Background
The Indian insolvency regime had very fragmented, time-consuming, and archaic personal insolvency laws. Two major laws on personal insolvency before the enactment of the Insolvency and Bankruptcy Code, 20161 (IBC or Code) were: (i) The Presidency-Towns Insolvency Act, 19092 dealing with insolvency cases in Presidency Towns (Bombay, Madras, Calcutta), and (ii) the Provincial Insolvency Act, 19203 which was applicable elsewhere. Due to persistent and continuing issues with the provisions of this Act, the need for a more structured and updated insolvency framework was felt. Acting upon it, the enactment of IBC in 2016 came into the picture. The provisions dealing with personal insolvency are provided under Part III of the Code. The Code comprehends three categories of individuals under Part III i.e.
(i) personal guarantors to corporate debtors;
(ii) individuals with partnership firms or sole proprietorships; and
(iii) other individuals.
However, the Code notified the insolvency resolution process in respect of companies initially and up until recently, the insolvency resolution process of the personal guarantors came into the existence on the recommendations of the Report of Reconstituted Working Group on Individual Insolvency (RWG).4
Further, the RWG suggested that the phase implementation of Part III is essential as the market dynamics, stakeholders, transactions, and nature of the proceedings may not adjust under a single umbrella procedure. Thus following the suggestion, the piecemeal approach was preferred and the rules and regulations thereof for the insolvency resolution process of personal guarantors were brought into existence.
Understanding personal guarantor to corporate debtor insolvency process
Before moving on to the jurisdictional dilemma on the personal guarantor to corporate debtor, the understanding of the concept of personal guarantor as envisaged under the Code is imperative. Personal guarantor as defined under Section 5(22)5 of the Code states that a personal guarantor is an individual who is the surety in a contract of guarantee to a corporate debtor. To put it simply, any person who promises to pay a borrower’s debt in the event that the borrower defaults in respect of their obligation. Under the mechanism of the Code, the personal guarantors provide guarantees for the loan or any other type of facility availed by the corporate debtor from the principal borrower. Consequently, when a corporate debtor defaults on the payment of such facilities, the liability of the personal guarantor comes into existence.
Parallel proceedings against the personal guarantor — A distinct category
The rationale of parallel proceeding against the personal guarantors has its genesis in the fundamental principle of co-extensive liability of the surety (personal guarantor) against the creditor or principal borrower.6 As far as the applicability of this principle under the Insolvency and Bankruptcy Code, 2016 is concerned, the Supreme Court in Lalit Kumar Jain v. Union of India7 held that the approval of a resolution plan for the resolution of corporate debtor does not ipso facto discharge a personal guarantor (of a corporate debtor) of her/his liabilities under the contract of guarantee.
The scheme of the Code for the designated adjudicating authority to adjudicate matters is clear and unambiguous. For the insolvency processes under Part II of the Code which deals with the insolvency resolution and liquidation process for the corporate persons, the adjudicating authority shall be the National Company Law Tribunal8 (NCLT). Whereas, the insolvency resolution and bankruptcy process for individual and partnerships firms which includes personal guarantors will have Debts Recovery Tribunal (DRT)9 as their designated adjudicating authority.
Therefore, on a bare perusal of the statutory provisions, the distinction is discrete without any ambiguity. However, with the introduction of the Insolvency and Bankruptcy Code (Second Amendment) Act, 201810 the conflict and overlapping of the jurisdiction in the case of personal guarantor arose.
Personal guarantor by nature is classified as individual insolvency and hence is a subject- matter of Part III of the Code. However, in this amendment, a distinct category was created for personal guarantors which does not align with the scheme of the Code and their insolvency resolution plan shall be dealt with under Part II of the Code. The constitutionality of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 201911 (the 2019 Rules) were challenged which enabled this provision was challenged in Lalit Kumar Jain v. Union of India12. The Supreme Court upheld the 2019 Rules and thus a distinct category for personal guarantor is now firmly established.
