2024 (2) TMI 1215 - Tri - Insolvency and Bankruptcy

Personal guarantor's insolvency resolution process initiated under Section 95(1) after admitting joint liability with principal borrower

NCLT admitted application under Section 95(1) of IBC, 2016 for initiation of CIRP against personal guarantor. Court held that under Section 128 of Indian ... Insolvency Resolution Process against Personal Guarantor - Personal guarantee and liability of surety - Limitation period and extension by judicial order - Recommendatory nature of Resolution Professional's report - Appointment and powers of Resolution Professional in personal guarantor proceedings - Moratorium on debts upon admission of insolvency applicationInsolvency Resolution Process against Personal Guarantor - Appointment and powers of Resolution Professional in personal guarantor proceedings - Moratorium on debts upon admission of insolvency application - Admission of the application under Section 95 of IBC, 2016 and initiation of Insolvency Resolution Process against the personal guarantor with appointment of a Resolution Professional and declaration of moratorium. - HELD THAT: - The Tribunal accepted the recommendation of the Interim Resolution Professional and held that the application filed by the Financial Creditor under Section 95 was maintainable. The report recorded that the respondent had executed the personal guarantee, a demand notice was issued and served, and no documentary evidence of payment was produced by the respondent. The Tribunal noted the co-extensive liability of surety with the principal debtor under the law of contract and, applying the statutory scheme, admitted the application, appointed the Resolution Professional already proposed, and declared the moratorium effective from the date of admission. The Tribunal furthermore directed publication of notices, framing of the list of creditors, preparation and submission of a repayment plan, periodic reporting by the Resolution Professional and other consequential steps as required under the Code. [Paras 10, 11, 12, 13]Application under Section 95 admitted; Insolvency Resolution Process initiated against the personal guarantor, Resolution Professional appointed and moratorium declared with directions to the Resolution Professional to proceed as mandated by the Code.Limitation period and extension by judicial order - Objection that the application was barred by limitation was rejected and the application was held not to be time barred. - HELD THAT: - The Tribunal examined the dates as set out in the record and accepted the Financial Creditor's contention that the default relevant to the claim occurred in December 2018 and that the application filed in November 2021 was within three years. The Tribunal also relied on the Supreme Court's order extending and modifying limitation timelines (as cited in the rejoinder) to conclude that the claim fell within the extended limitation period. On these bases the limitation objection was overruled. [Paras 7, 9, 11]Limitation objection rejected; application held to be within the period of limitation.Recommendatory nature of Resolution Professional's report - Principles of natural justice at adjudicating authority stage - The Tribunal treated the Resolution Professional's report as recommendatory in nature while exercising its own jurisdiction under Section 100 and proceeded to adjudicate the application observing that the adjudicating authority must apply principles of natural justice at the acceptance/rejection stage. - HELD THAT: - Relying on the Supreme Court's exposition regarding Sections 95 to 100, the Tribunal recorded that no judicial adjudication occurs at the stage of the Resolution Professional's report which is recommendatory and facilitative. The Tribunal nonetheless applied its statutory jurisdiction to determine admission, having considered the report, the parties' submissions, the existence of guarantee, demand notice service, and absence of proof of payment. The Tribunal noted that natural justice obligations bind the adjudicating authority when it decides under Section 100, and on the record before it the Tribunal found sufficient grounds to admit the application. [Paras 9, 11]Resolution Professional's report accepted as recommendatory; Tribunal exercised its own jurisdiction observing natural justice and admitted the application.Final Conclusion: The Tribunal admitted the Section 95 application and initiated the Insolvency Resolution Process against the personal guarantor, appointed the Resolution Professional and declared a moratorium; the limitation plea was repelled and the IRP's report was treated as recommendatory while the Tribunal applied its own adjudicatory power in accordance with principles of natural justice. Issues Involved:1. Initiation of Insolvency Resolution Process against Personal Guarantor.2. Objections raised by the Personal Guarantor.3. Constitutional validity of Sections 94 to 100 of IBC.4. Tribunal's decision and orders.Summary:1. Initiation of Insolvency Resolution Process against Personal Guarantor:The application was filed under Section 95 of the Insolvency and Bankruptcy Code, 2016 by the State Bank of India to initiate insolvency proceedings against the Personal Guarantor for a default amount of Rs. 37,15,26,865.29. The Tribunal appointed an Interim Resolution Professional (IRP) and directed him to file a report. The IRP recommended the admission of the application, stating that the Personal Guarantor had not provided any documentary evidence of repayment.2. Objections Raised by the Personal Guarantor:The Personal Guarantor raised several objections, including:- The petition was barred by the law of limitation.- Request to change the IRP due to location differences.- Dispute over the ownership and sale of certain properties.- Claim that the IRP did not verify records properly.- Stating that the State Bank of India had already filed its claim in the CIRP of the Corporate Debtor.3. Constitutional Validity of Sections 94 to 100 of IBC:The proceedings were put on hold pending the Supreme Court's decision on the constitutional validity of Sections 94 to 100 of the IBC. The Supreme Court upheld the validity of these sections, stating that:- No judicial adjudication is involved at the stages envisaged in Sections 95 to 99.- The resolution professional serves a facilitative role and the report is recommendatory.- The adjudicatory authority must observe natural justice principles when deciding under Section 100.- The interim moratorium protects the debtor from further legal proceedings.- Sections 95 to 100 do not violate Articles 14 and 21 of the Constitution.4. Tribunal's Decision and Orders:The Tribunal, after considering the IRP's report and the objections, found the application to be within the limitation period and noted that the Personal Guarantor had admitted to executing the Guarantee Agreement. The Tribunal ordered the initiation of the Insolvency Resolution Process against the Personal Guarantor, declaring a moratorium, and directed the Resolution Professional to carry out specific tasks, including publishing a public notice, preparing a list of creditors, and submitting a repayment plan.The Tribunal concluded by admitting the application under Section 95 (1) of the IBC, 2016 and initiating the Insolvency Resolution Process against the Personal Guarantor.