Petition Under Section 95 Not Maintainable Against Partnership Firms: NCLT Hyderabad

Brief Facts

The case emerged from a petition filed by the financial creditor under section 95 of the IBC against the respondent, a partnership firm. The respondent was a personal guarantor in a loan facility provided to Smaat India Pvt. Ltd, the corporate debtor. This personal guarantee was executed by the respondent on December 27, 2016 in which the loan amount advanced to the corporate debtor was secured.The financial creditor claimed that the respondent was responsible for the loan amount to the tune of Rs. 71.84 crores as the personal guarantor.

The corporate debtor defaulted in repaying the loan amount on April 30, 2016, in pursuance of which its account was classified as a Non Performing Assets (NPA). Thereafter, CIRP was initiated against the corporate debtor on July 9, 2018. When no resolution plan was approved, the corporate debtor was ordered to be liquidated on June 6, 2019. The liquidation process completed on August 13, 2020.

Resolution Professional (RP) recommended admission of insolvency resolution petition under section 95 against the respondent in his report IA No.1234/2024.

Contentions of Both Parties

It was contended by the financial creditor that the respondent was liable to pay full outstanding dues as a personal guarantor to the corporate debtor. It was submitted that the respondent had signed a guarantee deed rendering itself liable for any default on part of the corporate debtor.

It was further argued that since the corporate debtor had defaulted in the repayment, the respondent should be held responsible under provisions of the IBC.

Per Contra, it was submitted by the respondent that the petition was not maintainable as section 95 of the IBC is applicable only on individual personal guarantors and not on partnership firms. It was further contended that the respondent does not fall within the purview of section 95 of the IBC.

It was further argued that provisions of the IBC related to personal guarantors were incorporated to address individuals and the respondent had not become an individual just because it had signed a valid deed of guarantee for the purpose of section 95 of the IBC. Therefore, they argued that the insolvency proceedings initiated by the financial creditor is not legally sustainable.

Issue Before NCLT

Whether a petition under section 95 of the IBC can be filed against a partnership firm.

NCLT's Analysis

The NCLT carefully analysed legal provisions especially section 79 and section 5(22) of the IBC. Section 79 provides that Adjudicating Authority for individuals and partnership firms is Debt Recovery Tribunal (DRT) and not NCLT. Whereas section 5(22) defines a personal guarantor as an individual who is a surety in a contract of guarantee to a corporate debtor. It was noted that the term personal guarantor did not cover partnership firms therefore they do not fall under the scope of section 95 of the IBC. The tribunal observed as under:

“To answer the question as to who can be called as personal guarantor, we use fully refer to section 5(22) of IBC, 2016 which defines Personal Guarantor as an individual who is the surety in a contract of guarantee to a Corporate Debtor. It is important to note that partnership firm was not included under the definition of Personal Guarantor”.

The tribunal also referred to a notification issued by the Ministry of Corporate Affairs on November 15, 2019 which made provisions of the IBC applicable on individual personal guarantors to a corporate debtor. However, this notification did not bring the partnership firms under the ambit of section 95 of the IBC.

The NCLT after reading these two provisions and the notification together held that partnership firms are expressly excluded from the purview of section 95 of the IBC. Section 95 covers only individual personal guarantors and not partnership firms.

The tribunal held as under:

“We have carefully perused the notification issued by Ministry of Corporate Affairs on 15.11.2019, section 79(1) of IBC, 2016 and the section 5(22) of IBC, 2016 and conjoint reading of all the above provisions clearly conveys that section 95 proceedings cannot be initiated against the partnership firm which is not an individual”.

Consequently, the tribunal observed that:

“In view of the above answer to the point before us, report of the RP recommending admission of the present petition and the CP are liable to be rejected as not maintainable. Hence, we hereby reject the same, consequently, the CP stands dismissed as not maintainable. Hence without costs”.

Conclusion

The NCLT concluded that since partnership firms are not covered by section 5(22) of the IBC, a petition under section 95 against them cannot be maintained. The appropriate forum to proceed against them will be the Debt Recovery Tribunal as provided under section 79 of the IBC.

Case Title: Union Bank of India v. M/s. K M R Enterprises and Anr.

Case Reference: CP (IB) No. 66/95/HDB/2024

Court: National Company Law Tribunal, Hyderabad

Judgment Date: 11/09/2024

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