Personal Guarantors Can Face Insolvency Proceedings Independently

The Hon'ble Tribunal concluded that initiating Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor is not a prerequisite for pursuing Insolvency Resolution Process against Personal Guarantors. The Tribunal referenced relevant legal provisions and upheld the validity of including Personal Guarantors under the Insolvency and Bankruptcy Code. Consequently, the Interlocutory Applications seeking to recall orders against Personal Guarantors were dismissed, maintaining the status quo.

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Issues Involved:
1. Validity of the Corporate Insolvency Resolution Process (CIRP) commencement order dated 15th October 2020.
2. Legal effect of the National Company Law Appellate Tribunal (NCLAT) order dated 9th September 2021.
3. Jurisdiction of the National Company Law Tribunal (NCLT) to initiate Insolvency Resolution Process against Personal Guarantors under Section 95 of the Insolvency and Bankruptcy Code (IBC), 2016.

Issue-Wise Detailed Analysis:

1. Validity of the Corporate Insolvency Resolution Process (CIRP) commencement order dated 15th October 2020:
The applications were filed under Rule 11 of NCLT Rules, 2016 by the Personal Guarantors of M/s. Green Gateway Leisure Limited. The basis for the commencement of CIRP against M/s. Green Gateway Leisure Limited was the order dated 15th October 2020, admitting IBA/01/KOB/2020 filed by the Union Bank of India. This order declared a moratorium and initiated CIRP. However, this order was challenged and subsequently set aside by the Hon'ble NCLAT on 9th September 2021, effectively ending the CIRP and restoring the Corporate Debtor's management to its directors.

2. Legal effect of the National Company Law Appellate Tribunal (NCLAT) order dated 9th September 2021:
The NCLAT's order dated 9th September 2021 set aside the NCLT's order dated 15th October 2020, which had commenced the CIRP. As a result, the CIRP and all subsequent proceedings based on the NCLT's order became non-est in the eyes of the law. The Applicants argued that due to this, the orders passed by the NCLT admitting applications against the Personal Guarantors and appointing a Resolution Professional should also be recalled.

3. Jurisdiction of the National Company Law Tribunal (NCLT) to initiate Insolvency Resolution Process against Personal Guarantors under Section 95 of the Insolvency and Bankruptcy Code (IBC), 2016:
The Applicants contended that under Sections 60(2) and 60(3) of the IBC, the jurisdiction of the NCLT to order Insolvency Resolution Process against Personal Guarantors is contingent upon the existence of pending CIRP or liquidation proceedings against the Corporate Debtor. They argued that since the NCLAT had set aside the CIRP, there were no pending proceedings to justify the initiation of Insolvency Resolution Process against the Personal Guarantors.

Respondent's Argument:
The Financial Creditor, State Bank of India, argued that Personal Guarantors to Corporate Debtors are a separate class of creditors with independent existence under the IBC. They cited the amendment to Section 2 of the IBC, which introduced Personal Guarantors as a distinct category. They also referenced the Supreme Court's decision in Lalit Kumar Jain Vs. Union of India, which upheld the constitutional validity of the notification bringing Personal Guarantors under the purview of the IBC. The Respondent asserted that the initiation of CIRP against the Corporate Debtor is not a prerequisite for initiating Insolvency Resolution Process against Personal Guarantors.

Tribunal's Conclusion:
The Tribunal concluded that the initiation of CIRP against the Corporate Debtor is not a prerequisite for maintaining an application under Section 95 of the IBC against Personal Guarantors. The Tribunal referenced the Supreme Court's decision in Lalit Kumar Jain Vs. Union of India, which upheld the validity of the notification bringing Personal Guarantors within the IBC's scope. The Tribunal also noted that the State Bank of India had already filed a CIRP application against the Corporate Debtor, which was pending adjudication.

Final Order:
The Tribunal dismissed the Interlocutory Applications filed by the Personal Guarantors seeking to recall the orders admitting applications against them and rejecting the Resolution Professional's report. The Tribunal held that the applications were filed merely to object to the initiation of CIRP against the Personal Guarantors. Accordingly, IA(IBC)/170 (KOB)/2021, IA(IBC)/171 (KOB)/2021, and IA(IBC)/172(KOB)/2021 were dismissed without costs.

Dated this the 21st day of January, 2022.

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