The provisions of the Insolvency and Bankruptcy Code, 2016 (the “Code”) in relation to personal guarantors (“PG”) to corporate debtor (“Corporate Debtor”) have been effective since December 1, 2019. However, whether a corporate insolvency resolution process (“CIRP”) (or even a pending application to initiate such a process) against the Corporate Debtor is a pre-requisite for initiation of insolvency resolution process or bankruptcy process against the PG under the Code (“PG Proceedings”) before the National Company Law Tribunal (“NCLT”) has been a question that continued to vex the judicial for some time, until recently the Honourable Supreme Court, in Mahendra Kumar Jajodia v. SBI Stressed Assets Management Branch (“Mahendra Kumar Case”), upheld the National Company Law Appellate Tribunal (“NCLAT”) order holding that the NCLT has jurisdiction over PG Proceedings, regardless of any CIRP or liquidation proceedings pending against the Corporate Debtor before it.
This blog analyses the background, the developments so far and the position after the Apex Court’s order.
Section 60 of the Code – interpretation to date
Section 60(1) of the Code prescribes that the adjudicating authority in relation to CIRP or liquidation process for corporate persons, including corporate debtors and PG, will be the jurisdictional NCLT. Further, Section 60(2) of the Code states that an application relating to insolvency resolution or liquidation or bankruptcy of a corporate guarantor, or PG of the Corporate Debtor, shall be filed before the NCLT where CIRP or liquidation proceeding of the Corporate Debtor is pending. Section 60(3) of the Code prescribes for transfer of existing proceedings against the PG before any court/tribunal to the jurisdictional NCLT of the Corporate Debtor.
It may be noted that the NCLT’s jurisdiction for PGs (as mentioned in Section 60(1)) appears unqualified and not subject to any other provision. Also, while Section 60(2) starts with a non-obstante language, it preserves the operation of Section 60(1) (refer to usage of the words “Without prejudice to Section 60(1)”) thereby confirming that the application for a new PG Proceeding will lie before the jurisdictional NCLT of the Corporate Debtor in case where CIRP is pending in respect of the Corporate Debtor. However, neither Section 60(1) or 60(2) does not cover the situation where a PG Proceeding is already pending. The same appears to be covered under Section 60(3) of the Code, which talks about transfer of existing PG Proceedings to the jurisdictional NCLT of the Corporate Debtor. However, while usage of the words ‘court/tribunal’ indicates that a PG Proceeding may be existing either before the Debts Recovery Tribunal (“DRT”) or the NCLT, it is yet to be considered whether S. 60(3) should be held as a transitory provision. One may opine since this provision has been a part of the Code right from the beginning, the drafters meant to indicate that all PG Proceedings pending before any court prior to enactment of the Code will stand transferred to the jurisdictional NCLT. Conversely, it can also be said that it was envisaged that all such PG Proceedings which were initiated before any other NCLT (being the Adjudicating Authority under Section 60(1)) post the date of Notification (even in absence of any pending CIRP) will be transferred to the jurisdictional NCLT of the Corporate Debtor upon initiation of the CIRP.
The Hon’ble Supreme Court, in State Bank of India v. V. Ramakrishnan and anr., noted that the moment there is a proceeding pending against the Corporate Debtor under the Code, any PG Proceeding, if initiated before the Corporate Debtor’s CIRP, will be transferred to the NCLT, or, if the same is initiated after such CIRP had commenced, the application for initiation of such PG proceeding will be filed only in the NCLT having jurisdiction over the Corporate Debtor. While this judgment gave credence to the view that a PG Proceeding can be started independently even before the initiation of CIRP, the judgement was not unambiguous as to whether the same can be initiated before NCLT or only DRT.
Moreover, the Report of the Working Group on Individual Insolvency, issued in August 2017, mentioned (as a Specific Recommendation) that NCLT is the forum for PGs falling within the ambit of Sections 60(2) and 60(3) of the Code, and in all other cases of other individuals and firms, the relevant forum is the DRT. However, here also, it was not specifically clarified if the jurisdiction for PGs can lie before the NCLT or only the DRT (where no CIRP is pending).
