Insolvency Against Personal Guarantor Maintainable Without CIRP Against Borrower: NCLT Kolkata

The National Company Law Tribunal (NCLT) at Kolkata has reiterated that insolvency proceedings against a personal guarantor can be maintained even if no insolvency proceedings have been initiated against the principal borrower.

The ruling came while admitting Indian Bank's insolvency application against Santosh Jhawar, personal guarantor to Burgundy Life Style Pvt Ltd.

A bench of Judicial Member Bidisha Banerjee and Technical Member Rekha Kantilal Shah relied on the National Company Law Appellate Tribunal's ruling in Anita Goyal v. Vistra ITCL (India) Ltd., which held that proceedings against a personal guarantor can be maintained even in the absence of proceedings against the principal borrower.

“The maintainability of a Section 95 proceeding is not conditioned upon prior or parallel initiation of CIRP against the Principal Borrower, and consequently, no explanation is warranted for the Financial Creditor's choice to proceed directly against the Personal Guarantor. This Tribunal finds no merit in the said objection and the same stands rejected accordingly.”, it ruled.

Indian Bank had extended various credit facilities to Burgundy Life Style Pvt Ltd in March 2010. Santosh Jhawar executed a personal guarantee in favour of the bank to secure those facilities.

The borrower's account was classified as a non-performing asset on March 31, 2016. The bank thereafter issued a demand notice under the SARFAESI Act to the borrower and its guarantors.

In Januray 2024, the bank issued a demand notice Ti Jhawar seeking unpaid dues. It later moved tribunal for it. Challenging this, he contented that the proceedings were timebarred. He also contented that since no proceedings exist against the borrower, no prceedings could lied against him.

The tribunal rejected the limitation objection. It noted that the borrower had repeatedly acknowledged the debt through settlement proposals between 2019 and 2020.

Referring to Supreme Court and NCLAT rulings, the tribunal observed that acknowledgements by a principal borrower can extend the limitation period against a guarantor as well. It therefore held that the bank's application was filed within time.

It also rejected the challenge to the demand notice.

“The ground of lack of authority of the issuing officer has been contended by the Respondent without placing on record a single document, material, or evidence in support.”

On the question of service of notice, the tribunal found that the bank had sent the notice to the address provided in the deed of guarantee. It held that service at the last known address constituted valid service in law.

Finding no merit in any of the objections raised by Jhawar, the tribunal admitted the insolvency application and commenced the insolvency resolution process against him.

The tribunal also declared a moratorium in relation to all debts. Resolution Professional Chandra Kumar Jain was directed to invite claims from creditors and submit a status report within eight weeks.