IBC Does Not Require Prior CIRP Against Corporate Debtor To Initiate Guarantor Insolvency: NCLAT Delhi

The New Delhi National Company Law Appellate Tribunal (NCLAT) on 14 July held that financial creditors can directly initiate insolvency proceedings against personal guarantors without any pending Corporate Insolvency Resolution Process (CIRP) or liquidation proceedings against the corporate debtor.

Judicial Member Justice Mohd Faiz Alam Khan and Technical Member Naresh Salecha allowed appeals filed by UCO Bank against orders of the Kolkata Bench of the National Company Law Tribunal (NCLT), which had rejected insolvency applications filed against personal guarantors Subrata Das and Rahul Gupta of Haridra Vintrade Private Limited. The Bench observed:

“It can be said that the IBC is not contemplated to allow Personal Guarantor to escape independent liability merely because CIRP against the Corporate Debtor is pending or because the Corporate Debtor enjoy a memorandum or even no CIRP has been initiated against the Corporate Debtor at all.”

The appeals arose from orders passed by the NCLT, Kolkata, which had dismissed applications filed by UCO Bank under Section 95 of the Insolvency and Bankruptcy Code (IBC) seeking initiation of insolvency resolution process against Subrata Das and Rahul Gupta.

UCO Bank had sanctioned a cash credit facility of Rs. 250 lakhs to Haridra Vintrade Private Limited in July 2022. Subrata Das and Rahul Gupta, who were directors of the borrower company, executed personal guarantees for repayment of the facility. After the company defaulted, its account was classified as a Non-Performing Asset in March 2023.

The bank issued demand notices to the personal guarantors in June 2024, but they failed to clear the outstanding dues. It subsequently filed applications under Section 95 of the IBC before the NCLT, Kolkata, seeking initiation of insolvency proceedings against the guarantors. UCO Bank argued that despite the Interim Resolution Professional recommending admission of the applications, the NCLT had dismissed them.

The NCLT had proceeded on the understanding that insolvency proceedings against a personal guarantor could be initiated only if CIRP or liquidation proceedings against the corporate debtor had already commenced or been completed.

Rejecting this view, the NCLAT observed that Section 5(8) of the IBC includes liability arising from guarantees within the definition of “financial debt”. Therefore, a default in repayment of a guaranteed debt would constitute a default under the Code.

It further relied on Section 128 of the Indian Contract Act, 1872, which provides that the liability of a surety is co-extensive with that of the principal borrower unless the contract provides otherwise. It observed that once a default occurs, the creditor has the right to recover the amount from either the principal borrower or the surety, or both. It noted:

“We find that surety's liability to pay the debt is not removed by reason of the creditor's omission to sue the principal debtor. Such a creditor is not bound to exhaust his remedy against the principal debtor before suing the surety, and a suit may be maintained against the surety even though the principal debtor has not been sued. The argument is valid in favour of the Appellant to proceed against the Respondents in the present Appeal.”

Further, the Tribunal held that creditors can choose to proceed against personal guarantors independently, even where no CIRP or separate legal proceedings have been initiated against the corporate debtor. It observed:

“The Personal Guarantor can't insist that the creditors must first exhaust remedies against the Corporate Debtor, because both liabilities are co-extensive and the creditor has a concurrent right of action.”

Accordingly, the NCLAT allowed the appeals, set aside the orders passed by the NCLT, and remanded the matter for fresh consideration.

For Appellants: Advocates Sarfaraz Khan, Mirza Amir Baig & A. Wahid Mashaal