Further, in Lalit Kumar Jain v. Union of India and Ors. (“Lalit Kumar Case”), the Supreme Court, while upholding the constitutional validity of the Notification (at paragraph 108 as set out below) noted that Section 60(2) of the Code prescribes filing an application for initiating PG Proceedings with the NCLT, only in the event of an ongoing CIRP or liquidation process against the Corporate Debtor. It held as follows:
“Section 60(2) prescribes that in the event of an ongoing resolution process or liquidation process against a corporate debtor, an application for resolution process or bankruptcy of the personal guarantor to the corporate debtor shall be filed with NCLT concerned seized of the resolution process or liquidation. Therefore, the Adjudicating Authority for personal guarantors will be NCLT, if a parallel resolution process or liquidation process is pending in respect of a corporate debtor for whom the guarantee is given. The same logic prevails, under Section 60(3), when any insolvency or bankruptcy proceeding pending against the personal guarantor in a court or tribunal and a resolution process or liquidation is initiated against the corporate debtor. Thus if A, an individual, is the subject of a resolution process before the DRT and he has furnished a personal guarantee for a debt owed by a company B, in the event a resolution process is initiated against B in an NCLT, the provision results in transferring the proceedings going on against A in the DRT to NCLT.”
The Supreme Court also noted that the intent behind the Notification was to ensure the clubbing of the respective proceedings before the same forum viz. the NCLT. This judgment also did not directly address the abovementioned query regarding NCLT’s jurisdiction for PG Proceeding in absence of a CIRP.
The Conflict: NCLT Mumbai & Madras High Court v. NCLT Delhi
NCLT Mumbai –
The NCLT Mumbai Bench, in the cases of Altico Capital India Ltd. v. Rajesh Patel & Ors. and Insta Capital Pvt. Ltd. v. Ketan Vinod Kumar Shah, while interpreting Section 60(2) of the Code, refused to admit insolvency resolution application against the PG on the grounds that filing of such an application before the NCLT, when the Corporate Debtor was not under CIRP or liquidation, would tantamount to vesting NCLT with the jurisdiction of DRT.
Madras High Court –
In the case of Rohit Nath v. KEB Hana Bank Ltd., the Hon’ble Madras High Court dealt with a civil revision petition filed by a PG against a pending PG Proceeding before the DRT. Herein, the Madras High Court, while dismissing the petition, interpreted Section 60(2) of the Code to mean that Section 60 would apply to PGs only when the Corporate Debtor is undergoing CIRP. Further, it also noted that where no CIRP has been initiated against the Corporate Debtor, PG Proceedings must necessarily be carried only to the jurisdictional DRT and not to any other forum.
NCLT Delhi –
On the other hand, in the case of PNB Housing Finance Ltd. v. Mr. Mohit Arora and Ors. (“Mohit Arora case”), a financial creditor had filed an application under Section 95 of the Code to initiate insolvency resolution process against the PG to a Corporate Debtor against which multiple applications for initiating CIRP were already pending (notably, not admitted hence CIRP not commenced). The NCLT Delhi Bench interpreted the term in relation to in Section 60(1) of the Code to mean that the moment an application for initiation of CIRP or liquidation against the Corporate Debtor is filed and remains pending before the NCLT, the provisions of Section 60(1) of the Code would become applicable, thereby bestowing/affording NCLT the jurisdiction to entertain insolvency resolution process against the PG. This rationale was followed in the case of PNB Housing Finance Ltd. v. Goldy Gupta. Notably, the aforementioned judgments of the NCLT Mumbai Bench and the Madras High Court were not considered by the Delhi Bench before reaching this conclusion in the order (even though the petitioners referred to these cases in their submissions).
Mahendra Kumar Case
On October 5, 2021, in the case of State Bank of India v. Mahendra Kumar Jajodia, the NCLT Kolkata Bench rejected an application seeking to initiate insolvency resolution process against the PG, filed by a financial creditor under Section 95 of the Code, as no CIRP or liquidation process was pending against the Corporate Debtor.
