Section 94 IBC Not Available to Personal Guarantors of Sole Proprietorship Firms – SARFAESI Recovery Proceedings Valid
- REEDLAW
- Aug 30
- 3 min read
Updated: Sep 1
REEDLAW Legal News Network reports: In a significant clarification on the scope of insolvency protection, the Madhya Pradesh High Court has ruled that Section 94 of the Insolvency and Bankruptcy Code (IBC) is applicable exclusively to corporate debtors. The Court held that personal guarantors of sole proprietorship or partnership firms cannot invoke this provision, and therefore, SARFAESI recovery proceedings initiated against such guarantors remain valid.
The Division Bench of the Madhya Pradesh High Court (Indore Bench), comprising Justice Vivek Rusia and Justice Prem Narayan Singh, while adjudicating a Writ Petition, held that Section 94 of the IBC applies solely to corporate debtors and cannot be invoked by personal guarantors of sole proprietorship or partnership firms. Consequently, the Court confirmed the validity of SARFAESI recovery proceedings initiated against the petitioner and dismissed the writ petition.
The petitioner filed a writ petition seeking directions to the respondents to consider his representation concerning a pending petition under the Insolvency and Bankruptcy Code, 2016 (IBC), before the National Company Law Tribunal, Indore. The petitioner owned a property mortgaged as collateral for financial facilities availed by M/s Rainbow Sales and M/s Kothari Enterprises, both sole proprietorship firms, from Axis Bank. Following the classification of the accounts as Non-Performing Assets, the Bank initiated recovery proceedings under the SARFAESI Act and obtained an order from the Additional Collector for taking possession of the property. A notice was issued by the Tehsildar to the petitioner and the borrowers for taking possession, prompting the petitioner to approach the High Court to restrain recovery during the pendency of insolvency proceedings.
The petitioner contended that an interim moratorium under Section 96(1)(b)(i) of the IBC should apply from the date of filing an application under Section 94, staying all legal proceedings in respect of debts, and argued that the definition of “debtor” under Section 3(8) of the IBC could include individuals or proprietorship firms, thus covering him as a personal guarantor of the firms.
The Court rejected these submissions, observing that Section 94 of the IBC applies only to corporate debtors and allows them, personally or through a resolution professional, to approach the Adjudicating Authority for initiating insolvency resolution. Since the petitioner’s claims related to sole proprietorship firms, which do not qualify as corporate debtors under Section 3(8), no application under Section 94 was maintainable. Furthermore, the Court noted that the stage of consideration of the representation was already concluded, the Additional District Magistrate had become functus officio, and the Tehsildar had no adjudicatory authority to entertain the petitioner’s objection.
Consequently, the Court held that the writ petition was misconceived and dismissed it, confirming that no relief could be granted to restrain recovery proceedings against the petitioner in relation to the sole proprietorship firms.
Mr. Amit Agrawal, Senior Advocate, along with Mr. Utkarsh Joshi, Advocate, represented the Petitioner.
Mr. Bhuwan Gautam, Govt. Advocate, appeared for the Respondents.
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