Foreign Citizen Not Exempt from IBC: Deemed Rejection of Repayment Plan Invokes Bankruptcy Proceedings
- REEDLAW
- 7 hours ago
- 4 min read
REEDLAW Legal News Network reports:Â In a significant ruling, the National Company Law Tribunal (NCLT), Hyderabad Bench, through its order, clarified that foreign citizenship does not exempt a Personal Guarantor from compliance under the Insolvency and Bankruptcy Code (IBC). The Tribunal held that a failure to submit a repayment plan constitutes a deemed rejection under Section 115(2), thereby justifying the initiation of bankruptcy proceedings under Section 121.
The Hyderabad Bench, comprising Mr. Rajeev Bhardwaj (Judicial Member) and Mr. Sanjay Puri (Technical Member), while adjudicating an Interlocutory Application in the company petition, emphasised that statutory obligations under the IBC apply irrespective of nationality. The Tribunal observed that the deemed rejection mechanism under Section 115(2) serves as an automatic trigger, allowing creditors to initiate bankruptcy proceedings under Section 121 without requiring further discretionary approval. This decision underscores the IBC’s objective of enforcing timely repayment and ensuring uniform accountability for all personal guarantors.
The Petitioner, acting as the Financial Creditor, had filed an application under Sections 121 and 123 of the Insolvency and Bankruptcy Code, 2016, seeking initiation of bankruptcy proceedings against the Personal Guarantor to the Corporate Debtor. The Corporate Debtor had availed substantial financial assistance from the Petitioner and its associate banks, and the Personal Guarantor had executed multiple guarantee agreements securing the repayment obligations. The Corporate Debtor committed default, resulting in the loan account being classified as NPA, and despite the issuance of a demand notice under the SARFAESI Act, neither the Corporate Debtor nor the Personal Guarantor discharged the outstanding dues. The Financial Creditor thereafter initiated recovery proceedings before the Debt Recovery Tribunal and subsequently accepted a One-Time Settlement proposal, which was later cancelled due to non-payment of instalments. As the default persisted and the recovery proceedings remained pending, the Petitioner placed reliance on the Corporate Debtor’s financial statements and the guarantee deeds to demonstrate subsisting liability.
Parallelly, the Corporate Debtor had been admitted into the CIRP pursuant to a petition under Section 7 of the Code. Consequently, the Petitioner also invoked Section 95 of the Code to initiate the Insolvency Resolution Process against the Personal Guarantor. The demand notice was duly served, and the matter proceeded before this Tribunal, which admitted the Section 95 application, declared an interim moratorium, and appointed a Resolution Professional. The Personal Guarantor, despite several opportunities and extensions granted during the creditor meetings, failed to submit any repayment plan as contemplated under Sections 105 and 114 of the Code. In view of this default, the Resolution Professional sought liberty for the Financial Creditor to pursue bankruptcy proceedings under Section 121, which was granted by order dated 13.11.2024, leading to the filing of the present Form-B application.
The Personal Guarantor opposed the proceedings, primarily on the ground that he had been a citizen of the United States since 2011, contending that the Code did not extend to foreign nationals. It was argued that Sections 2(e), 3(23), 234, and 235 did not enable insolvency or bankruptcy proceedings against a foreign citizen and that the Government of India had not entered into any reciprocal framework with the United States. The Personal Guarantor further submitted that an earlier appeal filed before the Appellate Tribunal challenging the order under Section 100 had been dismissed for non-prosecution and that a restoration application was pending, thereby requesting that the present proceedings be kept in abeyance. Additional concerns were raised regarding the alleged adverse impact of bankruptcy proceedings on personal reputation and livelihood.
The Petitioner, in rejoinder, denied the objections raised and submitted that the Personal Guarantor was estopped from contesting jurisdiction, having executed guarantee deeds in India and having failed to disclose his foreign citizenship at the appropriate stage. It was submitted that Section 2(e) expressly applied the Code to all personal guarantors to corporate debtors without distinguishing between Indian and foreign nationals, and that Sections 234 and 235 were irrelevant for determining jurisdiction over personal guarantors. It was also pointed out that the Personal Guarantor had repeatedly defaulted in submitting a repayment plan and had sought extensions, which were duly granted, thereby foreclosing any plea of violation of natural justice. The Petitioner asserted that the objections raised were merely an attempt to delay and frustrate lawful bankruptcy proceedings.
Upon consideration, the Tribunal observed that the total dues admitted by the Corporate Debtor and secured by the Personal Guarantor exceeded ₹372 crores and that the Personal Guarantor had not disputed this liability. The Tribunal held that the failure of the Personal Guarantor to submit a repayment plan amounted to a deemed rejection under Section 115(2), thereby permitting the initiation of bankruptcy proceedings under Section 121. The plea regarding foreign citizenship was rejected as misconceived, the Tribunal holding that Section 2(e) covered all personal guarantors irrespective of nationality and that the Code did not carve out any exemption for foreign citizens. The pendency of a restoration application before the Appellate Tribunal was held immaterial in the absence of any stay order. Finding no legal or factual impediment, and noting the complete failure of the insolvency resolution process, the Tribunal concluded that the initiation of bankruptcy proceedings was warranted.
Accordingly, the Tribunal admitted the petition and declared the Personal Guarantor bankrupt, appointing the Resolution Professional proposed by the Applicant and directing the statutory process to commence in accordance with the provisions of the Insolvency and Bankruptcy Code, 2016.
Mr. G.P. Yash Vardhan, Advocate, represented the Petitioner.
Ms. Siva Praneetha, Advocate, appeared for the Respondent.
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