2021 (6) TMI 392 - Tri - Insolvency and Bankruptcy

Tribunal Dismisses Application Against Personal Guarantor for Procedural Non-Compliance

Intec Capital Limited Versus Eastern Embroidery Collections Private Limited

The Tribunal dismissed the application under Section 7 of the Insolvency & Bankruptcy Code against the personal guarantor due to non-compliance with ... Maintainability of application - initiation of CIRP - Corporate Debtor failed to make repayment of its dues - Financial Creditors - personal guarantor to a corporate debtor - invocation of Guarantee - Demand notice was not served upon the personal guarantor before application filed for CIRP - existence of debt and dispute or not - HELD THAT:- An application by the creditor against the personal guarantor shall be filed under Section 95 (1) of the IBC and according to Section 95(4) IBC 2016 (i) an application under sub-section (1) shall be accompanied with details and documents relating to the debts owed by the debtor to the creditor or creditors submitting the application for insolvency resolution process as on the date of application, (ii) it shall only be filed on failure by the debtor to pay the debt within a period of fourteen days of the service of the notice of demand and (iii) supported with relevant evidence of such default or non-repayment of debt - On co-joint reading of Section 95 of IBC with Rule 7 of Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019, made it clear, an application under Section 95 shall only be filed, on failure of debtor to pay the debt within the period of 14 days of service of the demand notice, served u/s. 95(4) IBC 2016. which means an application u/s. 95(1) IBC 2016 can only be filed after the expiry of period 14 days from the date of service of demand notice under Section 95(4)(b) of the IBC. The applicant/creditor has filed under Section 7 of the IBC not under Section 95 of IBC. Secondly, the applicant has filed the application for initiation of CIRP not against the Corporate Debtor rather against the personal guarantor. Therefore, the applicant is required to submit an application in Form C under Section 95(1) of the IBC and that too after service of demand notice as required under Section 95(4)(b) read with Rule 7 of Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 and if the debt is not paid within 14 days from the date of service of demand notice. Issues:- Application under Section 7 of the Insolvency & Bankruptcy Code, 2016 for initiation of Corporate Insolvency Resolution Process.- Default in repayment by borrower and invocation of guarantee against personal guarantor.- Compliance with the procedural requirements under Section 95 of the IBC for filing against personal guarantor.Analysis:1. The petition was filed under Section 7 of the Insolvency & Bankruptcy Code, 2016, seeking the initiation of the Corporate Insolvency Resolution Process due to the Corporate Debtor's inability to repay its financial debt. The Financial Creditor, a Non-Banking Financial Company, provided loan facilities to the Borrower, who later became the Corporate Debtor, with the Corporate Debtor standing as a guarantor for the financial facilities.2. Despite repeated requests and defaults by the Borrower in repaying the loan, the Financial Creditor recalled the loan facilities and initiated arbitration proceedings, which ruled in favor of the Financial Creditor. The Financial Creditor also invoked Section 138 of the Negotiable Instrument Act, 1881, against the Corporate Guarantor due to dishonored security cheques.3. The total outstanding amount due and payable by the Corporate Debtor and the guarantor was calculated, leading to the initiation of the application against the personal guarantor. However, the Tribunal observed that the application was filed under Section 7 of the IBC, not Section 95, which deals with personal guarantors.4. The Tribunal highlighted the procedural requirements under Section 95 of the IBC, emphasizing the necessity of serving a demand notice and filing an application in Form C against the personal guarantor after the debtor fails to repay the debt within 14 days of the notice. As the demand notice was not served on the personal guarantor in this case, the Tribunal deemed the application as not maintainable and dismissed it.5. The Tribunal allowed the applicant to file a fresh application in compliance with the provisions of the law, indicating that the dismissal was based on procedural grounds rather than the merits of the case. This ruling underscores the importance of adhering to the prescribed procedures under the Insolvency & Bankruptcy Code for initiating insolvency proceedings against personal guarantors.