Personal guarantor's appeal dismissed after failing to respond to insolvency proceedings despite multiple opportunities under Section 95

NCLAT dismissed appeal challenging admission of insolvency application under Section 95 of IBC against personal guarantor. Court found appellant was granted adequate opportunity to file reply to RP's report, including 10-day extension and final week deadline with peremptory order. Appellant failed to file reply, seek recall of closure order, or challenge appealable order under Section 61. Court concluded appellant showed no genuine intent to contest RP's recommendation for admission. Appeal dismissed as meritless, with insolvency admission upheld as valid.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

• Whether the application filed under Section 95 of the Insolvency and Bankruptcy Code, 2016 (the Code) for initiation of insolvency resolution process against a personal guarantor of a corporate debtor was rightly admitted by the Adjudicating Authority (Tribunal) based on the report of the Resolution Professional (RP).
• Whether the personal guarantor was afforded adequate opportunity to file a reply to the RP's report and whether failure to file such reply could be excused on grounds of miscommunication between the guarantor and his counsel.
• Whether the order dated 08.04.2024, which closed the right of the personal guarantor to file a reply to the RP's report, was rightly passed and whether the personal guarantor's failure to challenge this order or seek recall of the same affects the merits of the appeal.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Admission of Insolvency Application under Section 95 of the Code against Personal Guarantor

The relevant legal framework includes Section 95 of the Insolvency and Bankruptcy Code, 2016, which allows a financial creditor to initiate insolvency resolution process against a personal guarantor of a corporate debtor in case of default. The Insolvency and Bankruptcy Board of India (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 (Rules), and the IBBI (Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Regulations, 2019 (Regulations) provide procedural and substantive guidelines for such applications.

The RP's report under Section 99 of the Code confirmed that:

• The application complied with the requirements under Section 94 of the Code and Rule 6(1) of the Rules.
• The corporate debtor had committed default in repayment of the loan facility granted by the financial creditor.
• The personal guarantor had committed default in repayment of the loan after invocation of the personal guarantee.
• The debt was not an excluded debt under Section 79(15) of the Code.
• The personal guarantor was not eligible for a fresh start under Chapter II of the Code.
• The personal guarantor failed to provide proof of payment despite requests.

Based on these findings, the RP recommended admission of the insolvency application against the personal guarantor.

The Tribunal, after considering the RP's report and the application, admitted the insolvency application under Section 95 of the Code. The Court applied the law to the facts by verifying that the statutory requirements for admission were met, including default by the corporate debtor and personal guarantor, and compliance with procedural norms.

The appellant did not file any substantive objection or reply to the RP's report to contest the admission. The Court noted that the appellant's failure to respond effectively amounted to acceptance of the RP's findings.

Issue 2: Opportunity to File Reply and Consequences of Non-Compliance

The Tribunal granted the personal guarantor a 10-day opportunity on 06.03.2024 to file a reply to the RP's report. On the adjourned date of 08.04.2024, the personal guarantor was absent despite the matter being called twice, and no reply had been filed. The Tribunal then granted a final one-week extension to file the reply, warning that failure to do so would close the right to file any reply.

The appellant did not avail of this final opportunity and did not challenge the order dated 08.04.2024, which closed the right to file a reply. The Tribunal emphasized that this order was appealable under Section 61 of the Code but remained unchallenged, thereby attaining finality.

The appellant's contention of miscommunication between him and his counsel was found unsubstantiated, as the Court observed that ample time was granted and the appellant failed to explain the nature of the alleged miscommunication. The Court held that the appellant's failure to file a reply or challenge the closure order amounted to a waiver of the right to contest the RP's report.

The Court applied the principle that procedural fairness requires parties to diligently exercise their rights and that failure to respond or challenge adverse orders within prescribed time frames leads to forfeiture of those rights. The appellant's inaction was treated as deliberate or negligent, and the excuse was rejected as "lame."

Issue 3: Effect of Non-Challenge to Order Closing Right to File Reply

The order dated 08.04.2024, which closed the right to file a reply after the final extension expired, was not appealed by the appellant. The Tribunal held that this order attained finality and could not be reopened in the present appeal challenging the admission order dated 25.06.2024.

The Court reasoned that the appellant's failure to challenge the closure order or seek its recall demonstrated an intention not to contest the RP's report or the admission of the insolvency application. This procedural default was fatal to the appellant's case.

The Tribunal emphasized that procedural rules under the Code and the Rules are mandatory and that litigants must comply with timelines and orders to ensure orderly adjudication. The appellant's failure to comply or challenge the order was a significant factor in dismissing the appeal.

3. SIGNIFICANT HOLDINGS

The Tribunal observed:

"...the order of closing the right to file reply came into effect with the expiry of period of one week and for that matter no further order was required to be passed by the Court in that regard."

"...the Appellant was not only remiss in not filing the reply but also never wanted to file any reply much less objection to the recommendation of the RP for admission of the application filed under Section 95 of the Code."

"...The lame excuse which has been raised in the present appeal is of no avail to the Appellant for challenging the well-considered order passed by the Tribunal and hence, we do not find any merit in the present appeal and the same is hereby dismissed."

The core principles established include:

• Strict adherence to procedural timelines and orders under the Insolvency and Bankruptcy Code and related Rules is mandatory.
• Failure to file a reply to the Resolution Professional's report, despite opportunities granted, and failure to challenge closure orders, results in forfeiture of the right to contest admission of insolvency proceedings.
• The Adjudicating Authority's satisfaction based on the RP's report and compliance with statutory requirements is sufficient ground for admission of insolvency proceedings against a personal guarantor.
• Excuses such as miscommunication with counsel must be substantiated and cannot be used to circumvent procedural requirements.

Final determinations:

• The admission of the insolvency application under Section 95 of the Code against the personal guarantor was valid and rightly upheld.
• The personal guarantor was afforded adequate opportunity to file a reply to the RP's report; failure to do so and failure to challenge the closure order justified dismissal of the appeal.
• The appeal challenging the admission order was dismissed for lack of merit and procedural non-compliance.

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