NCLAT upholds Personal Insolvency Resolution Process initiation under Section 95 against guarantor through assignee creditors

NCLAT dismissed the appeal challenging initiation of Personal Insolvency Resolution Process under Section 95 of the Code. The Tribunal held that creditors can file applications through assignees despite lack of direct privity with guarantor, as assignment agreements create binding obligations. The personal guarantee allowed both lender and trustee to pursue guarantor independently. The adjudicating authority's order was valid, following natural justice principles appropriate for summary proceedings. Guarantor's liability remains co-extensive with corporate debtor under Section 128 of Indian Contract Act, requiring no prior action against principal borrower before pursuing surety.

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ISSUES PRESENTED and CONSIDERED

The Tribunal identified several core legal issues that needed examination to decide the present appeal:

Issue No. I

(a) Whether there was no privity of contract between the Appellant and Respondent No.1.

(b) Whether the Adjudicating Authority could have passed the Impugned Order based on the invocation of personal guarantee by a third party.

(c) Whether the guarantee was not invoked by the proper party as the Demand Notice was issued by PHL Fininvest Private Limited, whereas the Guarantee was executed between the Appellant and Piramal Trusteeship Services Private Limited.

Issue No. II

Whether the Impugned Order is a non-speaking order and contravenes the principle of natural justice.

Issue No. III

Whether the appointment of Respondent No. 2 was not in accordance with the provisions of the Code.

Issue No. IV

Whether there was no valid Board Resolution to show that Respondent No. 1 was authorized to file its Application under Section 95 of the Code.

Issue No. V

Whether, when adequate securities are already available with Respondent No. 1 by way of a first and exclusive mortgage of various properties charged in favor of Piramal Finance Limited, the Appellant as Guarantor is not liable for outstanding dues.

ISSUE-WISE DETAILED ANALYSIS

Issue No. I

(a) The Tribunal noted that the concept of trusteeship involves acting on behalf of creditors or lenders, and such deeds are generally signed between the trust and the personal or corporate guarantor of the principal borrower. The lenders or Financial Creditors are the true beneficiaries of such deeds of guarantee. Section 95 of the Code allows creditors to file applications to initiate Personal Insolvency Resolution Processes. The security trustee holds security in favor of the Financial Creditor, and either the trust or creditors may file an application under Section 95. The Tribunal concluded that the Assignment Agreement and the transfer of rights and obligations under the Facility Agreement were binding, and the Appellant could not escape his obligations.

(b) The Tribunal examined whether the Adjudicating Authority could pass the Impugned Order based on the invocation of a personal guarantee by a third party. It was determined that the creditors have the right to enforce the contract made for their benefit, and the Facility Agreement allowed for the assignment of rights without the consent of the Corporate Debtor.

(c) Regarding the proper party to invoke the guarantee, the Tribunal noted that all notices and demand letters were issued by the Lender to the Appellant, and no objections were raised by the Appellant. The terms of the Personal Guarantee allowed both the 'Lender' and the 'Trustee' to initiate action against the Appellant. The Tribunal found no merit in the Appellant's arguments.

Issue No. II

The Tribunal addressed whether the Impugned Order was a non-speaking order. It was noted that the proceedings under the Code are summary and time-bound, and the Adjudicating Authority is not required to conduct proceedings akin to civil proceedings. The Tribunal found that the Adjudicating Authority had considered the Resolution Professional's report and provided reasonable opportunities for objections. The Impugned Order was deemed valid, adhering to the principles of natural justice.

Issue No. III

The Tribunal examined the appointment of Respondent No. 2 as the Resolution Professional. It was noted that the appointment was within the discretion of the Adjudicating Authority and that the provisions of the Code are directory in nature. The Tribunal found no merit in the Appellant's contention regarding the appointment.

Issue No. IV

The Tribunal considered the validity of the Board Resolution authorizing Respondent No. 1 to file its application under Section 95. It was determined that the Board Resolution was valid and wide enough to cover the proceedings, and any objections raised by the Appellant were addressed by a fresh Board Resolution ratifying previous actions.

Issue No. V

The Tribunal addressed whether the existence of adequate securities relieved the Appellant of liability. It was noted that the creditor has the prerogative to initiate insolvency processes against the principal borrower or the personal guarantor or both. The liability of the surety is co-extensive with that of the principal debtor, and the creditor is not required to first proceed against the principal borrower. The Tribunal found no merit in the Appellant's argument that the existence of securities negated the need for insolvency proceedings against the personal guarantor.

SIGNIFICANT HOLDINGS

The Tribunal upheld the Impugned Order, finding no merit in the Appellant's arguments. The core principles established include the rights of creditors to enforce contracts for their benefit, the summary nature of proceedings under the Code, and the co-extensive liability of guarantors with principal debtors. The Tribunal concluded that the appeal was devoid of merit and dismissed it with no costs.

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