NCLAT Chennai Upholds Creditors Right To File For Bankruptcy Beyond Threshold Timeline U/S 118 Of IBC

Facts of the Case

In Tummala Sri Ganesh vs State Bank of India and Anr, the present appellants, inter alia, Tummala Sri Ganesh had entered into a guarantee agreement and a supplemental guarantee deed in favour of SBI, providing personal guarantee for the debt liabilities of the principal borrower, Chadalvada Infratech Limited.

As the Insolvency and Bankruptcy Board of India (IBBI) Regulations for personal guarantors came into force on 20th November 2019, SBI sent demand notices to the appellants on 21st October 2021. The appellant did not pay the due amounts in response to these notices also. Therefore, the petition under Section 95 of the IBC was put before the NCLT, Hyderabad Bench by the State Bank of India and on 20^th April, 2022, NCLT granted Interim Moratorium.

It also appointed the RP with a mandate to file a report under Section 99 of the IBC. On 21 June 2022, upon hearing the matter, NCLT admitted the petitions and directed RP to jointly draft a payment scheme with appellants and SBI. The appellants individually filed debt repayment plans on 15th August 2022. The plans were fine-tuned after joint consultation with the creditors. The amended repayment proposals were filed before NCLT on 26th December 2022, and, on 13th September 2023, NCLT approved the repayment proposals by directing them to be executed. Despite receiving successive reminders from RP appellants failed to make the payouts as per the scheme of repayment proposal.

Hence, the report dated 31st October, 2023, was filed by RP stating that repayment proposals have failed. NCLT, after making a perusal of the report, passed an order on 7th February 2024, under Section 118(3) of IBC, holding that the repayment plan was not duly implemented and granted liberty to SBI to file for bankruptcy against the appellants.

On 29^th April 2024, the appellants filed petitions asking the Tribunal to reverse its February order.

Arguments of Parties

Appellants averred that they were deprived of an opportunity to faithfully comply with the repayment schedule. Among other procedural lapses, the details of the bank account for remittance were furnished at a belated stage with a consequent inability to adhere strictly to the repayment schedule. They further argued that notice under Section 20(1) of the IBBI Regulations had not been issued to them before the submission of the RP's report under Section 118(2). They also complained about irregularities in the procedure followed in the repayment process.

On the other hand, the State Bank of India and the Resolution Professional brought on record such a plea by contending that the appellants had indeed defaulted on the repayment plan due within the stipulated timeline. According to the debtors, their respective repayment plan was approved by the NCLT on 13th September 2023 and since on several occasions, it had sent reminders, the appellants still failed to remit the pertinent payments.

In a further submission, SBI alleged that under the IBC section 118 of the Code, non-fruition of the Resolution Plan automatically vested in the financial creditors the right to file bankruptcy proceedings against the personal guarantors.

NCLAT's Decision

According to the NCLAT, the appellants failed to adhere to the repayment plan approved by NCLT on 13th September 2023. The appellants failed to act in consonance with the discharge plan presented by the RP for reimbursement of dues as per the schedule of repayment. NCLAT held that Section 118 of the Insolvency and Bankruptcy Code provides that where an insolvency resolution plan contemplated under the IBC is not filed within the threshold timeline, its mere existence lapses even before the lapse of its natural duration; at which point the right of the creditor to file bankruptcy proceedings vests.

NCLAT dismissed all such pleas of the appellants as far as infractions on part of the company in procedural matters were concerned along with the plea of negative parity theory whereby they claimed that there were unequal treatment and favouritism on part of the administrators who permitted other guarantors to make payments when it was after the expiry of their repayment period.

Therefore, NCLAT dismissed the appeals, confirming the orders of NCLT and granting permission to SBI to file bankruptcy proceedings against the appellants.

Conclusion

This case by Tummala Sri Ganesh and Or vs State Bank of India and Anr, has come to reveal the need for the strictest enforcement of timelines and obligations incorporated in IBC for personal guarantors. NCLAT was of the view that the debtors had not undertaken full implementation of the repayment plan in accordance to the given timeframe, which meant it had attained a premature end at that time by exercising its right and which allowed the creditor so to move for bankruptcy proceedings.

Case Title: Tummala Sri Ganesh Vs. State Bank of India and Anr

Case Number: Company Appeal (AT) (CH) (Ins) No.315/2024

Tribunal: NCLAT, Chennai

Judge: Justice Sharad Kumar Sharma, Member (Judicial)

Advocate For Appellant: Mr. P.H. Arvindh Pandian, Senior Advocate For Mr. C.V. Shailandhran & Mr. Ujjwal Jain, Advocates

Advocate For Respondent 1: Mr. Pranava Charan, Advocate

Advocate For Respondent 2: Mr. Maligi Madhudhana Reddy, RP

Date of Judgement: 07^th October, 2024

Read/Download Order Here

Read/Download Order Here