Insta Capital Private Limited Vs. Ketan Vinod Kumar Shah - An application for insolvency for resolution against the personal guarantor is not maintainable unless that CIRP/liquidation is ongoing against the Corporate Debtor.

 NCLT Mumbai-IV (27.04.2021) in  Insta Capital Private Limited Vs. Ketan Vinod Kumar Shah  [CP (IB)/ 1365/MB-IV/2020] held that; 

• this bench is of the considered view that an application for insolvency for resolution against the personal guarantor is not maintainable unless that CIRP/liquidation is ongoing against the Corporate Debtor. It is further observed that filing of applications seeking resolution of personal guarantors without the Corporate Debtor undergoing CIRP, would tantamount to vesting of jurisdiction on two course one is NCLT and another is the Debts Recovery Tribunal.

Excerpts of the order; 

# 2. This Petition has been filed by the Applicant (Financial Creditor) Insta Capital Private Limited, under Section 95 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred as Code) read with Rule 7(2) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 (Personal Guarantors Insolvency Rules) against Ketan Vinod Kumar Shah, Personal Guarantor/Respondent of the Corporate Debtor S.K. Products LLP, for initiating Insolvency Resolution Process.

# 3. The brief facts of the case are that the Corporate Debtor S.K. Products LLP, had applied for sanction of loan from the Financial Creditor vide application form dated 05.10.2018. The total amount due is Rs.31,52,781/- which includes principal outstanding of Rs.27,50,000/- alongwith interest of Rs.4,02,781/- @18% p.a. from 12.04.2019 to 03.02.2020. The debt was due as on 12.04.2019, and the default occurred on 12.04.2019.

# 5. S.K. Products LLP, vide letter dated 10.10.2018, proposed disbursal against Bill of Exchange. The financial creditor had advanced a cheque dated 11.10.2018 bearing No. 930048 and executed a demand Bill of Exchange dated 11.10.2018 alongwith the discount letter dated 11.10.2018, Post-dated cheques issued by S.K. Products LLP to Financial Creditor which got dishonored on presentation. The Financial Creditor issued loan recall notice to the guarantor and sent demand notice dated 03.02.2020 under Rule 7(1) of Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019.

# 8. The Ld. Counsel for the Financial Creditor had relied upon the judgment of Hon’ble National Company Law Appellate Tribunal (hereinafter referred as NCLAT) in the case of State Bank of India Vs. Athena Energy Ventures Private Limited, in which it is held that Corporate Insolvency Resolution Process (hereinafter referred as CIRP) can be initiated against both the Corporate Debtor as well as personal guarantor simultaneously for the same set of debt and default. The Hon’ble NCLAT relied upon the observations made by the Insolvency Law Committee at Para 14 which is reproduced hereunder : -

• “14. It would be appropriate now to refer to the observations made by Insolvency Law Committee in its Report of February 2020. Relevant part of the report has been filed by the Appellant as Annexure-C (Diary No. 233/3). Para 7 of the report is as follows:

• 7.3 The Committee noted that while, under a contract of guarantee, a creditor is not entitled to recover more than what is due to it, an action against the surety cannot be prevented solely on the ground that the creditor has an alternative relief against the principal borrower. Further, as discussed above, the creditor is at liberty to proceed against either the debtor alone or the surety alone or jointly against both the debtor and surety. Therefore, restricting a creditor from initiating CIRP against both the principal borrower and the surety would prejudice the right of the creditor provided under the contract of guarantee to proceed simultaneously against both of them.

• 7.5  However, the committee noted that the appellate authority has, in certain cases, taken a view contrary to its decision taken in the Piramal Enterprises Ltd.  Case. For example, in Edelweiss Asset Reconstruction Company Limited V. Sachet Infrastructure Private Limited & Others., the Appellate Authority has permitted simultaneous initiation of CIRP against the principal borrower and its corporate guarantors. Further, the appellate authority has also admitted a petition to review its aforesaid judgment in the Piramal Enterprises Limited case  Give this, the Committee decided that no legal changes may be required at the moment, and this issue may be left to judicial determination.”

