Personal Guarantors: An Ambiguity in the Jurisdiction of NCLT and DRT under IBC

The problem of an increasing number of Non-performing Assets (NPAs) within the Indian banking industry has proven to be one of its most primary hindrance at the moment. To recover the amount of such defaults in an expeditious manner, the Indian Government established Debt Recovery Tribunals (DRT) under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDBFI Act), and later the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act) for an efficient way to enforce of secured assets of the debtor as well as the personal guarantor. As per the SARFAESI Act, a bank or a financial institution may take possession of the secured assets of the debtor or their personal guarantors, which have been secured against the debt taken and realize the outstanding amount by way of sale through auctions. However, if the debtor has not created any interest over any property and owns a property that could be used to realize outstanding debts, then the bank or financial institutions may opt to approach the DRT under the RDDBFI Act for claiming an interest over such guarantor’s assets.

However, the structured recovery of dues by banks and financial institutions through the Debt Recovery Tribunal was seldom achieved. Incidentally, the Bankruptcy Law Reforms Committee had in its November 2015 report noted that loan recovery rates in India were among the lowest within the world, with lenders barely managing to recover 20% (twenty percent) of the outstanding debt in the event of a default. The report had attributed the sombre recovery rate to the extremely fragmented bankruptcy and recovery framework in India and had advocated for a single forum that hears and decides the rights of debtors and creditors. This eventually led to the financial condition and Bankruptcy Code, 2016 (Code), a unified legislation to resolve insolvency and bankruptcy in India.

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The Code has been brought into effect in phases and with effect from 01^st December 2019, creditors were allowed to seek relief under the Code by Corporate Insolvency Resolution Process (CIRP) against corporate debtors and their personal guarantors. The Code has empowered the National Company Law Tribunal (NCLT) as well as the DRTs as the Adjudicating Authorities for the purpose of resolution of insolvency, liquidation, and bankruptcy of corporate persons and partnership firms and individuals. The Code has set down specific provisions to identify when the creditors will approach NCLT (for insolvency of corporate debtors and personal guarantors) or DRT (for individuals and partnership firms). It also provides for specific jurisdiction of both Tribunals, wherein each Tribunal can try different cases and no case can be tried by both Adjudicating Authorities.

However, in light of the recent conflicting judgments of the NCLTs and the High Court, there is currently ambiguity concerning the jurisdiction of NCLT and DRT with regards to personal guarantors.

Adjudicating Authority under the Code

The interplay between the jurisdiction of DRT and NCLT under the Code are provided in Section 179 and Section 60 of the Code. Section 179 provides that, subject to Section 60 of the Code, DRTs will have jurisdiction to entertain insolvency matters of individuals and partnership firms. Section 60 of the Code provides that the NCLT would be the adjudicating authority, in relation to insolvency resolution and liquidation for corporate persons including corporate debtors and personal guarantors. It also provides that where CIRP of a corporate debtor is pending before an NCLT, an application about the insolvency of the company / personal guarantor of such corporate debtor shall be filed or stand transferred before the same NCLT. This means that whenever Section 60 is attracted, the remedy of Section 179 of the Code shall not be applicable, and the jurisdiction shall vest with NCLT and not the DRT.

In Altico Capital India Ltd v. Rajesh Patel & Ors,[1] (hereinafter referred to as “Altico case”), and also in Insta Capital Pvt. Ltd. v. Ketan Vinod Kumar Shah ( hereinafter referred to as “Insta Capital case”), the NCLT, Mumbai bench was faced with the question as to which forum is the acceptable Adjudicating Authority for insolvency proceedings of a private guarantor in the event an application seeking insolvency / liquidation of the corporate person is filed before the NCLT, however, such an application remains pending. In the aforementioned matters, NCLT held that an application for insolvency of the personal guarantor isn't maintainable unless insolvency / liquidation is current against the company person. NCLT opined that filing of applications seeking insolvency of personal guarantors without the corporate debtor undergoing insolvency / liquidation would be equivalent to vesting NCLT with jurisdiction of DRT. An analogous read was conjointly taken by the Madras tribunal in Rohit Nath v. Keb Hana Bank Ltd.

However, in PNB Housing Finance Ltd. v. Mr. Mohit Arora and Ors. (Mohit Arora case), the NCLT, Delhi Bench opined that the instant an insolvency / liquidation application in relation to the company person is unfinished before the NCLT, the provisions of Section 60 gets attracted and also the jurisdiction to entertain insolvency / liquidation applications against the personal guarantor would also lie with the NCLT and not with the DRT. The NCLT, Delhi Bench had opined that Sections 60(1), 60(2) and 60(3) of the Code, lays down three completely different situations where the facility to hear to the matter can lie with the NCLT and not the DRT, as illustrated below:

Section 60(1) – When an application “in relation” to insolvency/ liquidation for corporate persons is pending before the NCLT;

Section 60(2) – When insolvency / liquidation of a company debtor is pending before the NCLT; and

Section 60(3) – When insolvency / liquidation process of a corporate debtor is pending before the NCLT and similar proceedings against the company guarantor or personal guarantor, as the case may be, of the corporate debtor are pending in any Court or any Adjudicating Authority pending.

Its pertinent to note that the Apex Court, whilst upholding the provisions of the Code for insolvency and bankruptcy of personal guarantors in Lalit Kumar Jain v. Union of India and Ors. (hereinafter referred to as “Lalit Kumar case”) had adjudged that the Code distinguishes in the treatment of ‘personal guarantors’ from ‘ individual’. The Supreme Court opined that personal guarantors are “a separate species of individuals, for whom the Adjudicating Authority was common with the corporate debtor for whom they had stood as guarantee”. In alternative words, the Adjudicating Authority for the corporate debtors and their personal guarantors would be the NCLT and not the DRT.

The legislative intent to appoint NCLT as a single forum to adjudicate insolvency / liquidation of corporate debtors and their personal guarantors is furthermore indicated from Section 60(4) of the Code that vests all the powers of DRT with NCLT and conjointly vests NCLT with powers under Part III of the Code (insolvency resolution and bankruptcy for people and partnership firms). This permits the NCLT to take into account the nature of all the assets at disposal of the corporate debtor and its personal guarantors and this would facilitate the Committee of Creditors of the company somebody in framing pragmatic plans, keeping in mind the prospect of realizing some part of the corporate debtors’ dues from its personal guarantors. Therefore, the Supreme Court’s judgment in Lalit Kumar case, and the NCLT, Delhi Bench judgment in Mohit Arora case appears to be aligned with the legislative intent of the Code, i.e., common oversight of insolvency processes of the corporate debtor, its corporate guarantor, and personal guarantors, under one single forum.