Personal guarantors cannot avoid repayment plan termination under Section 118 despite making initial payment

NCLAT Chennai upheld NCLT's order dated 07.02.2024 allowing premature termination of repayment plan under Section 118 of IBC. Personal guarantors failed to comply with repayment schedule despite making initial payment on 27.10.2023. NCLAT held that initial payment cannot excuse subsequent defaults in repayment plan. Resolution professional was within rights to submit report under Section 118(2) following breach of repayment plan per Regulation 20 of IBBI regulations. Appeal dismissed as impugned orders contained no legal or factual flaws warranting appellate interference.

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Issues Involved:
1. Validity of the common Impugned Order dated 19.07.2024.
2. Compliance with the repayment plan and its implications under Section 118 of the I&B Code.
3. Initiation of bankruptcy proceedings under Section 121 of the I&B Code.
4. Alleged procedural lapses and fairness in the insolvency resolution process.

Detailed Analysis:

1. Validity of the Common Impugned Order dated 19.07.2024:
The appellants challenged the common Impugned Order dated 19.07.2024, which rejected their Interlocutory Applications (IAs) seeking to recall an earlier order dated 07.02.2024. The order of 07.02.2024 had declared the premature end of the repayment plan and granted liberty to the Financial Creditor (FC) to initiate bankruptcy proceedings against the personal guarantors. The NCLT had observed that despite repeated opportunities, the appellants failed to implement the repayment plan, thereby justifying the rejection of the recall applications.

2. Compliance with the Repayment Plan and its Implications under Section 118 of the I&B Code:
The appellants had defaulted on the repayment plan approved by the NCLT on 13.09.2023. The repayment plan required strict adherence to the stipulated timeline, and any breach would lead to the plan's premature end under Section 118 of the I&B Code. The Resolution Professional (RP) submitted reports under Section 118(2) stating the non-compliance by the appellants, which led to the NCLT's order under Section 118(3) confirming the plan's failure. The Tribunal emphasized that the legal consequences of non-compliance were automatic, and the plan would be deemed to have ended if not fully implemented.

3. Initiation of Bankruptcy Proceedings under Section 121 of the I&B Code:
Following the failure of the repayment plan, the FC filed an application under Section 121 for initiating bankruptcy proceedings against the appellants. The NCLT's order on 07.02.2024 had granted liberty to the FC to pursue this course of action. The appellants contended that they had made partial payments and should be allowed to fulfill the repayment plan. However, the Tribunal held that initial payments could not excuse subsequent defaults, and the legal framework under Section 118 necessitated the initiation of bankruptcy proceedings upon non-compliance.

4. Alleged Procedural Lapses and Fairness in the Insolvency Resolution Process:
The appellants argued that the insolvency resolution process was flawed, citing delays in sharing bank account details, lack of notice under Rule 20(1), and insufficient opportunities to address procedural shortcomings. They also alleged discriminatory treatment compared to other personal guarantors who were allowed to make repayments beyond the stipulated period. The Tribunal rejected these contentions, stating that the appellants had consistently failed to adhere to the repayment plan despite multiple communications from the RP. The Tribunal found no contravention of Regulation 20 and upheld the NCLT's orders.

Conclusion:
The Tribunal dismissed the appeals, affirming the NCLT's orders dated 19.07.2024 and 07.02.2024. It concluded that the appellants had failed to comply with the repayment plan, leading to its premature end under Section 118 of the I&B Code. Consequently, the initiation of bankruptcy proceedings under Section 121 was justified. The Tribunal found no legal or factual flaws in the NCLT's decisions, and all pending applications were disposed of accordingly.

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