NCLT Jaipur Holds Section 95 IBC Maintainable For Pre-2019 Guarantees If Default Occurs Later

The Jaipur National Company Law Tribunal (NCLT) on 26 May held that insolvency proceedings under Section 95 of the Insolvency and Bankruptcy Code, 2016 can be initiated against a personal guarantor even where the guarantee was executed prior to the coming into force of the personal guarantor framework, so long as the default and invocation of the guarantee occurred thereafter.

Judicial Member Reeta Kohli and Technical Member Kavita Bhatnagar admitted an insolvency application filed by Tata Capital Limited against Ashit Jain, personal guarantor of Nidhikamal Automobiles Private Limited. The Bench held:

“The Hon'ble Supreme Court further notes that even prior to the IBC, insolvency law in relation to individuals and partnership firms was already being governed by the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920. Therefore, Part III of the IBC did not create any new substantive liability in respect of past guarantees, but merely substituted the earlier insolvency framework with a new statutory mechanism.”

Tata Capital initiated proceedings seeking insolvency resolution against Ashit Jain for an alleged default of Rs. 5.37 crore. The corporate debtor, a Tata Motors dealership, had availed term loan and channel finance facilities aggregating Rs. 4.70 crore, secured by personal guarantees executed by Ashit Jain and other guarantors.

Upon default by the corporate debtor, Tata Capital invoked the personal guarantees through a recall notice. The Resolution Professional, pursuant to directions of the NCLT, submitted a report under Section 99 of the Code recommending admission of the application.

Opposing the petition, Jain contended that the guarantees were executed prior to 1 December 2019, when the provisions relating to personal guarantors under the IBC were brought into force, and therefore Section 95 could not be applied retrospectively.

The Tribunal, however, held that maintainability under Section 95 depends on the occurrence of default and not on the date of execution of the guarantee deed. It noted that although the guarantees were executed earlier, the cause of action arose only on 15 January 2020 when the creditor invoked the guarantees through a demand notice.

Rejecting the objection, the Tribunal observed:

“…….this Adjudicating Authority is of the view that the date of execution of the guarantee deed is inconsequential for determining the maintainability of proceedings under Section 95 of the Code, given the default and invocation giving rise to cause of action occurred after the enforcement of the said provision.”

Relying on the Supreme Court's decision in Dilip B Jiwrajka v. Union of India, the Tribunal reiterated that Part III of the IBC does not create a new substantive liability for past guarantees but only provides a procedural mechanism for insolvency resolution.

The Tribunal also rejected the plea of limitation, noting that the application was filed within the prescribed period after exclusion of time granted by the Supreme Court during the COVID-19 pandemic. It further held that communications seeking time for repayment amounted to acknowledgment of liability, extending the limitation period.

It additionally rejected objections regarding filing of a composite petition for multiple credit facilities, alleged defects in stamping, discrepancies in the debt amount, and issues raised concerning the conduct of the Resolution Professional.

The Bench clarified that proceedings under Section 95 are initiated against the personal guarantor as a whole and not facility-wise, and held that the objections did not affect the maintainability of the insolvency application.

Accordingly, the NCLT admitted the insolvency application against Ashit Jain.

For Applicant: Advocates Amarjit Singh Bedi, Pooja Pandey, Aanchal Rai, Ashwin Tripathi and Anubhav Singh

For Respondent: Shashank Kasliwal, Arjun Parashar and Divisha Misra