Upon appeal against the NCLT decision, the NCLAT vide order dated January 27, 2022 set aside the order of the NCLT and held that:
(a) the idea of Section 60 of the Code is to ensure the consolidation of the respective proceedings before the same NCLT and it does not in any way prohibit filing of proceedings under Section 95 of the Code, even if no proceedings against the Corporate Debtor are pending before NCLT; and
(b) even when a particular case is not covered in Section 60(2), an application to initiate PG Proceedings can very well be filed in the jurisdictional NCLT, as per Section 60(1) of the Code, being a substantive provision.
Supreme Court’s Order
Upon appeal against the NCLAT’s order, the Hon’ble Supreme Court, initially vide order dated March 21, 2022 stayed the operation of NCLAT order and subsequently, vide order dated May 6, 2022, dismissed the appeals simpliciter and upheld the NCLAT order by holding that they do not see any cogent reason to entertain the appeal, and that the judgment impugned does not warrant any interference.
While a summary order, the Supreme Court’s order clarifies the position that the jurisdictional NCLT of a corporate person can entertain application for initiation of PG Proceedings under Section 60(1), irrespective of any pending (i) CIRP or liquidation proceedings against the Corporate Debtor or (ii) applications for initiation of CIRP against the Corporate Debtor. Further, if any CIRP or liquidation proceeding is pending before the NCLT, then the PG Proceedings must also be initiated before such NCLT, as per Section 60(2).
While the order passed by the Hon’ble Apex Court has clarified the position on this issue, there are a few aspects which may need some consideration –
- As per the NCLAT’s order, the idea behind Section 60(2) is to achieve consolidation of PG Proceedings and CIRP/liquidation proceedings where CIRP/liquidation proceeding is pending before a NCLT. However, it is still not clear whether such consolidation is envisaged even where an application for initiation of CIRP is pending before the NCLT. As was held by the Hon’ble Supreme Court in Embassy Property Developments Private Limited v. State of Karnataka & Ors. (“Embassy Case”), while interpreting the terms ‘arising out of or in relation to’ in Section 60(5)(c), the jurisdiction of NCLT cannot be interpreted to include all questions of law or facts under the sky, including questions at the time of initiation of CIRP, otherwise the jurisdiction of NCLT would be considered to have been stretched to bring absurd results. Therefore, there may arise situations where PG Proceedings are admitted, however, the adjudication on default by a corporate debtor is still pending.
- As noted previously, it still needs to be considered whether S. 60(3), which covers the situation where no CIRP is pending, is a transitory provision or not. This aspect on interpretation of Section 60(3) was not covered in the NCLAT’s order.
While the intent behind the provisions, as reiterated in the Lalit Kumar case, was to achieve clubbing of the respective proceedings (against the Corporate Debtor and the PG) before the same forum (i.e. NCLT), the Supreme Court’s view in the matter certainly seems to bring relief to the creditors who now have the liberty to exercise their rights against the PG before the NCLT to derive maximum value from his/her assets even in absence of a CIRP. Also, this view is in consonance with the NCLAT judgment in State Bank of India v. Athena Energy Ventures Limited and the ILC Report, as per which creditors have the right to initiate simultaneous insolvency proceedings against the principal borrower as well as the guarantor, though it must be mentioned that these relate to the substantive rights rather than the issues of jurisdiction.
*The authors were assisted by Associate, Tushar Kumar
 Civil Appeal No. 1871-1872/2022, Supreme Court.
 (2018) 17 SCC 394, para 24.
 (2021) 9 SCC 321, paras 105 and 108.
 I.A. 1062/ 2021 in C.P. 293/ 2020.
 2021 SCC Online NCLT 486, para 18.
 2021 SCC Online Mad 2734, para 23.
 2021 SCC Online NCLT 488, paras 31 and 32.
 2021 SCC Online NCLT 487, para 20.
 C.P. (IB)/230 (KB) 2021, para 2.
 (2020) 13 SCC 308, para 37.
 Similar was held by the Calcutta High Court in the case of Kolkata Municipal Corporation and Anr. v. Union of India and ors,.2021 SCC Online Cal 145.
 Company Appeal (AT) (Ins) No. 633 of 2020, para 19.
 Report of the Insolvency Law Committee, Ministry of Corporate Affairs, February 2020, Page 32.