Proposed ARC Debt Assignment Doesn't Bar Insolvency Proceedings Against Personal Guarantor: NCLT Delhi

The Principal Bench of the National Company Law Tribunal (NCLT) at Delhi on 12 October held that a financial creditor's proposal to assign its debt to an Asset Reconstruction Company (ARC) does not prevent it from initiating insolvency proceedings against a personal guarantor.

A Bench comprising President Justice Anupinder Singh Grewal and Technical Member Ravindra Chaturvedi admitted Yes Bank's application under Section 95(1) of the Insolvency and Bankruptcy Code, 2016 (IBC), against Rajesh Madan, personal guarantor of Johnson Watch Company Pvt. Ltd. It observed:

“Further, the argument of the PG that negotiation talks are underway for assigning the FC's debt to an Asset Reconstruction Company, we observe that the same is a baseless statement without any proof or substance. In any event, the mere expectation/possibility of the future assignment of a debt by the FC cannot operate as a bar or disentitle the FC from initiating insolvency proceedings against the PG in accordance with the provisions of law presently enforceable.”

Johnson Watch Company had availed credit facilities from Yes Bank, including cash credit limits of up to Rs. 32 crore, subsequently reduced to Rs. 25.5 crore. Madan and other family members executed personal guarantees between 2013 and 2018 to secure the facilities.

After defaults, Yes Bank classified the corporate debtor's account as a non-performing asset on 16 March 2023 and issued recall and guarantee invocation notices. The bank also initiated proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).

Swiss Promotions Private Limited filed an application under Section 9 of the IBC against Johnson Watch Company, which was admitted on 17 January 2024. The dues remained unpaid, prompting Yes Bank to invoke the personal guarantee and seek insolvency proceedings against Madan for a debt of Rs. 17.07 crore.

The Tribunal appointed Mavent Restructuring Services LLP as the Resolution Professional (RP) under Section 97 of the IBC to examine the application. In its report under Section 99, the RP recommended admission, finding the application complete and the default established.

Madan opposed the application, arguing that the SARFAESI notices and Form B did not constitute valid invocation of the personal guarantee. He disputed service of a notice and contended that his liability had not arisen without valid invocation. He also alleged that the RP had accepted Yes Bank's claims without independently verifying the guarantee invocation.

He also argued that the pending corporate insolvency resolution process (CIRP) against Johnson Watch Company made his liability uncertain. He also claimed that Yes Bank was negotiating to assign its debt to an ARC, which, according to him, affected the bank's right to initiate proceedings.

Rejecting the challenge to the guarantee invocation, the Tribunal held that the SARFAESI notice under Section 13(2) constituted valid invocation, even if the notice dated 24 May 2023 was disputed. It relied on Ujwal Gupta v. Union Bank of India, to observe that a notice demanding payment from guarantors under Section 13(2) could constitute valid invocation under the guarantee agreement.

Further, the Bench rejected the allegation that the RP had failed to independently assess the application, finding the objection unsubstantiated. It relied on SBI v. Mahendra Kumar Jajodia, and reiterated that insolvency proceedings against a personal guarantor are maintainable irrespective of the status of the CIRP against the corporate debtor.

It held that the possibility of a future assignment to an ARC did not bar the proceedings. It also found that the requirements under Section 100(1) of the IBC were satisfied, as the application was complete, the debt was due and payable, and the default remained unpaid.

Accordingly, the NCLT admitted Yes Bank's application, initiated the insolvency resolution process against Madan, imposed a moratorium and appointed Mavent Restructuring Services LLP as the RP.

The matter is listed for the RP's status report on 25 November.