Individual Consortium Lender Can Initiate Insolvency Proceedings Against Personal Guarantor: NCLT Delhi

The New Delhi Bench of the National Company Law Tribunal (NCLT) has held that an individual consortium lender can initiate insolvency resolution proceedings under the Insolvency and Bankruptcy Code (IBC) against a Personal Guarantor without requiring all consortium lenders to jointly institute the proceedings.

Judicial Member Manni Sankariah Shanmuga Sundaram and Technical Member Reena Sinha Puri rejected the objections raised by Amit Sethi, a Personal Guarantor of Santosh Overseas Limited, and admitted the application filed by State Bank of India (SBI) under Section 95 of the IBC. The Tribunal observed:

“Section 95 permits a creditor to file an application either by itself, jointly with other creditors, or through a resolution professional. The provision does not require all consortium lenders to collectively institute proceedings against a personal guarantor”

SBI had extended loan facilities to Santosh Overseas Limited from 2015, secured, among other things, by Sethi's personal guarantee. The borrower defaulted, and its account was classified as a non-performing asset (NPA) on 31 March 2017.

Subsequently, SBI issued a demand notice to Sethi on 29 June 2021, but he failed to discharge the liability. SBI subsequently filed an application under Section 95(1) of the IBC.

The NCLT appointed Deepak Mittal as the Resolution Professional (RP) under Section 99 by an order dated 30 July 2024. The RP recommended initiation of insolvency proceedings against Sethi.

Sethi opposed the application, contending that it was deceptive, barred by limitation and inconsistent with the notice issued under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act).

He also argued that the consortium had failed to implement the sanctioned package and that SBI had acted arbitrarily by pursuing proceedings before the Debt Recovery Tribunal (DRT) while participating in the resolution process of the corporate debtor. He further contended that conclusion of insolvency proceedings against the principal debtor extinguished claims against the guarantor. The Tribunal rejected the objections.

On limitation, it held that liability under a continuing guarantee remains in force until the debt is repaid and that limitation begins when the guarantor fails to comply with a demand made under the guarantee. Since SBI issued the demand notice on 29 June 2021 and filed the application on 27 August 2021, the Tribunal held that the application was within limitation.

On whether all consortium lenders were required to act jointly, the Bench relied on the NCLAT's decisions in Dheeraj Wadhawan v. Union Bank of India and Amit Dineshchandra Patel v. SBI, which held that Section 95 permits individual creditors to independently initiate proceedings. It held:

“In view of the aforesaid statutory position and the decisions of the Hon'ble NCLAT, we hold that an individual consortium lender is competent to file an application under Section 95 of the Code. The objection raised by the Personal Guarantor on this ground is accordingly rejected.”

The Tribunal also rejected the contention that resolution or liquidation of the principal debtor extinguishes the guarantor's liability. It noted that a valid and subsisting guarantee continues to bind the guarantor and that Sethi's guarantee deed expressly provided that his liability would continue until full repayment of the debt.

Further, the Bench found no violation of natural justice, noting that the RP's report had been served on Sethi and that he had been given an opportunity to respond. It accepted the RP's report and imposed a moratorium under Section 101 for 180 days.

Accordingly, the NCLT admitted SBI's application under Section 95 and commenced insolvency resolution proceedings against Sethi.

For Applicants: Advocates Prafful Saini & Harshit Khare