Insolvency proceedings cannot be brought against the legal heirs of a personal guarantor under the Insolvency and Bankruptcy Code 2016: Bank Of Baroda, Stressed Asset Management Branch (Samb) V Ms Divya Jalan, Heiress personal guarantor of the late Sandeep Kumar Jalan – Insolvency/Bankruptcy

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Insolvency proceedings cannot be brought against the legal heirs of a personal guarantor under the Insolvency and Bankruptcy Code 2016: Bank Of Baroda, Stressed Asset Management Branch (Samb) V Ms Divya Jalan, Heiress personal guarantor of the late Sandeep Kumar Jalan1

Background

Kilburn Chemicals Limited has obtained credit facilities from c. ₹103,000,000 from, among othersBank of Baroda, which were guaranteed by, among others, Mr. Sandeep Kumar Jalan.

The Guarantor died and in August 2021, the Bank issued a formal notice against his legal heirs on the grounds that the guarantee agreement provided an exhaustive list of the legal heirs and also stipulated that in the event of the death of the Guarantor, the Bank would be entitled to recover from his legal heirs.

On this basis, the Bank filed a claim under Section 95(1) of the Insolvency and Bankruptcy Code 2016 (IBC)”for initiating the insolvency resolution process against viz., Mrs. Divya Jalan, legal heiress of the personal guarantor”.

The NCLT decision

The NCLT, Calcutta rejected the request saying:

  1. The definitions of a “personal guarantor”, in subsection 5(22) of the IPC and Rule 3(1)(e) of the Insolvency and Bankruptcy Rules 2019 (Application to contracting authority for guarantor insolvency resolution process corporate debtors), does not include the legal heirs of personal guarantors.
  1. When admitting an application under Article 95 of the CIB, there is a moratorium on the property of the personal guarantor and if the legal heirs were to be put in place of the personal guarantor, then the personal property of this heir would be affected by the moratorium which would seriously affect the rights of the heir.
  1. The IPC is clear insofar as it refers to the
    “estate/assets of personal guarantor”
  1. Thus, the definition ofpersonal guarantorin collateral agreements are inconsistent with the definition of a “personal guarantoras part of the IBC.

Conclusion

We have to wait and see if the decision is appealed to the NCLAT and the view taken by the NCLAT on this issue.

Footnote

1 Decision of 11 February 2022 adopted by the National Company Law Tribunal, Kolkata Bench in CP (BI) No. 363/KB/2021.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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