The jurisdictional anomaly on personal guarantor’s process
Therefore, the said Amendment and the Rules inter alia enabled the provisions of Section 6013 of the Code which envisaged four situations under which the exclusive jurisdiction in personal guarantor applications rests with the NCLT—
- The adjudicating authority in relation to insolvency and resolution for personal guarantors shall be NCLT having territorial jurisdiction.
- Instances where the corporate insolvency resolution process (CIRP) against the corporate debtor is pending.
- In an instance where the CIRP is in the process against the corporate debtor, the application against the personal guarantor shall be transferred before such NCLT.
- The powers provided to DRT in matters of the personal guarantor shall be vested with NCLT.
Here, we have a situation where an application against the corporate debtor is either initiated, pending, or in the process (admitted) in such a case the application for initiation of insolvency resolution process against the personal guarantor shall be the NCLT.
On a harmonious construction of Sections 9414, 9515 and Section 60 of the Code, it can be construed that special provisions have been provided to vest NCLT with the jurisdiction in personal guarantors to corporate debtors’ cases. The intent of these provisions of the Code is manifested to allow for the creditor to initiate and maintain proceedings against both the corporate debtor and the guarantor simultaneously and before the same forum.
However, different NCLTs have taken a different view on this aspect. For instance, the NCLT, New Delhi in PNB Housing Finance Ltd. v. Mohit Arora16 discussed the scope of the amendment enabling Section 60 of the Code. The NCLT stated that whenever Section 60 is attracted, the provision of Section 179(1)17 IBC, 2016 shall not be applicable and the jurisdiction shall vest with NCLT.
Further, the Tribunal held that in a situation where application(s) in relation to the corporate debtor for initiation of CIRP is pending before NCLT then, initiation of CIRP of the corporate debtor is not a prerequisite for maintainability of an application under Section 95 IBC filed for initiating insolvency resolution process against the personal guarantor of that corporate debtor before the NCLT.
The NCLT in PNB Housing Finance Ltd. v. Goldy Gupta18 held that the commencement of CIRP against the corporate debtor is not a condition precedent for maintaining an application under Section 95 of the Code filed for initiating insolvency resolution process against the personal guarantor of the corporate debtor before the NCLT.
This rationale was not taken by the NCLT, Mumbai in Insta Capital (P) Ltd. v. Ketan Vinod Kumar Shah19 where the issue for consideration is whether a financial creditor can initiate CIRP against the personal guarantor in the absence of any resolution process/liquidation process against the corporate debtor. The Tribunal held an application for insolvency for a resolution against the personal guarantor is not maintainable unless that CIRP or liquidation application is ongoing against the corporate debtor. It is further observed that filing of applications seeking resolution of personal guarantors without the corporate debtor undergoing CIRP, would tantamount to the vesting of jurisdiction on two courses, one is NCLT and another is the Debts Recovery Tribunal.
The NCLTs have a diverse opinion on the initiation of the insolvency resolution process against the personal guarantor during the initiation or pendency of CIRP application against the corporate debtor. Such a situation has not been resolved as the NCLAT (Appellate Tribunal) has not yet dealt with this anomaly.
Concurrent jurisdiction with Debts Recovery Tribunals
As pointed, the Debts Recovery Tribunals are the designed adjudicating authority in proceedings related to insolvency matters of individuals and firms, which also includes personal guarantors and having territorial jurisdiction over the place where the individual debtor actually and voluntarily resides or carries on business or personally works for gain20. It can be stated that the original jurisdiction for personal guarantors rests with the DRTs.
However, a peculiar situation which Section 60 of the Code does not comprehend is that where an application for initiation of CIRP against the corporate debtor is neither initiated, pending nor admitted in such cases who shall have the jurisdiction. This situation further builds up to the existing dilemma.
Following the strict interpretation of the provisions of the Code, in such situations, the DRTs are best suited to entertain the application. The reason being, they have the original jurisdiction to deal with personal guarantors under the Code. Further, the Amendment of 2018 and Rules thereof are the enabling provisions that created a special case for Section 60 provision. However, the amendment and rules are silent on the deprivation of jurisdiction with the DRTs.
