SARFAESI, DRT Proceedings Do Not Bar IBC Action Against Personal Guarantor: NCLT Mumbai

The National Company Law Tribunal (NCLT) in Mumbai has recently held that proceedings under the SARFAESI Act and pending recovery proceedings before the Debt Recovery Tribunal do not bar insolvency proceedings against a personal guarantor to a corporate debtor under the Insolvency and Bankruptcy Code, 2016.

A coram of Judicial Member Nilesh Sharma and Technical Member Sameer Kakar passed the ruling while admitting an insolvency application filed by Canara Bank against Shewta Deepak Patel, personal guarantor to Swaminarayan Diamonds Private Limited.

The tribunal was dealing with an objection raised by the personal guarantor. She argued that Canara Bank had already initiated proceedings under the SARFAESI Act and had also filed an Original Application before the DRT under the Recovery of Debts and Bankruptcy Act, 1993. According to her, the insolvency proceedings were being used merely as a recovery mechanism.

Rejecting the contention, the bench observed:

“As regard the objection of the Personal Guarantor that the applicant has already resorted to SARFAESI Action and has also filed OA before learned and view of the same the intent of the applicant is to use this petition as a means of recovery rather than for Resolution, we are of the view that the said objection is not tenable for the reason that the provisions of IBC, 2016 override the provisions of SARFAESI Act, 2002 and also of RDDB Act, 1993 as result of the provision of section 238 of IBC”.

The bank had extended various credit facilities to Swaminarayan Diamonds Private Limited. These included an OCC facility of ₹38 crore and GECL Working Capital Term Loans of ₹5 crore and ₹6.4 crore. A personal guarantee dated February 21, 2019 was executed in favour of the bank.

Following default by the borrower, the account was declared NPA on July 5, 2024. The bank thereafter issued a demand notice under Section 13(2) of the SARFAESI Act to both the borrower and the guarantor.

The personal guarantor opposed the insolvency proceedings. She contended that the insolvency process was being misused merely as a recovery mechanism and could not be pursued alongside pending recovery proceedings before the DRT and under SARFAESI.

Rejecting the contention, the tribunal held that the IBC overrides the provisions of SARFAESI and the RDDB Act by virtue of Section 238 of the Code. The Bench observed that proceedings under the IBC against personal guarantors are not recovery proceedings. It said they are intended for restructuring and resolution of debts through a repayment plan.

The Tribunal observed:

“Invocation of provisions of SARFAESI Act and filling of an OA before Ld. DRT do not invalidate the filling of application u/s 95 of IBC, 2016, which is not for making of the recovery from the Personal Guarantor, rather the same is for restructuring and resolution of the dues of the Personal Guarantor by way of a agreed repayment plan”

The Bench relied on NCLAT rulings in Y.Y. Butchi Babu v. State Bank of India and Sri Vibu Venkatsubramanian v. State Bank of India. It held that pending DRT or SARFAESI proceedings do not bar action under the IBC.

The tribunal ultimately admitted the insolvency petition and initiated insolvency resolution proceedings against the personal guarantor. Megha Agarwal was appointed as the Resolution Professional