr. Ramesh Kumar Chugh (personal guarantor) for the debt of M/s. Sahil Home Loomtex Pvt. Ltd (corporate debtor). This petition was filed on December 22, 2023 which led to interim moratorium under section 96 of the IBC. An Interim Resolution Professional (IRP) was also appointed by the Adjudicating Authority on February 12, 2024. The personal guarantor was also a partner in a partnership firm with 25 % shares. The firm had also taken loan from HSBC and Citi Bank. In addition to that he was a personal guarantor for the loan advanced by the PNB and IDBI Bank to M/s. Sheena Textile Ltd. (STL). Assets care and construction enterprises ltd. (ACRE), respondent, became assignee of these loans after an assignment agreement.

The respondent issued an auction notice on December 15, 2023 when loan payment was not made. Thereafter properties of the M/s. Sheena Exports and ST were auctioned on January 22, 2024. The property of the STL was also auctioned through second notice issued on February 1, 2024.

Partnership firm was dissolved by the personal guarantor through a notice issued on February 6, 2024. Consequently, the personal guarantor contended that since the partnership firm had been dissolved, all liabilities of the firm should be settled as per section 45 of the partnership act. An application was filed by the personal guarantor in which the respondent was sought to be restrained from auctioning the properties due to interim moratorium under section 96 of the IBC.

Contentions

The appellant contended that since interim moratorium under section 96 was in operation, any action could not be taken under the Security Interest (Enforcement) Rules, 2002. It was further argued that after the dissolution of a partnership firm, all liabilities of the firm should be settled as per section 45 of the partnership act which gives preference to firm's debts over personal debts. It was further submitted that section 178 of the IBC also prioritises firm's debts over personal debts therefore auction of properties of the firm during interim moratorium would violate the provisions of the IBC. It was further argued that the firm was dissolved through a notice issued on February 6, 2024 which was a legitimate act for distributing the assets and liabilities of the partnership firm.

Per contra, the respondent submitted that auction of the properties of the firm was sought to be conducted and not of the personal guarantor therefore the interim moratorium will not be applicable. It was further submitted that since the respondent was a secured creditor, it was entitled to auction the properties of the firm under SARFAESI Act. It was further argued that dissolution of the firm was an attempt to defeat the legitimate rights of the secured creditors under the Act.

NCLAT's Analysis

The NCLAT noted that section 96 of the IBC covers the debts included in the personal guarantee and not the debts related to the partnership firm. Tribunal further noted the terminologies used in the section and observed that they point towards a particular debt and not cover the entire liability of the debtor. Based on this, the tribunal held that interim moratorium is directed at the particular debt for which a petition under section 95 was filed and not at the properties of the partnership firm.

The tribunal referred to the Supreme Court judgment in Rajendra Bajoria Vs Hemant Kumar Jalan (2021) wherein it was held that the partners of a firm are entitled only to the profits of the firm and upon dissolution of the firm they are entitled to the surplus of the sale proceeds of the assets and properties of the firm after meeting the liabilities of the firm in the share agreed upon in the Partnership Deed. The partners do not have any right, title or interest in respect of the assets and properties of a firm.

The judgment of the Allahabad High Court in Onkar Rice Mill vs State of U.P. & Ors.(2003) was also referred in which it was held that no part of the assets of the partnership could be regarded as belonging to any individual partner and no individual partner can predicate his share in a particular property belonging to the Firm.

The Tribunal came to the conclusion that the assets held in the name of the partnership firm is not the personal property of the Appellant and cannot be subjected to the provisions of interim moratorium merely because a Section 95 application has been filed against a partner of the firm in respect of a personal guarantee given for a party other than the partnership firm

The tribunal further noted that just because a notice of dissolution of the firm was issued, it does not mean that the liabilities of the personal guarantor shifted onto the partnership firm. The tribunal further noted that debt for which the personal guarantee was given was separate from the liabilities of the partnership firm. The tribunal further observed that in fact dissolution of the firm was tainted with malafide as it was done during ongoing SARFAESI proceedings.

The tribunal rejected the argument with respect to section 178 of the IBC and held that section 238 of the IBC gives overriding effect to the provisions of the IBC. Therefore, scope of section 96 is confined to the debt for which a personal guarantee was given and it does not cover debts of the partnership firm. The tribunal held that the moratorium imposed under Section 96 of IBC would apply only to the security interest created by the Appellant under the personal guarantee in his capacity as a personal guarantor with respect to default of operational debt qua White Line Enterprises..

Conclusion

The Tribunal concluded that interim moratorium under section 96 of the IBC would be applicable to the debts for which personal guarantee was given. The debts of the partnership firm were outside of the scope of section 96. Accordingly, the present appeal was dismissed as devoid of merit.

Case Title: Ramesh Kumar Chugh v. Assets Care & Construction Enterprises Ltd.

Court: NCLAT, New Delh

Case Reference: Company Appeal (AT) (Insolvency) No. 1726 of 2024

Judgment Date: 15/10/2024

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