The personal assets of guarantors cannot be transferred during the CIRP of a debtor company without initiating a separate procedure – NCLAT – Finance and Banking

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India: Personal property of guarantors cannot be transferred during the CIRP of a debtor company without initiating a separate procedure – NCLAT

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The Honorable NCLAT ruled that CIRP against the debtor company cannot include a resolution process against personal guarantors, even if the properties have been mortgaged to financial creditors. This was decided in the case of “M. Nitin Chandrakant Naik & Anr. Vs. Sanidhya Industries LLP & Ors. ‘ see judgment of 26e August 2021

Previously, the competent authority, National Company Law Court, Mumbai Court (“Arbitral authority”) confirmed the resolution plan including certain provisions allowing the transfer of the personal property of the guarantors.

While overturning the decision of the contracting authority, Hon. NCLAT observed that:

1) If the Financial Creditors were to sue the Personal Guarantors, he could avail himself of the provisions of

(a) “Presidency Towns Insolvency Act, 1909”,

(b) ‘The Provincial Insolvency Act, 1920’, and

(c) “Law of 1993 on the collection of debts owed to banks and financial institutions”.

Note: Part III of the IBC allows financial creditors to exercise recourse against personal guarantors. However, NCLAT did not take this into account because the litigation in question predated 1st December 2019 being the date of notification of Part III of the IBC.

2) Pursuant to article 61 (3) of the Insolvency and Bankruptcy Code, 2016, the resolution plan approved by the adjudication authority is contrary to the provisions of the law and the right of a financial creditor to sue the personal guarantor may exist, but the application of this law must be in accordance with the provisions of the law.

https://ibbi.gov.in//uploads/order/2021-09-05-222422-6j5ra-26414f3846632f4c82d397e67e510d1f.pdf

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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