Section 95 IBC Proceedings Against Personal Guarantors Valid Once Corporate Debtor Default Is Finalised
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REEDLAW Legal News Network reports: In a significant ruling on personal guarantor insolvency, the Appellate Tribunal reaffirmed that once default of a Corporate Debtor has been conclusively established and has attained finality under Section 7 of the Insolvency and Bankruptcy Code, 2016, insolvency proceedings against personal guarantors under Section 95 of the Code are maintainable, notwithstanding contractual conversion clauses or belated objections to invocation of guarantee.
The appeal was decided by a Bench comprising Justice Sharad Kumar Sharma (Judicial Member) and Mr. Jatindranath Swain (Technical Member) of the National Company Law Appellate Tribunal, Chennai Bench. The Tribunal noted that the Corporate Debtor had already been admitted into CIRP under Section 7 of the Code, followed by an order of liquidation which had attained finality. It was held that contractual provisions relating to conversion of OFCDs into equity and objections regarding demand notice or limitation could not be used by personal guarantors to reopen an adjudicated default, and that their liability remained co-extensive under Section 128 of the Indian Contract Act, 1872.
The Appellate Tribunal examined a batch of appeals filed by personal guarantors challenging the initiation of insolvency resolution proceedings under Section 95 of the Insolvency and Bankruptcy Code, 2016, arising from a common order passed by the Adjudicating Authority. The proceedings stemmed from financial assistance extended to the corporate debtor through subscription to Optionally Fully Convertible Debentures under a share subscription-cum-debenture subscription and shareholders' agreement, supported by continuing personal guarantees.
It was noted that the corporate debtor had already been admitted into CIRP under Section 7 of the Code, followed by an order of liquidation, both of which had attained finality. The Appellants contended that no default had occurred due to automatic conversion of OFCDs into equity under contractual clauses and further alleged defects in demand notices and limitation. The Tribunal found that such objections were neither raised before the Adjudicating Authority nor sustainable once default had been conclusively determined in prior Section 7 proceedings.
The Tribunal held that contractual conversion clauses could not override the statutory framework of the IBC and that disputes regarding the interpretation of commercial agreements could not be used to defeat insolvency proceedings against personal guarantors. Reliance was placed on the co-extensive nature of guarantor liability under Section 128 of the Indian Contract Act, 1872, and the statutory scheme under Sections 95, 97, and 99 of the Code.
The Appellate Tribunal further observed that the service of the demand notice stood established and that multiple settlement attempts amounted to an acknowledgement of liability. Upholding the findings of the Resolution Professional and the Adjudicating Authority, the Tribunal dismissed the appeals and affirmed the initiation of insolvency resolution proceedings against the personal guarantors.
Mr. G. Vairava Subramanian, Advocate for Mr. B. Raghupathy, Advocate, represented the Appellant.
Mr. E. Om Prakash, Senior Advocate for Mr. M.D. Srinivasan and Ms. Dharaniya Sri, Advocates, appeared for the Respondent No. 1.
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