Article

In the matter of State Bank of India, Stressed Asset Management Branch  v. Mahendra Kumar Jajodia Company Appeal (AT) Insolvency No. 60 of 2022, State Bank of India (“Appellant”) approached the Hon’ble National Company Law Appellate Tribunal (“NCLAT”) against the order of Ld. National Company Law Tribunal, Kolkota (“NCLT”). Vide impugned order, NCLT, Kolkata had rejected the application of the Appellant under Section 95(1) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) seeking initiation of Corporate Insolvency Resolution Process against the Guarantor. As per the NCLT, the application was premature as on date of application there was no Corporate Insolvency Resolution Process (“CIRP”) or Liquidation Process pending against the Corporate Debtor because of approval of the Resolution Plan. Since Section 60(2) of the Code prerequisites that there must be CIRP or Liquidation Process pending against the principal borrower or the corporate debtor for initiation of an insolvency resolution process to be initiated against the personal guarantor, the application was liable to be dismissed.

On analysis of Section 60(2) of the IBC, the Hon’ble NCLAT held that purpose and object of Section 60(2) of the IBC is that “when proceedings are pending in ‘a’ National Company Law Tribunal, any proceeding against Corporate Guarantor should also be filed before ‘such’ National Company Law Tribunal. The idea is that both proceedings be entertained by one and the same NCLT. The sub-section 2 of Section 60 does not in any way prohibit filing of proceedings under Section 95 of the Code even if no proceeding are pending before NCLT.” It was further clarified by the Hon’ble NCLAT that Section 60(2) was applicable in a limited circumstances i.e. only when a CIRP or Liquidation Proceeding of a Corporate Debtor is pending before NCLT. In cases where CIRP is not pending against the corporate debtor, section 60(1) shall apply.

The NCLAT explained that the provision of Section 60(2) are without prejudice to Section 60(1) and are supplemental to Section 60(1) which provides that Adjudicating Authority in relation to Insolvency or Liquidation for Corporate Debtor including Corporate Guarantor or Personal Guarantor shall be the NCLT having territorial jurisdiction over the place where the Registered Office of the Corporate Person is located. Therefore, section 60(1) is the substantive provision and can be invoked in the cases which do not fall under section 60(2) of the IBC.

The Hon’ble NCLAT, therefore, allowed initiation of insolvency resolution process against the personal guarantor under section 95(1) of the Code, although no CIRP of the corporate debtor was pending before the NCLT.

It is important to note that the CIRP was initiated against the corporate debtor but has ceased to continue on account of approval of the resolution plan. Interestingly, section 60(2) provides for two situation only i.e. “where a corporate insolvency resolution process or liquidation proceeding of a corporate debtor is pending before a National Company Law Tribunal”.

The order has been now challenged by the personal guarantor before the Hon’ble Supreme Court where the moot question is whether Insolvency Resolution Process can be initiated against the Personal Guarantor in the absence of Corporate Insolvency Resolution Process. This absence of CIRP may arise out of the fact that there is no CIRP initiated against the corporate debtor at all or that it commenced but terminated on account of approval of resolution plan. The situation that the CIRP culminates into commencement of Liquidation Process has been squarely covered by the provision under section 60(2) of the IBC.

The Division Bench of the Hon’ble Supreme Court comprising of Justice Abdul Nazeer and Justice Vikram Nath vide order dated 21.03.2022 stayed the operation of order of the Hon’ble NCLAT and issued notice while citing Paragraph 95 in the judgment of Lalit Kumar Jain v. Union of India 2021(9)SCC321 wherein it was held that:

“Section 60(2) prescribes that in the event of an ongoing resolution process or liquidation process against a corporate debtor, an application for resolution process or bankruptcy of the personal guarantor to the corporate debtor shall be filed with the concerned NCLT seized of the resolution process or liquidation. Therefore, the Adjudicating Authority for personal guarantors will be the NCLT, if a parallel resolution process or liquidation process is pending in respect of a corporate debtor for whom the guarantee is given. The same logic prevails, under Section 60(3), when any insolvency or bankruptcy proceeding pending against the personal guarantor in a court or tribunal and a resolution process or liquidation is initiated against the corporate debtor. Thus if A, an individual is the subject of a resolution process before the DRT and he has furnished a personal guarantee for a debt owed by a company B, in the event a resolution process is initiated against B in an NCLT, the provision results in transferring the proceedings going on against A in the DRT to NCLT.”