2024 (5) TMI 1524 - HC - IBC

Personal guarantee waiver eliminates NCLT jurisdiction over guarantor under Section 95 IBC proceedings

Farooq Ali Khan Versus Bank of Baroda, Mumbai; Punjab National Bank (Formerly Known as Oriental Bank of Commerce), Mumbai; Union Bank of India, Mumbai; Ram Ratan Kanoongo Resolution Professional, Mumbai

Karnataka HC allowed a writ petition prohibiting NCLT from entertaining proceedings against petitioner under Section 95 of IBC. The petitioner had ... Maintainability of petition filed against the petitioner given the claim that the personal guarantee was waived - Seeking a writ in the nature of prohibition prohibiting the National Company Law Tribunal, Bengaluru from entertaining proceedings against him pending on its file filed by the 4th respondent acting on behalf of the 1st respondent - jurisdiction of NCLT to entertain proceedings against the petitioner u/s 95 of the Insolvency and Bankruptcy Code (IBC) as a personal guarantor - HELD THAT:- The proceedings against an individual before the Tribunal would become maintainable, only if he has stood as personal guarantor to any loan of any Company. No doubt, the petitioner did give his approval, as a guarantor in the year 2010, when the term loan was granted. Subsequently, the personal guarantee of the petitioner stood waived in terms of what is noted supra. If personal guarantee of the petitioner has stood waived, he is no longer a guarantor to the finance availed by Company. The proceedings before the Tribunal can be maintained only against a person in default or against a personal guarantor of a Company in terms of the amendment considered in the aforesaid judgment. Therefore, if the petitioner is no longer a personal guarantor, proceedings before the Tribunal against him, depicting him to be a personal guarantor would not be maintainable. The Apex Court in DILIP B. JIWRAJKA [2024 (1) TMI 33 - SUPREME COURT] holds that no judicial adjudication is involved at the stages envisaged in Sections 95 to 99 of the Code. The Resolution Professional is appointed under Section 97 and serves in a facilitative role. There is no violation of natural justice under Sections 95 to 100 of the Code and the report of the Resolution Professional is only a recommendatory and does not bind the adjudicating authority. The purpose of interim moratorium under Section 96 is to protect the debtor from further legal proceedings. Therefore, the provisions i.e., Sections 95 to 100 of the Code were held to be not unconstitutional in a challenge to the constitutional validity. There can be no qualm about the principles laid down by the Apex Court as to the issue whether the petition would even be maintainable before the Tribunal. The Apex Court was not considering a petition that was not maintainable before the Tribunal, as only under two circumstances this Court has considered whether the proceedings before the Tribunal would be maintainable. Non-maintainability of it would cut at the root of the matter. Conclusion - i) The jurisdiction of the NCLT is contingent upon the existence of a personal guarantee. A waived guarantee negates the NCLT's jurisdiction. ii) It is declared that the petition before the National Law Company Tribunal is not maintainable qua the petitioner. Petition allowed. ISSUES PRESENTED and CONSIDEREDThe Court considered the following core legal issues:Whether the National Company Law Tribunal (NCLT) has jurisdiction to entertain proceedings against the petitioner under Section 95 of the Insolvency and Bankruptcy Code (IBC) as a personal guarantor.Whether the petition filed against the petitioner is maintainable given the claim that the personal guarantee was waived.Whether the proceedings under Section 95 of the IBC can continue despite the petitioner's claim that the guarantee was no longer in effect.Whether the order appointing a Resolution Professional by the NCLT was premature and whether the writ petition challenging this order is maintainable.ISSUE-WISE DETAILED ANALYSIS1. Jurisdiction of the NCLT to entertain proceedings under Section 95 of IBC:Relevant legal framework and precedents: Section 95 of the IBC allows a creditor to initiate insolvency proceedings against a personal guarantor. The Court referred to the judgment in DILIP B. JIWRAJKA v. UNION OF INDIA, which clarified that no judicial adjudication occurs at the stages envisaged in Sections 95 to 99 of the IBC.Court's interpretation and reasoning: The Court emphasized that the NCLT's jurisdiction is limited to cases where the individual is a personal guarantor. The petitioner argued that his guarantee was waived, and thus the NCLT lacked jurisdiction.Key evidence and findings: The petitioner was initially a guarantor but claimed his guarantee was waived by subsequent documentation and communication from the Bank of Baroda, which indicated the waiver of his personal guarantee.Application of law to facts: The Court found that the petitioner was no longer a personal guarantor due to the waiver, and thus the NCLT lacked jurisdiction to entertain the proceedings against him.Treatment of competing arguments: The respondents argued that the petition was premature and that the NCLT's proceedings were in line with the Supreme Court's judgment. However, the Court found that the jurisdictional issue was fundamental and needed resolution before proceedings could continue.Conclusions: The Court concluded that the NCLT lacked jurisdiction to entertain the petition against the petitioner as he was no longer a personal guarantor.2. Maintainability of the petition given the waiver of personal guarantee:Relevant legal framework and precedents: The IBC provisions and the notification dated 15-11-2019, which brought personal guarantors within the ambit of the IBC, were considered.Court's interpretation and reasoning: The Court held that the petitioner's personal guarantee was waived, and thus he was not liable as a personal guarantor under the IBC, making the petition against him non-maintainable.Key evidence and findings: The waiver of the personal guarantee was supported by documentation from the Bank of Baroda and the absence of the petitioner's signature on subsequent guarantee documents.Application of law to facts: The Court applied the IBC provisions and the evidence of waiver to determine that the petition was not maintainable against the petitioner.Treatment of competing arguments: The respondents' reliance on the Supreme Court's judgment was rejected as it did not address the specific issue of maintainability in the context of a waived guarantee.Conclusions: The Court concluded that the petition was not maintainable due to the waiver of the personal guarantee.3. Prematurity of the order appointing a Resolution Professional:Relevant legal framework and precedents: The Court considered the procedural aspects of appointing a Resolution Professional under the IBC.Court's interpretation and reasoning: The Court found that the order was premature as the fundamental jurisdictional issue had not been resolved.Key evidence and findings: The appointment of the Resolution Professional was based on the assumption that the petitioner was still a personal guarantor, which was contested.Application of law to facts: The Court determined that resolving the jurisdictional issue was necessary before appointing a Resolution Professional.Treatment of competing arguments: The respondents argued that the appointment was procedural, but the Court emphasized the need to resolve jurisdiction first.Conclusions: The Court concluded that the order appointing the Resolution Professional was premature and should be quashed.SIGNIFICANT HOLDINGSPreserve verbatim quotes of crucial legal reasoning: 'The proceedings against an individual before the Tribunal would become maintainable, only if he has stood as personal guarantor to any loan of any Company. No doubt, the petitioner did give his approval, as a guarantor in the year 2010, when the term loan was granted. Subsequently, the personal guarantee of the petitioner stood waived.'Core principles established: The jurisdiction of the NCLT is contingent upon the existence of a personal guarantee. A waived guarantee negates the NCLT's jurisdiction.Final determinations on each issue: The Court quashed the proceedings against the petitioner, declaring them non-maintainable due to the waiver of the personal guarantee. The order appointing the Resolution Professional was also quashed as premature.