# 9. The Hon’ble NCLAT at Para 19 has categorically held that in the matter of guarantee, CIRP can proceed against the principal borrower as well as guarantor.

# 11.In view of the ratio laid down by the Hon’ble NCLAT in the matter of State Bank of India Vs. Athena Chhattisgarh Power Ltd., the Financial Creditor for initiate proceedings simultaneously against the principal borrower and the corporate guarantor. In the case of Edelweiss Asset Reconstruction Company Limited Vs. Sachet Infrastructure Limited and others, the Hon’ble NCLAT permitted simultaneous initiation of CIRP against the principal borrower and its corporate guarantor.

# 12.The Personal Guarantor/Respondent had filed Affidavit in reply and raised preliminary objections against the maintainability of Petition u/s 95 on the following grounds: -

• a. section 60(1) of the Code envisages that the National Company Law Tribunal will have jurisdiction in relation to Insolvency Resolution and liquidation of Corporate Persons including Corporate Debtor and personal guarantors. But however;

• b. section 60(2) categorically stipulate notwithstanding anything contained in the Code where the Insolvency Resolution Process or liquidation proceedings against the Corporate Debtor is pending before National Company Law Tribunal.

• c. The jurisdiction to entertain Insolvency and Bankruptcy proceedings against the individual will vest in the National Company Law Tribunal (hereinafter referred as NCLT) only on the following conditions:

- i. the individual is a personal guarantor to the debt availed by the corporate debtor;

- ii. an Insolvency Resolution Proceedings with respect to said Corporate Debtor is pending before the said NCLT; or 

- iii. liquidation proceeding with respect to corporate debtor is pending before NCLT.

• d. Unless the aforesaid connections are met, NCLT shall not have jurisdiction for the insolvency qua the individuals as the said jurisdiction is specifically vested with the Debts Recovery Tribunals at part 3 of the Code.

FINDINGS

# 13.We have carefully gone through the pleadings available on record, and opine that, though it is settled law that the liability of principal borrower and guarantor is coextensive as enunciated u/s 128 of the Contract Act, 1872, and the Creditor may proceed against the principal borrower or the guarantor simultaneously, however, the judgement of Hon’ble NCLAT in the case of Dr. Vishnu Kumar Agarwal Vs. Piramal Enterprises Limited, it was laid down that there cannot be two CIRP proceedings, one against the borrower and one against the guarantor.

# 14.The judgment of Hon’ble NCLAT in State Bank of India Vs. Athena Energy Ventures Private Limited, further clarified that CIRP can be initiated against the principal borrower and the guarantor.

# 17.Upon conjoined reading of section 60 r/w section 128 of the Contract Act, 1872, it is clear that the CIRP can be initiated against the Corporate Debtor as well as corporate guarantor. But however, in the instant case, section 60(2) contains a non-obstante clause which specifies that only where a CIRP process or liquidation process of a Corporate Debtor is pending before NCLT, an application initiating Insolvency Resolution Process against the Personal Guarantor, of such Corporate Debtor shall be filed before such NCLT. Further, the code also provides the definition of personal guarantor which includes the surety in a contract of guarantee to a Corporate Debtor which means that Financial Creditor can initiate proceedings of CIRP against the personal guarantor of Corporate Debtor. While Section 7 petition can be filed by the Financial Creditor against the Corporate Debtor and Corporate Guarantor, but under Section 95 of the Code can be filed by Financial Creditor only against personal guarantor of Corporate Debtor, which is already been undergoing CIRP or is in Liquidation.

# 18.In view of the judgement of Hon’ble NCLAT in State Bank of India Vs. Athena Energy Ventures Limited and the law as entailed in section 60(2), this bench is of the considered view that an application for insolvency for resolution against the personal guarantor is not maintainable unless that CIRP/liquidation is ongoing against the Corporate Debtor. It is further observed that filing of applications seeking resolution of personal guarantors without the Corporate Debtor undergoing CIRP, would tantamount to vesting of jurisdiction on two course one is NCLT and another is the Debts Recovery Tribunal.

# 19.In view of the above observation, the petition is dismissed with no costs.

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