NCLT's Scrutiny Of Applicant's Standing To Invoke Personal Insolvency Process Is Not Adjudication: Karnataka HC

The Karnataka High Court has held that the National Company Law Tribunal (NCLT) is entitled to examine whether an applicant possesses the requisite locus standi to invoke the personal guarantor insolvency framework before permitting the process to proceed.

The court held that such an exercise does not amount to an adjudication of the insolvency claim on merits.

Justice Suraj Govindaraj observed:

“Thus, when the National Company Law Tribunal examines whether an applicant possesses the requisite locus standi to maintain an application under Section 94, it is not adjudicating the insolvency claim itself. It is merely determining whether the applicant has crossed the threshold necessary for the invocation of the statutory mechanism.”

The court added, "Such an exercise is akin to a civil court examining whether a suit is maintainable, whether the plaintiff possesses locus standi, whether the action is barred by limitation, or whether the court possesses jurisdiction to entertain the proceedings. The determination of such preliminary issues cannot be equated with adjudication of the substantive dispute."

The observation came while dismissing a writ petition filed by K.C.M. Gowda. He had challenged an order of the NCLT, Bengaluru, which rejected his application to initiate voluntary insolvency proceedings after concluding that he had failed to establish that he was a personal guarantor. The High Court also imposed costs of ₹1 lakh.

Gowda had approached the NCLT claiming that he was a personal guarantor for credit facilities extended by Aditya Birla Capital Ltd. to Ace Embedded Intensive Care Units Pvt. Ltd. He contended that the invocation of the alleged guarantee entitled him to initiate insolvency proceedings.

The NCLT dismissed the application after concluding that Gowda had failed to establish that he was a personal guarantor. Challenging that order, Gowda contended before the High Court that the Tribunal exceeded its jurisdiction by examining his status at the threshold stage. He argued that the Tribunal ought to have proceeded under the statutory scheme and appointed a Resolution Professional.

Appearing for Aditya Birla Capital, Senior Advocate C.K. Nandakumar opposed the petition. He contended that Gowda was a co-borrower and not a personal guarantor. He further contended that the NCLT was required to satisfy itself that a person invoking its jurisdiction possessed the legal standing necessary to do so.

Accepting the respondent's contention, the High Court observed,

“When jurisdiction is invoked on the basis of a particular legal status claimed by an applicant, the Adjudicating Authority cannot be expected to accept such assertion at face value and proceed mechanically. Jurisdiction cannot be conferred by a mere assertion made in an application. The existence of the jurisdictional fact must first be established before the authority proceeds to exercise powers under the statute.”

The court observed that an inquiry into jurisdictional facts is distinct from an adjudication on the merits of an insolvency claim. It observed that such an inquiry precedes any determination of substantive rights, liabilities, and entitlements of the parties.

The court further observed that accepting the petitioner's contention would require the NCLT to appoint a Resolution Professional even where an applicant was not entitled to invoke the insolvency framework. The Court held that such an interpretation was neither borne out by the language employed in the statute nor consistent with the overall scheme of the Code.

It further observed, “The legislature could not have intended that such consequences should follow merely upon a self-serving assertion made by an applicant without any scrutiny whatsoever by the Adjudicating Authority.”

The court observed that the consequences flowing from an application were not merely procedural or insignificant. It noted that an interim moratorium comes into operation upon the filing of an application and affects the rights and remedies of creditors. The court therefore held that threshold scrutiny serves as a safeguard against abuse of the insolvency process.

On the facts, the court found that the sanction letter relied on by Gowda described him as a co-borrower. The Court also found that the facility agreement categorised him as a co-borrower. It further observed that no deed of guarantee, contract of guarantee, undertaking of guarantee or other instrument creating liability as a guarantor had been produced despite repeated opportunities.

Justice Govindaraj further observed:

“Merely because the creditor has described the Petitioner as a personal guarantor in the said notice, it does not follow that the Petitioner acquires the legal status of a personal guarantor.”

The court observed that the status of a personal guarantor must arise from a valid contractual instrument creating obligations of guarantee and not from a unilateral description contained in a subsequent notice.

Finding no infirmity, illegality, perversity or jurisdictional error in the NCLT's order, the High Court dismissed the writ petition. The Court also imposed costs of ₹1 lakh.

It observed that Gowda had invoked the jurisdiction of the NCLT without establishing the foundational facts necessary to maintain an application. The Court further observed that he persisted with the writ proceedings despite the availability of appellate remedy.