2025 (4) TMI 1292 - AT - IBC

Personal Guarantors Can Face Insolvency Proceedings Even After Corporate Debtor's Resolution Plan Under Section 95 of IBC

The SC/Tribunal upheld the initiation of Corporate Insolvency Resolution Process (CIRP) against Personal Guarantors under Section 95 of IBC, despite a ... Challenge to order admitting Section 95 application filed by the State Bank of India against the Personal Guarantor - Submission is that since the Resolution Plan has changed the quantum of debt, the proceedings under Section 95 ought not to have proceeded with - HELD THAT:- There can be no dispute that Resolution Plan is binding on all including the Financial Creditor. Clause 1.8 F as has been relied by the Counsel for the Appellant only provide that the financial creditors shall have the right to recover any unrecovered financial debt owed by the company to them by recourse to the personal guarantees. Thus, in event under the Resolution Plan any amount is recovered by the financial creditor allowance of the said amount has to be given while preparing a repayment plan with regard to personal guarantors’ insolvency. Conclusion - There is no error in the initiation of the CIRP against the personal guarantor i.e. Appellant herein and the submission which has been raised by the Appellant regarding the recovery of certain amount by the financial creditor under the Resolution Plan is a question that need to be addressed by the Resolution Plan at the time of finalizing the repayment plan against the personal guarantor. Appeal dismissed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal in these Appeals are:Whether the initiation of the Corporate Insolvency Resolution Process (CIRP) against Personal Guarantors under Section 95 of the Insolvency and Bankruptcy Code (IBC) was justified despite the approval of a Resolution Plan in the CIRP against the Corporate Debtor.Whether the invocation of the Personal Guarantee and subsequent filing of the Section 95 application by the Financial Creditor (State Bank of India) was premature or barred due to the Resolution Plan's provisions concerning recovery of unrecovered financial debt.Whether the quantum of debt as altered or adjusted under the Resolution Plan affects the admissibility of the Section 95 application against the Personal Guarantors.Whether the applications filed by the Personal Guarantors seeking deferment of the Section 95 proceedings were rightly rejected.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Validity of Initiation of CIRP against Personal Guarantors under Section 95 after approval of Resolution Plan against Corporate DebtorRelevant Legal Framework and Precedents: Section 95 of the IBC enables a Financial Creditor to initiate CIRP against a Personal Guarantor to a Corporate Debtor when the Corporate Debtor has defaulted. The Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 prescribe procedural safeguards including issuance of notice under Rule 7 prior to initiation. Clause 1.8 F of the approved Resolution Plan clarifies that Financial Creditors retain the right to recover unrecovered financial debt from Personal Guarantors.The Tribunal relied on its earlier decision in 'Hari Singh Thakur vs. Sandeep Kumar Bhatt (RP) and Anr.' which held that issues relating to quantum of debt or amounts recovered cannot be grounds to reject a Section 95 application at the admission stage.Court's Interpretation and Reasoning: The Tribunal observed that the cause of action for filing the Section 95 application arose on the date of invocation of the Personal Guarantee (13.02.2018). The subsequent approval of the Resolution Plan against the Corporate Debtor on 05.09.2019 does not negate the right of the Financial Creditor to initiate proceedings against the Personal Guarantor for any unrecovered financial debt.The Tribunal emphasized that Clause 1.8 F of the Resolution Plan explicitly preserves the Financial Creditor's right to recover unrecovered debt from Personal Guarantors. Therefore, the initiation of CIRP under Section 95 is not vitiated merely because the Resolution Plan has altered the quantum of debt owed by the Corporate Debtor.Key Evidence and Findings: The invocation of the Personal Guarantee preceded the filing of the Section 95 application. The Resolution Plan's Clause 1.8 F was examined and interpreted to mean that recovery from Personal Guarantors is permissible for unrecovered amounts post-Resolution Plan approval.Application of Law to Facts: Since the Personal Guarantee was invoked and the debt remained unpaid, the Financial Creditor was entitled to initiate CIRP under Section 95. The Resolution Plan's provisions do not bar such initiation but only affect the quantum recoverable, which is to be considered at the stage of repayment plan finalization.Treatment of Competing Arguments: The Appellants contended that the Resolution Plan's modification of debt extinguished or limited the Financial