The ambiguity over the jurisdiction of NCLT and DRT under IBC – Insolvency / Bankruptcy / Restructuring

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The problem of non-performing assets (APM) in the Indian banking system is one of its main difficulties. In order to enable lending institutions to collect these NPAs in a timely manner, the Indian government has established Debt Collection Courts (DRT) under the Law of 1993 on the recovery of debts owed to banks and financial institutions (RDDBFI Law), and subsequently the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Law) for faster performance of the secured property of the debtor as well as the guarantor. Under the SARFAESI law, a bank or a financial institution could take possession of the guaranteed assets of the borrower or its guarantors and sell them at auction to realize the outstanding debt. However, if the guarantor has not created any security on the property but owns property and other assets, the bank or financial institution will have to apply to the DRT under the RDDBFI law to claim interest on the assets. of this guarantor.

However, effective collection of contributions by banks and financial institutions using the DRT process has rarely been achieved. Incidentally, the Bankruptcy Law Reforms Committee had in its report of November 2015 (read here) noted that India’s loan recovery rates were among the lowest in the world, with lenders barely managing to collect 20% (twenty percent) of the value of the debt in the event of default. The report attributed the dismal collection rate to the highly fragmented bankruptcy and collection framework in India and recommended that there be a single forum that hears and decides the rights of debtors as well as creditors. This eventually led to the Insolvency and Bankruptcy Code, 2016 (Coded), unified legislation to resolve insolvency and bankruptcy in India.

The Code entered into force in phases and, as of December 1, 2019, creditors were allowed to seek redress under the Code by initiating insolvency resolution proceedings against the personal guarantors of the debtor companies. The Code appointed the National Court of Company Law (NCLT) as well as DRTs as contracting authorities for the resolution of the insolvency, liquidation and bankruptcy of legal persons and companies and individuals. The Code has made specific provisions to identify when creditors can apply to the NCLT (for corporate debtor insolvency and personal sureties) or the DRT (for the insolvency of individuals and partnerships). It further provides that if the NCLT has jurisdiction over a case, it cannot be heard by the DRT.

However, in light of recent conflicting NCLT and High Court judgments, there is now an ambiguity regarding the jurisdiction of the NCLT and DRT with respect to personal guarantors.

Arbitral authority under the Code

The interplay between the jurisdiction of the DRT and the NCLT under the Code is defined in Articles 179 and 60 of the Code. Article 179 provides that, subject to article 60 of the Code, the DRTs will have jurisdiction to hear insolvency cases of individuals and partnerships. Article 60 of the Code provides that the NCLT would be the contracting authority, with regard to the resolution of insolvency and the liquidation of legal persons, including corporate debtors and personal guarantors. It further provides that when insolvency or liquidation proceedings of a debtor company are pending before an NCLT, an insolvency claim of the legal person / personal guarantor of that debtor company must also be filed or transferred. in front of the same NCLT. This implies that whenever Article 60 is invoked, the provision of Article 179 of the Code will not apply, and jurisdiction will be vested in the NCLT and not the DRT.

In Altico Capital India Ltd. vs. Rajesh Patel & Ors. (Altico case), and also in
Insta Capital Pvt. Ltd v.Ketan Vinod Kumar Shah (Insta Capital case), NCLT Court, Mumbai was faced with the question of which body is the competent authority to rule on the insolvency proceedings of a personal guarantor in the event that an insolvency / liquidation claim of the debtor company is filed with the NCLT, but such a request is still pending. In said cases, NCLT held that a personal guarantor insolvency claim is not admissible unless insolvency / liquidation is pending against the debtor company. The NCLT considered that filing personal guarantor insolvency claims without the debtor company going into insolvency / liquidation would be tantamount to giving the NCLT the jurisdiction of the DRT. A similar view was also taken by the Madras High Court in
Rohit Nath v. KEB Hana Bank Ltd

