Corporate Debtor's Sub-Threshold Default Does Not Bar Personal Guarantor Insolvency: NCLT Chennai

The National Company Law Tribunal (NCLT) at Chennai on 15 September held that insolvency resolution proceedings can be initiated against a personal guarantor even when the corporate debtor's default is below the statutory threshold for initiating the Corporate Insolvency Resolution Process (CIRP).

A Bench comprising Judicial Member Jyoti Kumar Tripathi and Technical Member Ravichandran Ramasamy observed:

“The default of the Corporate debtor is below the threshold prescribed for initiation of the Corporate Insolvency Resolution Process under Section 4 of the IBC. However, the absence of a qualifying default for initiation of CIRP against the Corporate Debtor does not, by itself, bar the initiation of individual insolvency resolution proceedings against the Personal Guarantor under the applicable provisions of the IBC.”

V. Lakshmi, a personal guarantor for Vahanashree Marketing Services Private Limited, filed an application under Section 94(1) of the Insolvency and Bankruptcy Code (IBC) seeking initiation of insolvency resolution proceedings against herself.

She had also furnished personal guarantees for credit facilities availed from Tamilnad Mercantile Bank (TMB) by Shree Varsha Papers and Valarthiru Print Packs. After the accounts turned into non-performing assets, TMB issued demand notices under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act. The application disclosed a default of Rs. 1,13,52,633.58 owed to TMB and Rs. 53,75,428 owed to M. Ramachandran in connection with Vahanashree Marketing Services.

The Tribunal had appointed Prabhu S as Resolution Professional pursuant to an interim order dated 30 September 2025. After examining the loan documents, recall notices, bank statements and SARFAESI records, he confirmed the default and recommended admission of the application.

TMB opposed the application, stating that the mortgaged property had already been sold at an auction for Rs. 1.21 crore after Lakshmi failed to comply with the conditions of a conditional stay granted by the Debt Recovery Tribunal, Coimbatore.

A sale certificate was issued on 31 May 2024, and her appeal before the Debt Recovery Appellate Tribunal was subsequently dismissed. TMB alleged that Lakshmi had suppressed the auction and partial recovery of its dues and had approached the Tribunal to circumvent the SARFAESI proceedings.

The Tribunal held that the application was maintainable even though the corporate debtor's default was below the threshold prescribed for initiating CIRP under the IBC. It observed that an application under Sections 94 or 95 of the IBC can be filed independently and does not require CIRP to have first been initiated against the corporate debtor.

The Bench also referred to Section 128 of the Indian Contract Act, 1872, which provides that a surety's liability is co-extensive with that of the principal debtor unless otherwise provided by the contract.

Accordingly, the NCLT found the application within the limitation period, admitted it and initiated insolvency resolution proceedings against Lakshmi.

For Applicant: Advocates A.G Sathyanarayana, Nanda Gopal and R Aishwarya

For TMB: Advocate Purujit Narayanan

For RP: Advocate Deepika Gupta