In addition to that the RWG stated that “In cases where there a corporate insolvency process is not pending against the corporate debtor, the jurisdiction in respect of insolvency and bankruptcy of personal guarantor is Debts Recovery Tribunal.”21
DRT taking up the jurisdiction in personal guarantors insolvency proceedings
The Debts Recovery Tribunal, Chennai in KEB Hana Bank v. Rohit Nath22 has taken a step further and entertained an application under Section 95 of the Code wherein the CIRP against the corporate debtor is already initiated. The Tribunal in reply to the contention of the respondent on non-applicability of the application on grounds of lack of jurisdiction stated:
“in our view that this contention is unfounded as Section 60 deals with proceedings initiated against the corporate debtor whereas having a separate forum is clothed with the power to adjudicate. The present proceedings are against the guarantor to the corporate debtor alone. As far as the proceedings before this Tribunal is concerned under Section 60 IBC have no application.”
Conclusion
On a concurrent reading of the provisions under Sections 60 and 95 of the Code, even NCLT has concurrent jurisdiction. Therefore, the provisions here clearly outlined the anomaly where two different forums have assumed jurisdiction for overlapping matters. Unfortunately, the concrete answer and resolution to this problem are not yet provided as the higher courts or tribunals have not yet entertained this anomaly. The assumptive rationale behind that could be that both NCLT and DRT have assumed jurisdiction as per their interpretations and hence they have been filed on an appeal.
Although, it is clear from the provisions, amendments, and the Supreme Court ruling in Lalit Kumar case23 that DRT has original jurisdiction along with a special situation where CIRP is not even initiated against the corporate debtor or principal borrower. Whereas NCLT is vested with jurisdiction through an enabling Amendment. Such a jurisdiction can be termed as “exceptional jurisdiction” to streamline the CIRP process against the personal guarantor and the corporate debtors.
IBC is still in its nascent stages and its jurisprudence is evolving throughout. The anomaly highlighted in this article shall sooner be knocking on the doors of the higher courts for interpretation. Hence, a ruling with the Appellate Tribunal and ultimately the Supreme Court will settle this jurisdictional challenge.
†Graduate Insolvency Programme, Indian Institute of Corporate Affairs (2021-2023); LLM in Corporate and Financial Law and Policy, Jindal Global Law School, Sonipat; BA LLB, Hidayatullah National Law University, Raipur. Author can be reached at shivamsinghal020@gmail.com.
1 Insolvency and Bankruptcy Code, 2016.
2 Presidency-Towns Insolvency Act, 1909.
3 Provincial Insolvency Act, 1920.
4 Report of the Working Group on Individual Insolvency (Regarding strategy and approach for implementation of the provisions of the Insolvency and Bankruptcy Code, 2016 to deal with the insolvency of guarantors to corporate debtors and individuals having business).
5 Insolvency and Bankruptcy Code, 2016, S. 5(22).
7 (2021) 9 SCC 321 : 2021 SCC OnLine SC 396.
8 Insolvency and Bankruptcy Code, 2016, S. 5(1).
9 Insolvency and Bankruptcy Code, 2016, S. 79(1).
10 Insolvency and Bankruptcy Code (Second Amendment) Act, 2018.
11 Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019.
12 (2021) 9 SCC 321 : 2021 SCC OnLine SC 396.
13 Insolvency and Bankruptcy Code, 2016, S. 60.
14 Insolvency and Bankruptcy Code, 2016, S. 90.
15 Insolvency and Bankruptcy Code, 2016, S. 95.
17 Insolvency and Bankruptcy Code, 2016, S. 179(1).
20 Insolvency and Bankruptcy Code, 2016, S. 179(2).
21 Report of the Working Group on Individual Insolvency (Regarding strategy and approach for implementation of the provisions of the Insolvency & Bankruptcy Code, 2016 to deal with the insolvency of Guarantors to Corporate Debtors and Individuals having business).