However, in PNB Housing Finance Ltd. vs. Mr. Mohit Arora and Ors. (Mohit Arora case),the NCLT, Delhi Bench held that at the time when an insolvency / liquidation application concerning the debtor company is pending before the NCLT, the provisions of Section 60 are drawn and jurisdiction to initiate insolvency / liquidation proceedings. liquidation against the personal guarantor would also rest with the NCLT and not with the DRT. The NCLT, Delhi Bench had held that Sections 60 (1), 60 (2) and 60 (3) of the Code establish three different circumstances in which the power to hear the case will rest with the NCLT and not the DRT, as illustrated below :

  • Subsection 60 (1) – Where a request “Related” insolvency / liquidation for debtor companies is pending before the NCLT;
  • Article 60 (2) – When the insolvency / liquidation process of a debtor company is pending before the NCLT; and
  • Section 60 (3) – When the insolvency / liquidation proceedings of a debtor company are pending before the NCLT and similar proceedings against the social guarantor or personal guarantor, as the case may be, of the debtor company are pending before a court or tribunal pending.

It is relevant to note that the Supreme Court, while maintaining the provisions of the Insolvency and Bankruptcy Code of personal sureties in Lalit Kumar Jain v. Union of India and the Golds. (The Lalit Kumar case) considered that the Code treats “personal guarantors” differently from “natural persons”. The Supreme Court ruled that personal guarantors are “a distinct species of individuals, for whom the authority of judgment was common with the debtor company to which they had stood surety ”.In other words, the competent authority for both social debtors and their personal guarantors would be the NCLT and not the DRT.

The legislative intention to have NCLT as a single forum to deal with the insolvency / liquidation of debtor companies and their personal guarantors is further stated in Article 60 (4) of the Code which grants all DRT powers to NCLT and also grants powers to NCLT under Part III of the Code (insolvency resolution and bankruptcy for individuals and partnerships). This will allow the NCLT to consider the nature of all assets available from the debtor company and its personal guarantors and it would facilitate the debtor company’s creditors committee in developing realistic plans, bearing in mind the prospect of realizing part of the contributions of the corporate debtors of its personal guarantors. Therefore, the Supreme Court ruling in Lalit Kumar case, and the NCLT, Delhi Bench judgment in
Mohit Arora case seem to be aligned with the legislative intent of the Code, i.e. joint oversight of the insolvency processes of the debtor company, its corporate guarantor and its personal guarantors, through a single forum .

Our thoughts

In the Mohit Arora case, the NCLT, Delhi Bench based its judgments on its interpretation of Article 60 (1) of the Code which provides that the adjudicating authority “in connection with” insolvency resolution and liquidation of legal persons, including debtor companies and their personal guarantors, are the NCLT. In the NCLT, Delhi Bench’s thoughtful view, the words “in connection with” describes a situation where insolvency or liquidation proceedings have not been initiated against the debtor company and, therefore, even in such a case, a claim against the personal guarantor would also be submitted to the NCLT . It can be argued that this reasoning is consistent with the objective of the Code, which is to consolidate the insolvency-related cases of an entity into a single proceeding. Therefore, at the time a creditor decides to apply to NCLT for the insolvency / liquidation of a debtor company, then any subsequent or parallel insolvency action against the guarantor of that debtor company should also be before the same. NCLT. Supreme Court, in Lalit Kumar case, recognized the dynamic and the link between the debtor company and the guarantor to consider that “personal guarantors” are different from “natural persons” and considered that the Code provides for the NCLT as a common forum for insolvency / liquidation at both the debtor company and the personal guarantor. However, it does not specify when the NCLT should be approached by creditors as opposed to the DRT. There is no doubt that the judgment of the Mohit Arora case Brings good news for all creditors who would prefer to go to the NCLT, which will also be competent to deal with matters related to the debtor company. However, given the contrary judgments on this issue and the fact that there would be multiple cases involving the same issue, it is highly hoped that the Supreme Court of India will consider this issue at the earliest for effective implementation of the creditors’ rights without any unnecessary delay!

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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