Enforceability of Personal Guarantee Affirmed; Pending Recovery Does Not Bar Section 95 IBC Action
- REEDLAW
- 2 hours ago
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REEDLAW Legal News Network reports:Â In a pivotal ruling, the NCLAT Principal Bench reaffirmed that a personal guarantee covering existing credit facilities remains enforceable even in the absence of subsequent disbursements. The Tribunal further clarified that the pendency of recovery proceedings does not bar a creditor from initiating insolvency proceedings under Section 95 of the Insolvency and Bankruptcy Code, 2016, against the personal guarantor.
The National Company Law Appellate Tribunal (NCLAT), Principal Bench, comprising Justice Ashok Bhushan (Chairperson) and Mr. Barun Mitra (Technical Member), while adjudicating an interlocutory application in a company appeal, held that the enforceability of a personal guarantee extends to existing credit facilities, even if there is no subsequent disbursement. The Bench also ruled that ongoing recovery proceedings before any forum do not constitute a legal impediment to initiating insolvency proceedings under Section 95 of the IBC against the personal guarantor.
The National Company Law Appellate Tribunal (NCLAT) dealt with an appeal filed by a personal guarantor challenging the order of the Adjudicating Authority admitting an application under Section 95 of the Insolvency and Bankruptcy Code, 2016, filed by Cosmos Cooperative Bank Limited. The appellant argued that the personal guarantee executed on 02.03.2016 was based on the representation that fresh credit of ₹44 crore would be sanctioned, which was never disbursed. Therefore, there was no debt or default attributable to the appellant. It was also contended that the guarantee pertained only to proposed facilities, and the Adjudicating Authority exceeded its jurisdiction by imputing liability for past loans secured by separate guarantees of other directors.
The bank, however, asserted that the appellant executed the guarantee covering facilities already granted to the corporate debtor, amounting to ₹44 crore. The loan agreement dated 02.03.2016 referred to existing facilities, including term loans and cash credit, and the guarantee deed expressly extended to these obligations. The bank produced supporting documents such as the loan agreement, promissory note, and statements of account to establish that the facilities were already availed. It was further contended that the guarantee was invoked through call-back and statutory notices, and the pendency of recovery proceedings or counterclaims before the DRT did not bar the initiation of Section 95 proceedings.
After examining the records and submissions, the NCLAT held that the guarantee dated 02.03.2016 was valid and enforceable as it secured facilities already granted by the bank. The tribunal rejected the appellant's argument that the absence of disbursement after the execution of the guarantee absolved liability, noting that the repayment schedule commencing on 04.03.2016 indicated prior disbursement. The tribunal also found that the invocation of the guarantee was duly established and that the pendency of proceedings before other forums did not preclude action under Section 95. It was observed that the bank was within its rights to proceed against one guarantor without initiating action against all. Consequently, the appeal was dismissed, and the order admitting the Section 95 application was upheld.
Subsequently, an interlocutory application was filed seeking the disposal of the appeal in terms of a settlement reached between the appellant and the bank. Under the settlement agreement, the appellant agreed to pay ₹15 crore in phases, and the bank consented to discharge the personal guarantee upon full payment. The NCLAT considered the provisions under Rule 11 of the relevant Rules, which allow withdrawal of an application post-admission with the consent of 90% of creditors. The tribunal noted that claims had already been received, including a significant claim from the Income Tax Department, and therefore, withdrawal required compliance with statutory requirements. While taking note of the settlement, the tribunal clarified that further steps in the insolvency process would depend on compliance with the prescribed procedure.
Mr. Arun Kathpalia & Mr. Abhijeet Sinha, Sr. Advocates with Mr. NPS Chawla, Mr. Sujoy Datta, Mr. Surekh Kant Buxy, Ms. Kinjal Goyal and Mr. Ritwik D. and Mr. Akhil Bhansali, Advocates, represented the Appellant.
Mr. Krishnendu Dutta, Sr. Advocate, with Mr. Ramchandra Madan, Ms. Mehak Khurana and Mr. Tushar Nigam, Advocates, appeared for the Respondent No. 1.
Mr. Gaurav Mitra, Mr. Himanshu Shembekar and Ms. Aarushi, Advocates, appeared for the Respondent No. 2.
Mr. Himanshu Shembekar, Advocate, appeared for the Resolutional Professional (RP).
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