NCLT Delhi Dismisses Personal Guarantor's Insolvency Plea, Says It Was Filed To Take Advantage Of IBC Moratorium

The Delhi bench of the National Company Law Tribunal (NCLT) has dismissed a personal insolvency petition filed by a director and guarantor of two companies.

It held that the petition was filed to take advantage of the insolvency moratorium and stall recovery proceedings already initiated by Union Bank of India.

“The timing of the filing of the present petition is significant. The petition has been filed after crystallisation of recovery proceedings against the Personal Guarantor and after initiation of measures by the Financial Creditor for enforcement of its security. The filing of the petition resulted in the automatic triggering of interim moratorium under Section 96 of the IBC, thereby stalling recovery action against the Personal Guarantor and the secured assets.,” the bench comprising Judicial Member Manni Sankariah Shanmuga Sundaram and Technical Member Reena Sinha Puri observed.

The bench held that the petition was not a bona fide attempt at insolvency resolution. It was a “tactical measure to obtain the benefit of interim moratorium and frustrate recovery proceedings already initiated by the Financial Creditor.”

The case concerned Pradeep Kumar Jain, who was a director of Jain Timber Co. Pvt. Ltd. and Mittal Lumber Pvt. Ltd. He had also stood as personal guarantor for credit facilities obtained by the companies from Corporation Bank, formerly Corporation Bank's successor, Union Bank of India.

The two loan accounts were classified as non-performing assets on September 30, 2016 and August 31, 2016, respectively. The bank issued demand notices under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act on December 9, 2016.

When the dues remained unpaid, the bank issued a possession notice under Section 13(4) on March 30, 2017. It then took symbolic possession of the mortgaged properties.

The bank subsequently initiated recovery proceedings before the Debt Recovery Tribunal (DRT). The proceedings culminated in orders dated September 5 and September 14, 2019. Recovery Certificates were thereafter issued for Rs 9.32 crore and Rs 6.83 crore against the two companies and their personal guarantors.

Jain filed his Section 94 application on August 25, 2022. He sought to initiate an insolvency resolution process in respect of himself as a personal guarantor. Section 94 allows a personal guarantor to a corporate debtor to apply for initiation of an insolvency resolution process.

The NCLT appointed Resolution Professional Ashish Singh on December 22, 2022. It directed him to examine Jain's application and submit a report under Section 99. Singh recommended admission of the application after recording that Jain had committed a default, the debts were not excluded debts and the application had been filed in the prescribed form with the requisite fee.

Applications under Section 10 of the IBC were subsequently filed against the two corporate debtors. The applications were admitted in 2023, and both companies were ordered to be liquidated in September 2024.

Union Bank opposed Jain's application. The bank pointed out that both companies were under liquidation. It also told the tribunal that filing the Section 94 application had triggered an interim moratorium under Section 96, preventing it from proceeding with recovery against Jain and the secured assets.

Section 96 provides for an interim moratorium when a personal guarantor files an insolvency application. In this case, the moratorium stalled the bank's recovery action against Jain and the secured assets, the tribunal observed.

The tribunal noted that the timing of Jain's application was significant. It had been filed after the bank obtained the DRT orders and Recovery Certificates against the companies and their personal guarantors. The bank had also initiated measures to enforce its security.

The NCLT relied on the NCLAT's decision in Syed Sirajis Salikin Khadri v. Edelweiss Asset Reconstruction Company Ltd. & Anr. The appellate tribunal had held that a Section 94 application is liable to be dismissed when it is filed with the intent to stall recovery proceedings by seeking refuge under the Section 96 moratorium.

Applying that principle, the NCLT held that Jain's application had been filed with the object of taking advantage of the interim moratorium and obstructing the recovery process initiated by the financial creditor.

“IBC cannot be allowed to be used in a manner that defeats or delays legitimate recovery proceedings,” the bench observed.

It added that the existence of a statutory mechanism under Section 94 did not mean that every petition filed by a debtor had to be admitted mechanically.

This was particularly so where the surrounding circumstances indicated an abuse of process.

The NCLT rejected the Resolution Professional's report recommending admission of the application. It consequently dismissed Jain's Section 94 insolvency petition.