REJECTION OF APPLICATION FOR INSOLVENCY RESOLUTION PROCESS OF PERSONAL GUARANTOR TO CORPORATE DEBTOR

[Mr. M. GOVINDARAJAN]

Initiation of Insolvency Resolution Process

Chapter III of Part III of the Insolvency and Bankruptcy Code, 2016 (‘Code’ for short) provides the procedure for insolvency resolution process of personal guarantors to Corporate Debtors.  The Insolvency and Bankruptcy Board of India (‘IBBI’ for short) framed a regulation for this purpose called as ‘IBBI (Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Regulations, 2019 (‘Regulations’ for short). 

In this process a financial creditor may initiate corporate insolvency resolution against a corporate debtor for his default in refund of the loan taken by it from the financial creditor.  The financial credit can simultaneously initiate insolvency process against the corporate debtor who guaranteed the loan given to the corporate debtor under section 95 of the Code.  Under Section 94 of the Code either the Corporate Debtor or Personal guarantor may initiate insolvency resolution process.

Application

For initiating Insolvency Resolution Process the person concerned may apply to the Adjudicating Authority in Form A along with the required fee.  The applicant is required to appoint one Insolvency Professional as an interim resolution professional.  If the applicant does not appoint Insolvency Professional, the Adjudicating Authority may appoint an Insolvency Professional from the panel maintained by the IBBI.  Interim moratorium will come into force once the application is filed.  The Interim Resolution Professional has to submit a report to the Adjudicating Authority under Section 99 of the Code as to the admission or rejection of the application by the Adjudicating Authority.  A copy of the report is to be forwarded to the Personal Guarantor, Corporate Debtor, and financial creditor for filing objections, if any.

Admission/Rejection

The Adjudicating Authority shall, within fourteen days from the date of submission of the report under section 99 pass an order either admitting or rejecting the application referred to in section 94 or 95, as the case may be.  If the application referred to in section 94 or 95, as the case may be, is rejected by the Adjudicating Authority on the basis of report submitted by the resolution professional that the application was made with the intention to defraud his creditors.  Before rejecting the application the Adjudicating Authority is to give reasonable opportunity of being heard.

Case laws

Rejection on limitation

In BANK OF BARODA VERSUS MRS. ZULEKHA AMIR DODHIA - 2024 (4) TMI 537 - NATIONAL COMPANY LAW TRIBUNAL MUMBAI BENCH, this Application was filed under Section 95 of the Code  read with Rule 7(2) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 by Bank of Baroda for the purpose of initiating insolvency process against Mrs. Zulekha Amir Dodhia, Personal Guarantor for recovery of Rs.50,14,15,575/- as on 31.10.2020 plus unapplied interest with effect from  01.11.2020 and other relevant charges till the date of full and final payment. The date of default is 10.02.2018. The Corporate Debtor was brought under CIRP under Section 7 of the Code vide order dated 25.09.2019.

A letter of Guarantee dated 23.04.2015 and 18.01.2016 was executed by the Personal Guarantors in favor of the Financial Creditor  for Rs. 27,19,00,000/- and 30,00,00,000/-The Financial Creditor issued notice under section 13(2) of SARFAESI Act,2002, dated 12.12.2017 against the Personal Guarantors for recalling of the outstanding amount.  However guarantors have not paid the unpaid debt in default due from the Corporate Debtor.

On presentation of the application by the Financial Creditor, under section 95(1) of the Code for initiating Insolvency Resolution Process against the Personal Guarantor, the Tribunal appointed Resolution Professional on 08.03.2022.  The Resolution Professional has filed a report on 31.03.2022 and was further directed to make recommendations with reasons in writing for acceptance or rejection of the Company Petition.

The personal guarantor filed objections on the report filed by the Resolution Professional.  The personal guarantor submitted the following before the Adjudicating Authority-

• The report dated 31.03.2022 is nothing but an abuse of law. The respondent vide reply dated 29.03.2022 categorically denied the liability of Bank of Baroda. However, in the said report the applicant has stated that the respondent has not denied the liability.

• The petition is barred by limitation.

• The Applicant had already filed the company petition against the other Personal Guarantor, wherein the Resolution Professional is already appointed and therefore appointing of Resolution Professional in respect of the same debt against this respondent as Guarantor for the same claim is not permissible under the law.

• The Applicant has filed the Application and seeking relief against the Respondent in respect of the loan already paid off/ settled of the principal borrower i.e. Calchem Industries (India) Limited, under the Resolution Plan (which is pending approval), will be considered as payment of the entire debt due and payable by the borrower under the loan transaction facilities granted by Bank of Baroda to the Borrower i and there is no cause of action in favor of the Applicant against this personal guarantor.

The Adjudicating Authority observed the following-

• There is no bar in the Code to proceed against each separate Personal Guarantor for same debt.

• The pendency of Corporate Insolvency Resolution Process) against the Principal Borrower does not debar lender from proceeding against Personal Guarantor. Additionally, pendency of Resolution Plan approval also cannot be a ground for dismissal of proceedings against the Personal Guarantor.

The Adjudicating Authority rejected the application on limitation.  The Adjudicating Authority held that the guarantee was invoked on 12.12.2017 and the limitation began on that day and any subsequent notice of demand cannot be considered for the purpose of limitation. Since the invocation of guarantee was on 12.12.2017 and the present Company Petition was filed on 21.12.2021, it is beyond the limitation period and hence the Company Petition deserves to be rejected.

Intention of fraud

In IN RE : RAKESH RAMESHKUMAR SHAH, TAMILNAD MERCANTILE BANK VERSUS MR. RAKESHKUMAR SHAH - 2024 (4) TMI 536 - NATIONAL COMPANY LAW TRIBUNAL AHMEDABAD, the present application was filed by the Personal Guarantor to Corporate Debtor, Devkrut Engineers Private Limited,  under Section 94(1) of the Code for initiating insolvency resolution process.  The Adjudicating Authority appointed Interim Resolution Professional.  The IRP submitted a report to the Adjudicating Authority recommending initiating Insolvency Resolution Process.

In this case the Financial Creditor bank granted loan to the tune of Rs.1.5 crores to the Corporate Debtor who provided securities to the bank.  The said loan turned into NPA on 31.03.2021.  A demand note was issued by the financial creditor to the corporate debtor under SARFAESI Act on 12.04.2021 to the tune of Rs.1.66 crore.  The Financial Creditor took symbolic possession of the mortgaged property on 28.06.2021. On 11.05.2022, on application of the Financial Creditor the District Magistrate handed over the mortgaged property to the Financial Creditor.  The Financial Creditor contended that the present application is filed with a fraud and malicious intention to enjoy the moratorium and to thwart the recovery proceedings initiated by the Financial Creditor.

The Adjudicating Authority analyzed the report of IRP.  The Adjudicating Authority observed that IRP is appointed to assist the Tribunal and his duty is limited to check the application and not comment upon the conduct of the Financial Creditor or Corporate Debtor.  The IRP commented - ‘Financial Creditor has acted in fast manner to recover the outstanding loan amount by redeeming the security’.  This shows that the IRP was totally biased and has leaned on the shoulders of the debtor.

The Adjudicating Authority held that the present application was filed by the Corporate Debtor to thwart recovery proceedings initiated by the Financial Creditor who has obtained physical possession of the mortgaged properties.  To frustrate other proceedings under SARFAESI Act the debtor filed the present application.  The Adjudicating Authority held that the sole intention of the debtor is to enjoy the moratorium which commences from the date of application.  The Adjudicating Authority rejected the application.