Recent conflicting judgments of the National Company Law Tribunal (NCLT) and the High Courts had given rise to ambiguity regarding the jurisdiction of NCLT vis-à-vis personal guarantors under the Insolvency and Bankruptcy Code, 2016 (Code). The issue of the correct forum for insolvency proceedings of a personal guarantor arises where an application seeking insolvency or liquidation of the corporate debtor is filed before the NCLT, but such an application is still pending and at the same time proceedings against the personal guarantor of the said corporate debtor is initiated by a creditor. (To read our article on this jurisdictional clash between NCLT and Debt Recovery Tribunal (DRT), please click here.)
The same question again came up for consideration before the National Company Law Appellate Tribunal (NCLAT) in State Bank of India v. Mahendra Kumar Jajodia (SBI Judgement) wherein exclusive jurisdiction was conferred upon the NCLT for insolvency proceedings against the personal guarantor to the corporate debtor. In this case, the application seeking insolvency of the personal guarantor was rejected by the NCLT, Kolkata Bench, as premature on the ground that as on date, no insolvency or liquidation process was pending against the corporate debtor. In appeal, NCLAT overturned the NCLT’s decision and held that initiation of insolvency proceedings against the corporate debtor is not a pre-requisite to initiate insolvency proceedings against the personal guarantor.
Under the framework of the Code:
– Section 60(1) provides that the NCLT would be the adjudicating authority, in relation to insolvency resolution and liquidation for corporate persons including corporate debtors and personal guarantors.
– Section 60(2) provides that where insolvency or liquidation proceeding of a corporate debtor is pending before a NCLT, an application relating to the insolvency of the corporate / personal guarantor of such corporate debtor shall also be filed before the same NCLT.
NCLAT observed that Section 60(2) of the Code does not in any way forbid filing of insolvency proceedings against the personal guarantor even if no proceeding is pending against the corporate debtor, and in such a case, an application can be filed by relying upon Section 60(1) of the Code. Taking a purposive approach towards interpretation of Section 60(1) and (2), the NCLAT opined that the purpose of Section 60(2) is to avoid two different benches of the NCLT to take up insolvency proceedings of the corporate debtor and its personal guarantor, where insolvency or liquidation proceedings are pending against the corporate debtor.
The SBI Judgment clarifies that if a particular case is not covered under Section 60(2) of the Code, then the application can be very well filed under Section 60(1) against the personal guarantor in the NCLT having territorial jurisdiction over the place where the personal guarantor resides. Once the application against the corporate debtor is admitted by a certain NCLT, then the application filed against the personal guarantor to such corporate debtor will also stand transferred before the same NCLT as provided under Section 60(3) of the Code.
In SBI Judgment, the NCLAT has clarified the different circumstances in which Section 60(1), (2) and (3) of the Code come into play and throws light on the jurisdictional clash between NCLT and DRT. The SBI judgment is welcome news for all creditors, who can now approach NCLTs against the personal guarantors without any need to wait for initiation of insolvency or liquidation process against the corporate debtor. The judgment provides much needed clarification on the ambiguous interpretation of section 60(1) of the Code on account of conflicting judgments, and it furthers the purpose of enacting the Code, i.e., reducing jurisdiction of various forums to deal with insolvency / liquidation cases in India to increase efficiency in the process.
Authors: Souvik Ganguly, Managing Partner and Altamash Qureshi, Associate
