The insolvency of the personal guarantor is independent of the insolvency resolution process of the debtor company

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Facts

The State Bank of India Stressed Asset Management Branch (SBI) has filed a petition to initiate the insolvency of a personal guarantor (Guarantor) under Section 95(1) of the Insolvency and Bankruptcy Code , 2016 (IBC) before the National Company Law Tribunal, Kolkata Bench (NCLT). The NCLT denied the petition on the grounds that the petition was premature since the company (CD) whose debt was guaranteed by the guarantor was not in corporate insolvency resolution proceedings (CIRP). SBI appealed to the National Company Law Appellate Tribunal (NCLAT) where the issue to be considered was whether opening the CIRP of a CD in the National Company Law Appellate Tribunal (Tribunal) was a condition precedent to the opening of CIRP proceedings for a debtor company in the personal insolvency of a personal guarantor, in this case the Guarantor. The NCLAT, by its judgment of January 27, 2022, in Company Appeal (AT) Insolvency Nos. 60 and 61 of 2022 reversed the NCLT’s findings.

Results

In its judgment, the NCLAT noted that Section 60(1) and Section 60(2) of the IBC are provisions that apply in separate areas. The NCLAT held that section 60(1) simply designates the Tribunal as the authority that would hear cases of CIRP and liquidation of corporate debtors and corporate guarantors, as well as the authority that would hear cases of insolvency of personal guarantors. The specific Court would be based on the location of the registered office of debtor companies and/or guarantor companies.

With respect to Section 60(2) of the IBC, the NCLAT noted that it was seeking to consolidate procedures regarding personal guarantors and corporate debtors. The scope of Article 60(2) is that if CIRP proceedings are pending against a corporate debtor in a particular court, personal insolvency proceedings against that personal guarantor should also be filed in the same court. By implication, it was decided that the court in whose jurisdiction the personal guarantor resided would not be the court that would hear such a request.

The NCLAT found that after a joint reading of Sections 60(1) and 60(2) of the IBC, in order to commence personal insolvency proceedings against the guarantor, it was not necessary to commence CIRP proceedings. against the debtor company.

Khaitan’s comment

This judgment sheds light on the opening of a personal guarantee procedure and on the Court which would have jurisdiction over it. The NCLT’s observation that initiating CIRP proceedings as a precondition to initiating personal surety proceedings goes against the principle that the guarantee is an independent contract and not dependent on the main contract.

The guarantor has the right to appeal to the Supreme Court of India in accordance with this judgment.

“The contents of this document do not necessarily reflect the views/positions of Khaitan & Co but remain solely those of the author or authors. For any other questions or follow-up, please contact Khaitan & Co at [email protected]

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