Creditor's right to initiate Section 95 proceedings. The Tribunal rejected this, holding that the right to initiate proceedings is independent of the quantum disputes, which are to be addressed during repayment plan formulation. The Respondent's reliance on precedent supported this view.Conclusion: The initiation of CIRP against Personal Guarantors under Section 95 was valid and not barred by the prior approval of the Resolution Plan against the Corporate Debtor.Issue 2: Effect of Quantum of Debt and Recovery under Resolution Plan on Admission of Section 95 ApplicationRelevant Legal Framework and Precedents: The IBC and associated rules do not mandate precise determination of debt quantum at the admission stage of Section 95 applications. The Tribunal's precedent in 'Hari Singh Thakur' clarified that disputes over debt quantum or amounts already recovered cannot be grounds for rejecting the application.Court's Interpretation and Reasoning: The Tribunal held that questions regarding the quantum of debt or adjustments for amounts already realized by the Bank are to be considered while finalizing the repayment plan and not at the stage of admission of the Section 95 application. The valuation of assets or debt amount is open for challenge by the Personal Guarantors with appropriate evidence before the Adjudicating Authority.Key Evidence and Findings: The Resolution Plan's Clause 1.8 F was examined to confirm that it provides for recovery of unrecovered financial debt from Personal Guarantors, implying that the debt quantum can be adjusted but does not preclude initiation of proceedings.Application of Law to Facts: Since the debt quantum is a matter for determination during the repayment plan process, the Tribunal found no error in admitting the Section 95 application despite the Appellants' contention regarding debt adjustments.Treatment of Competing Arguments: The Appellants argued that the changed debt quantum under the Resolution Plan should prevent initiation of proceedings. The Tribunal rejected this, relying on precedent and the statutory scheme which separates admission from repayment plan finalization.Conclusion: Disputes relating to the quantum of debt or amounts recovered under the Resolution Plan do not affect the admissibility of the Section 95 application.Issue 3: Rejection of Applications for Deferment of Section 95 ProceedingsRelevant Legal Framework: The IBC and Rules provide procedural mechanisms for deferment or stay of proceedings, but such relief is discretionary and depends on the merits.Court's Interpretation and Reasoning: The Tribunal noted that the applications for deferment filed by the Personal Guarantors were rightly rejected by the Adjudicating Authority. The reasons for rejection are implicit in the Tribunal's acceptance of the validity of initiation and the procedural correctness of the Section 95 application.Key Evidence and Findings: The record shows that the Section 95 application was filed after due invocation of the Personal Guarantee and after following the prescribed notice requirements.Application of Law to Facts: Since the initiation was valid and the application admissible, there was no justification to defer the proceedings.Treatment of Competing Arguments: The Appellants sought deferment presumably on grounds of pending issues regarding debt quantum or recovery under the Resolution Plan. The Tribunal found these insufficient to warrant deferment.Conclusion: The rejection of deferment applications was appropriate and in accordance with law.3. SIGNIFICANT HOLDINGS'The submission of the Appellant that the debt has not been correctly shown in the application is not a question which can be ground to reject the application under Section 95. The question of debt and adjustment of any amount already realized by the Bank are the question which has to be taken into consideration when payment plan is finalized.''Notwithstanding anything stated in this Resolution Plan, the financial Creditors shall have the right to recover any unrecovered financial debt owed by the Company to them by recourse to the personal guarantees and corporate guarantees executed by the Existing Promoters or any third party ('Guarantors') in favor of the secured financial Creditors.'The Tribunal established the principle that the approval of a Resolution Plan in the CIRP against a Corporate Debtor does not preclude the Financial Creditor from initiating CIRP proceedings against Personal Guarantors under Section 95 for any unrecovered financial debt.The Tribunal confirmed that disputes regarding the quantum of debt or amounts recovered under the Resolution Plan do not affect the admissibility of Section 95 applications and are to be addressed during the repayment plan formulation stage.Finally, the Tribunal upheld the procedural correctness of the Section 95 application and endorsed the rejection of deferment applications filed by the Personal Guarantors.