The Government of India vide the November 2019 Notification, brought into effect Part III of the Insolvency and Bankruptcy Code, 2016 (hereafter referred to as “IBC”) which pertains to the insolvency of individuals in so far as it is applicable to the Corporate Debtors’ Personal Guarantors. In light of recent events concerning the invocation of personal guarantees and the Apex Court having transferred to itself all matters wherein there is a challenge raised as to the validity of the abovementioned notification, it becomes relevant to explore the scope of the IBC in relation to personal guarantees and the maintainability of actions before various Adjudicating Authorities envisioned under the Code.
A yardstick to trace the scope of the terms “Guarantor” and “Contract of Guarantees”
Section 5(22) of the IBC requires a Personal Guarantor to be “a surety in a contract of guarantee to the Corporate Debtor”. Furthermore, in pursuance to Rule 3(e), an application can be made under the PG Rules, 2019 only when a “guarantor is a Personal Guarantor to a Corporate Debtor in respect of whom the guarantee has been invoked by the creditor and remains unpaid in full or in part.”
Application of the aforementioned provisions requires a comprehensive definition of the terms “Guarantor” or “Contract of Guarantee” in order to limit the incidences of proceedings under Part III, and prevent the use of the Code as a debt recovery tool. The existence of this conundrum with respect to what qualifies as a ‘contract of guarantee’ can be best understood from the case of Bank of Baroda v. Doshion Water Solutions. The Tribunal, while holding that a third-party Pledge Agreement and Mortgage Agreement respectively, are mere collateral securities and cannot be viewed as a contract of guarantee, opined that such a third party not being part of the loan agreement, but only a ‘facilitator’ to provide a security by pledging/ mortgaging, cannot be said to be a borrower under the purview of the Code. Another interesting aspect observed in the Doshion Water Solutions case was that, when multiple collateral securities are given by a third party under a facility agreement, singular collateral security cannot be used to invoke corporate guarantee at the Tribunal. Therefore, it is essential that contours to the scope of “Guarantors” and “Contract of Guarantees” under the Code are established. Consequently, it is necessary that the Adjudicating Authority while admitting an application in relation to Personal Guarantors gives due regard to the elements of a Guarantee under the Indian Contracts Act, 1872.
DRT v NCLT: A Jurisdictional Dilemma in case of Personal Guarantees
Although the Code under Section 179 stipulates that the Debt Recovery Tribunal (hereafter referred to as “DRT”) is the appropriate authority for the purposes of Part III, a claim invoking personal guarantee may also be entertained by the National Company Law Tribunal (hereafter referred to as “NCLT”) under Section 60 of the Code. Reliance is placed on the case of SBI v Anil Ambani, wherein the Tribunal admitted an application filed under Section 60(2) r/w Section 95 of the Code as Corporate Insolvency Resolution Proceedings (hereinafter referred to as “CIRP”) were already pending against the Corporate Debtor at such Tribunal. Therefore, a perusal of the case indicates that as per Section 60(1) and Section 60(2) of the Code, NCLT’s jurisdiction in relation to personal guarantees is, firstly, Derivative, i.e. the concerned Tribunal must have territorial jurisdiction over the registered office of the Corporate Debtor and, secondly, Contingent upon CIRP being pending against the Corporate Debtor at the concerned Tribunal. Furthermore, the scope of Section 60(2) may not be extended to admit applications invoking personal guarantee where resolution proceedings are yet to be commenced against the Corporate Debtor. The intention of the Legislature is clear from a bare reading of Section 60(3), which provides for transferability of insolvency proceedings pending against the Personal Guarantor to the Adjudicating Authority dealing with CIRP of the Corporate Debtor. Therefore, circumvention of the remedy available at the DRT in pending cases of CIRP against the Corporate Debtor, under the façade of avoiding multiplicity of proceedings at multiple forums, is not necessary.
Additionally, the Tribunals ought to consider the extent of powers exercised by the NCLT under Section 60(5)(c). The NCLT is empowered to determine all matters arising out of and incidental to the Insolvency proceedings of the Corporate Debtor by virtue of Section 60(5)(c). It is worth mentioning the case of Embassy Property v State of Karnataka wherein the apex court observed that the purpose ofSection 60 is to ensure that the NCLT exercises its jurisdiction to dispose of matters referred to in section 60(5) and section 179(2), only when the contingency stated in Section 60(2) arises. Therefore, since as per Section 179(1), it is the DRT which is the Adjudicating Authority in relation to Personal Guarantors, a restricted application of the section 60(5)(c) is suggested, while balancing it with the commercial rationale behind such a provision.
Can Simultaneous Proceedings be initiated against a Corporate Debtor and Personal Guarantors?
In a financial transaction, such as those in which loans are granted to corporate entities, the most pervasive method adopted by lenders is the method of obtaining guarantees to secure the principal debt. Although guarantees of such nature are governed by the principle of Co-extensive liability under Section 128 of the Indian Contract Act, the same may result in multiplicity of proceedings and claims at the Adjudicating Authority under the Code. While the position of law on the question of simultaneous proceedings against a Corporate Debtor and Corporate Guarantor seem to have been affirmatively settled in the aftermath of the Athena Energy Ventures Case, the law with respect to pendency of proceeding against Personal Guarantors to Corporate Debtors is yet to be decided. In a move to halt the insolvency proceedings against Anil Ambani, the Delhi High Court stated that while dealing with proceedings against the Corporate Debtor, the liability of the Personal Guarantor may be examined by the Resolution Professional.
Conclusion
Therefore, only time will tell whether a challenge to the November 2019 notification stands before the Apex Court and whether simultaneous proceedings may be instituted against both the Personal Guarantor and the Corporate Debtor under the Code. It is hoped that the Supreme Court considers the interests of all stakeholders while not hampering the remedy available with the creditors to proceed against the guarantors in case of default.
[Anoushka Borker is a fourth-year student at School of Law, Christ University. She can be reached at anoushkapborker@gmail.com]
NUALS Restructuring and Insolvency Law Journal 