Resolution Professional's Report Is Recommendatory In Personal Guarantor Insolvency Cases: NCLAT

The National Company Law Appellate Tribunal (NCLAT) in Chennai has held that a Resolution Professional's report in personal insolvency cases is only recommendatory and does not bind the adjudicating authority.

It ruled that where debt, default, and the status of the personal guarantor are already established, the absence of such a report does not invalidate the proceedings.

A coram of Judicial Member Justice Sharad Kumar Sharma and Technical Member Jatindranath Swain observed,

“Upto the stage of submission of the report under Section 99 of the I & B Code, 2016, in fact the personal guarantor has got no role to play because the provisions of the Code till that point are only meant to facilitate the Tribunal to come to a conclusion. That is why Section 99 of the I & B Code, 2016, uses the word “recommending”. Thus, it has to be inferred that the report of RP is recommendary in nature and that, it is only for the aiding the Tribunal in taking a decision either to admit or to reject the Section 95 application.”

The tribunal dismissed an appeal filed by Dr Badri Prasad, promoter and director of Furnace Fabrica (India) Ltd. He had challenged an order of the Kochi bench of the National Company Law Tribunal admitting insolvency proceedings against him as a personal guarantor for loans extended by Tata Capital Financial Services Ltd.

In 2019, Tata Capital sanctioned term loans and working capital facilities worth ₹39.60 crore to Furnace Fabrica (India) Ltd. The sanction letter identified Dr Prasad as one of the personal guarantors. He also signed the guarantee documents.

After the company defaulted, its loan account was classified as a non-performing asset in December 2022. Tata Capital then issued demand and recall notices to the borrower and guarantors. It later initiated insolvency proceedings against Dr Prasad as a personal guarantor.

Dr Prasad argued that a memorandum of understanding executed in 2014 had removed him from the management of the company. He contended that he therefore could not be held liable under the guarantee. He also argued that the NCLT admitted the insolvency application without first considering the Resolution Professional's report, which he claimed was mandatory.

He further relied on a commercial suit, a complaint before the Registrar of Companies and company law proceedings to support his claim that he was no longer involved in the company's affairs.

The tribunal rejected these submissions. It held that Dr Prasad had admitted his status as a guarantor by signing the loan sanction letter and the guarantee documents. It ruled that he could not subsequently deny that liability.

The tribunal further observed that the Resolution Professional's report is intended only to assist the adjudicating authority in determining whether debt, default and guarantor liability exist.

The tribunal observed that the Resolution Professional's report is intended only to assist the adjudicating authority in determining whether debt, default, and guarantor liability exist.

It also held that a personal guarantor has no role in the proceedings until the stage when the adjudicating authority considers whether to admit the application.

In that context, it observed, “Up to the stage of proceedings under Section 100 of the I & B Code, 2016, the personal guarantor will have no role to play and cannot derive any benefit out of the contents of the report to object to the proceedings under Section 95 of the I & B Code, 2016.”

The tribunal also observed, “The admission of the Appellant regarding his status of a guarantor in itself as evident from the loan sanction letter and from the letter of guarantee is sufficient to initiate proceedings under Section 95 of the I & B Code, 2016.”

The tribunal also rejected Dr. Prasad's claim that he had signed the documents under duress. It observed that if the documents had been executed under coercion in 2019, he ought to have challenged them within a reasonable time. Instead, he raised the issue only after the company defaulted.

The tribunal further noted that the commercial suit, the complaint before the Registrar of Companies and the company petition relied upon by Dr Prasad were all initiated after the insolvency proceedings had already commenced. It held that those proceedings did not affect his liability as a guarantor.

The appeal was accordingly dismissed.