2021 (7) TMI 1429 - HC - Insolvency and Bankruptcy

Insolvency proceedings against Guarantor - Whether an individual in his capacity as a guarantor in connection with credit facilities granted by a bank or financial institution to a corporate entity may be proceeded against by way of insolvency proceedings under Section 95(1) of the Insolvency and Bankruptcy Code 2016 before an appropriate Debts Recovery Tribunal? HELD THAT - The statutory source of authority for carrying such application to the Debts Recovery Tribunal is found in Section 95 of the Code of 2016. Section 95 is included in Chapter III of Part III of the Code. Part III of the Code is intituled Insolvency Resolution and Bankruptcy for Individuals and Partnership Firms . A creditor may apply to the jurisdictional Debts Recovery Tribunal for initiating an insolvency resolution process against appropriate persons under Section 95 of the Code. Section 60 of the Code which is included in Part II thereof identifies the adjudicatory authority in relation to insolvency resolution and liquidation for corporate persons. Section 60(1) of the Code mandates that insolvency resolution and liquidation for corporate persons including corporate debtors and personal guarantors may be brought before the National Company Law Tribunal having territorial jurisdiction over the places where the registered office of the corporate person is located - However a corporate debtor is defined in Section 3(8) of the Code to mean a corporate person who owes a debt to any person and a corporate person in turn is defined in Section 3(7) of the Code to mean a company a limited liability partnership firm or any person incorporated with limited liability under any law for the time being in force but not including any financial service provider. Thus by no stretch of imagination may a human individual whether as a guarantor or otherwise be seen to be a corporate debtor or a corporate person within the definitions ascribed to such expressions in the Code. The petitioner seeks to send the Court on a wild goose chase by seeking to take advantage of the perceived anomaly upon the Code like the Companies Act 2013 being notified and implemented in stages. That Section 95(1) of the Code applies to any debtor other than debtors against whom an insolvency resolution process may be initiated under other specific provisions is apparent - the construction as suggested by the petitioner would also be impermissible inter alia in the light of Section 94 which permits an individual debtor to initiate an insolvency resolution process and the use of the general word debtor therein without it being confined to certain classes of persons or partners of partnership firms. In view of Section 128 of the Contract Act 1872 the liability of a guarantor is co-extensive with that of the principal-debtor unless it is otherwise provided by the contract. The petitioner does not claim that there is any agreement or clause present in any agreement that obliges the creditor-bank to exhaust its remedies against the concerned corporate entity before proceeding against the guarantor. The rule as embodied in Section 128 of the Act of 1872 will apply in equal measure to a guarantor who has furnished a guarantee in connection with any credit facilities obtained by a corporate entity. The petition is found to be completely devoid of merit and nothing but a kite-flying exercise to waste time and dodge the inevitable. For all of the petitioner s efforts the petitioner will pay costs assessed at Rs.50, 000/- (Rupees Fifty Thousand only) to the respondent bank which the respondent bank will be entitled to recover in course of the insolvency resolution process initiated before the appropriate Debts Recovery Tribunal. Petition dismissed.

Summary

Issues Involved:
1. Whether an individual guarantor can be proceeded against by way of insolvency proceedings under Section 95(1) of the Insolvency and Bankruptcy Code, 2016.
2. The appropriateness of the Debts Recovery Tribunal as the adjudicating authority for such proceedings.
3. The applicability of Section 128 of the Contract Act, 1872 regarding the liability of the guarantor.

Issue-Wise Detailed Analysis:

1. Insolvency Proceedings Against Individual Guarantor:
The main issue is whether an individual, in his capacity as a guarantor for credit facilities granted to a corporate entity, can be subjected to insolvency proceedings under Section 95(1) of the Insolvency and Bankruptcy Code, 2016 (IBC). The petitioner argued that Section 95(1) should be restricted to partnership debts and not apply to individual guarantors. However, the court rejected this argument, stating that Section 95(1) applies to any debtor, not just partnership firms or their partners. The court emphasized that statutory interpretation does not permit rendering any provision redundant, and Section 95(1) should be applied broadly to include individual guarantors.

2. Appropriateness of Debts Recovery Tribunal:
The court examined Rule 7 of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process of Personal Guarantors to Corporate Debtors) Rules, 2019, which provides for a creditor to issue a demand notice in Form B and submit an application in Form C to the Debts Recovery Tribunal (DRT). The court confirmed that the prescribed forms were adhered to, and the notice was issued in accordance with the rules. The court further clarified that the DRT is the appropriate adjudicating authority for insolvency proceedings against individual guarantors, as defined in Section 79(1) of the IBC and Rule 3 of the 2019 Rules. The court noted that the statutory source of authority for such applications is found in Section 95 of the IBC, which permits creditors to initiate insolvency resolution processes against debtors, including individual guarantors.

3. Applicability of Section 128 of the Contract Act, 1872:
The court highlighted Section 128 of the Contract Act, 1872, which states that the liability of a guarantor is co-extensive with that of the principal debtor unless otherwise provided by the contract. The petitioner did not claim any agreement obliging the creditor to exhaust remedies against the corporate entity before proceeding against the guarantor. Therefore, the court held that the rule embodied in Section 128 applies equally to guarantors of credit facilities obtained by corporate entities, allowing the creditor to proceed against the guarantor without first exhausting remedies against the corporate entity.

Conclusion:
The court found no merit in the petition, deeming it a complete waste of time by an admitted defaulter. The court dismissed the petition and ordered the petitioner to pay costs of Rs. 50,000 to the respondent bank, which the bank could recover during the insolvency resolution process before the appropriate DRT. The court emphasized that the petitioner's attempts to restrict the application of Section 95(1) were unfounded and that the DRT is the correct forum for such insolvency proceedings. The court also reinforced the principle that a guarantor's liability is co-extensive with that of the principal debtor under Section 128 of the Contract Act, 1872.