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Filling Under Insolvency Code Against Guarantor Without Filling Against The Corporate Debtor

In State Bank of India, Stressed Asset Management Branch Vs. Mahendra Kumar Jajodia, Personal Guarantor to Corporate Debtor, appeal was filed against the order of the NCLT, Kolkata rejecting the CIRP application filed by the Appellant under Section u/s. 95(1) of the Insolvency and Bankruptcy Code, 2016 seeking initiation of Insolvency Resolution Process against the guarantor as premature since no CIRP or Liquidation Process is pending against the principal borrower/Corporate Debtor.

Background

The Appellants argument was that the application was fully maintainable under Section 60(1) of the Code despite there being no pendency of any Corporate Insolvency Resolution Process in National Company Law Tribunal (NCLT in short).

Section 60 of the Code has 2 parts. Subsection 1 states that the Adjudicating Authority or Tribunal in question for insolvency resolution and liquidation for corporate persons including corporate debtors and personal guarantors thereof shall be the NCLT having territorial jurisdiction over the place where the registered office of the corporate persons located.

While Section 2 states that notwithstanding whatever has been said under Section 1, an application relating to the insolvency resolution or liquidation or bankruptcy of a corporate guarantor or personal guarantor shall be filed in the same NCLT where an application for CIRP or liquidation against the Corporate Debtor is pending.

Judgment 

While agreeing with the Appellant opined that the Application filed by the Appellant was fully maintainable and could not have been rejected only on the ground that no CIRP or Liquidation Proceeding of the Corporate Debtor are pending before the NCLT.

Opinion/Note

Unfortunately as a judgment goes, the NCLAT order is at little unsatisfactory. The Supreme Court has always maintained that it is imperative that the court clearly expresses its views when passing judgment. This one is neither here not there. Initiating action against guarantors independent of the borrower is allowed in DRTs which however is a recovery process while IBC is resolution. However, it should be noted that in Laxmi Pat Surana vs. Union Bank of India & Anr, while allowing an application under Section 7 of the Code, the Supreme Court held that the obligation of the guarantor is coextensive and coterminous with that of the principal borrower to defray the debt, as predicated in Section 128 of the Contract Act, 1872. As a consequence of such default, the status of the guarantor metamorphoses into a debtor or a corporate debtor if it happens to be a corporate person, within the definition of 'corporate debtor' under the IBC. It should however noted that in this case the guarantor was a company.

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