Coparcener Claiming Guarantor's Property Cannot Intervene In Guarantor's Insolvency Case: NCLAT

The National Company Law Appellate Tribunal (NCLAT) at Delhi has recently held that a person claiming coparcenary rights over a guarantor's property cannot be impleaded in personal guarantor insolvency proceedings (Section 95), as such proceedings are confined to personal guarantors.

A bench of Judicial Member Justice Sharad Kumar Sharma and Technical Member Jatindranath Swain emphasised that the Insolvency and Bankruptcy Code limits such proceedings to specific individuals acting as guarantors.

“The law quite specifically, as intelligently uses the words 'individual and who is surety in a contract of guarantee', meaning thereby that the provisions contained under Sub-Section (22) of Section 5 of the I & B Code, 2016, describing the personal guarantor, has confined it to an individual, only and not a group of persons who have executed a guarantee,” the tribunal said.

“The reason behind is that the law has intentionally used the word 'individual', here because otherwise under the I & B Code, the person had been independently defined and that is why under Sub-Section (22) of Section 5 of the I & B Code, 2016, the word 'person', has not been used, which could have include the person as defined under Sub-Section (23) of Section 3 of the I & B Code, 2016, which includes apart from individual, HUF, trust, partnership, LLP and any entity established under a statute and such other hierarchy of family,” the bench added.

“Hence, from that perspective, if the proceedings under Section 95 of the I & B Code, 2016, is restricted to be regulated against the personal guarantors, as defined under Sub-Section (22) of Section 5 of the I & B Code, 2016, and when Section 95 of the I & B Code, 2016, in itself restricts its proceedings against the guarantors, a person claiming the coparcenary right may not be falling within the zone of consideration to be impleaded for the purposes of deciding the proceeding under Section 95 of the I & B Code, 2016,” it observed.

The ruling came on an appeal filed by a man who claimed a coparcenary interest in property belonging to his late mother, one of the guarantors for a loan extended to Maruthi Tubes Pvt. Ltd. The company had already undergone insolvency proceedings and was subsequently dissolved.

The property had been offered as security under the guarantee arrangement. He sought to intervene in proceedings initiated by the financial creditor under Section 95 of the Insolvency and Bankruptcy Code against his brother, who had separately executed a personal guarantee.

The tribunal noted that the Section 95 proceedings were initiated only against the brother as the personal guarantor. The appellant was not a party to the contract of guarantee and was not claiming any coparcenary rights in respect of the assets of the personal guarantor against whom the proceedings were pending.

It also noted that the appellant had already filed a civil suit seeking partition of the joint family property. The suit is still pending. No court has yet determined his coparcenary rights. In such circumstances, the Tribunal held that he could not insist on being impleaded in the insolvency proceedings.

The bench clarified that proceedings under Section 95 are governed by a special statutory framework. They do not involve adjudication of private rights arising from succession or coparcenary. Such rights must be decided in appropriate civil proceedings.

On the issue of intervention, the Tribunal reiterated that only those parties whose presence is necessary for effective adjudication can be impleaded. Since the liability of a guarantor flows strictly from the contract of guarantee, a person who is not a party to that contract cannot claim a right to participate in such proceedings.

Explaining the nature of a guarantee, the bench observed, “The contract of guarantee, is an assurance of the performance of an act or a promise to discharge the liability of a principal debtor in case of default, debtor. The Appellant herein under no circumstance is falling under the terms of the contract of guarantee and therefore, he will not be necessary party for the purpose of deciding the proceedings under Section 95 of the I & B Code, 2016.”

It also emphasised that the definition of “personal guarantor” under the Code is limited to an individual who has acted as a surety under a contract of guarantee. A person asserting rights in relation to another guarantor's property would not fall within the scope of such proceedings.

Finding no merit in the appeal, the tribunal dismissed it.