NO CAUSE OF ACTION ARISES UNLESS SECTION 95 PETITION IS ADMITTED AGAINST THE PERSONAL GUARANTORS

[DR.MARIAPPAN GOVINDARAJAN]

Insolvency resolution process

Chapter III of Part III of Insolvency and Bankruptcy Code, 2016 (‘Code’ for short) provides the procedure for conduct of insolvency resolution process.  By this process the financial credit may initiate insolvency resolution process against the personal guarantors.  The personal guarantor is the person who gives personal guarantee to the financial creditor for the loan obtained by a company.  Usually, the personal guarantors will be the Managing Director or Director of the company who gets loan from financial institutions.

The financial creditor initiates corporate insolvency resolution process against the corporate debtor under Section 7 of the Code.  The Financial Creditor can also initiate insolvency resolution process against the personal guarantor under Section 95 of the Code.  Section 95 of the Code provides that the financial creditor may apply either by himself, or jointly with other creditors, or through a resolution professional to the Adjudicating Authority for initiating an insolvency resolution process under this section by submitting an application.  The application shall be accompanied with details and documents relating to-

• the debts owed by the debtor to the creditor or creditors submitting the application for insolvency resolution process as on the date of application;
• the failure by the debtor to pay the debt within a period of 14 days of the service of the notice of demand; and
• relevant evidence of such default or non-repayment of debt.

The copy of the said application shall be sent to the personal guarantor.  This application may also be filed even without initiating corporate insolvency resolution process.

Interim moratorium shall commence on the date of filing the application before the Adjudicating Authority.  If the said application is filed by the creditor through a resolution professional, the Adjudicating Authority shall direct the Insolvency and Bankruptcy Board of India (‘IBBI’ for short) within 7 days of the date of the application to confirm that there are no disciplinary proceedings pending against resolution professional.  The Board may confirm the appointment of resolution professional or reject the same.  If rejected the Board shall nominate the other resolution professional to conduct the insolvency resolution process.  If the application is not filed through the Resolution Professional, the Adjudicating Authority may appoint a resolution professional from the panel maintained by the Board. 

If the debtor or creditor wants to replace the resolution professional appointed in the above said process may replace the resolution professional by filing an application before the Adjudicating Authority. 

In the order of appointment of resolution processional, the Adjudicating Authority shall direct the resolution professional to analyse the application filed by the debtor or creditor, called for any records required for from the concerned person.  The resolution professional shall submit a report to the Adjudicating Authority within 10 days from the date of communication of the order of the Adjudicating Authority and his recommendations as to his recommendation either for admitting the application or rejecting the application by recording his reasons for coming to such a conclusion.  A copy of the report shall be sent to the debtor/creditor for filing any objection on the report.

The Adjudicating Authority shall analyse the report submitted by the resolution professional and also the objections raised by the debtor/creditor and decide the admission or rejection of the application. 

The debtor/creditor can file objections on the report filed by the resolution professional but cannot challenge the appointment of the resolution professional.  The sections from 95 to 100 are not judicial decisions and therefore any decision taken by the Adjudicating Authority cannot be challenged.  There will be no cause of action arise for such actions.

Case law

In MR. RAJESH BHATIA AND MR. ASHWANI KUMAR BHATIA VERSUS CANARA BANK, CHENNAI AND MR. RAMACHANDRAN SUBRAMANIAN - 2025 (5) TMI 857 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL - CHENNAI, one company ARS Energy Private Limited (Corporate Debtor) availed loan to the extent of Rs.397.64 crores from a consortium of banks led by Canara Bank.  The appellants in this case, being the Managing Director of the Corporate Debtor executed a personal guarantee to the said amount on 29.06.2017. Since the corporate debtor could not able to pay the monthly instalments the same has been declared as Non-Performing Asset on 29.08.2022. The Canara Bank, the first respondent issued a demand notice under Section 13(4) of the SARFAESI Act, 2002 on 20.09.2023.  At that time the outstanding dues was Rs.305.22 crores.  The Canara Bank issued the possession notice on 02.12.2023.

The Corporate Debtor challenged the notice of possession issued by Canara Bank before Debts Recovery Tribunal.  The same was pending till date.

The bank has not initiated corporate insolvency resolution process against the corporate debtor.  However, the Canara Bank issued a notice dated 30.11.2023 to the appellants being personal guarantors, invoking the personal guarantee executed by the appellants.  Since no payment has been received the Canara Bank filed an application before the Adjudicating Authority, Chennai against the appellants in CP (IB) 57 (CHE)/2024 under Section 95(1) of the Code.  The Adjudicating Authority, vide their order dated 20.03.2024, appointed the Interim Resolution Professional, the second respondent in these appeals.  The Adjudicating Authority, vide the above said order, directed the Interim Resolution Professional to analyse the case in detail and to give his report, within 10 days from the date of communication of the order, as to the admission/rejection of the application.     

Being aggrieved against the impugned order which appointed the Interim Resolution Professional, the appellants filed the present two appeals before the National Company Law Appellate Tribunal (‘NCLAT’ for short).  The appellants contended that the appointment of Interim Resolution Professional is against the provisions of Section 97 of the Code.  Once the appointment of Interim Resolution Professional is bad the entire proceedings become illegal.  The appellants further contended that the Adjudicating Authority appointed the Interim Resolution Professional without consulting the creditors, who initiated action under section 95 of the Code.  This may vitiate the process and influence the decision of Adjudicating Authority that can be detrimental to them.  Since the appointment of the Interim Resolution Professional is in violation of Sub-Section (4) of Section 97 to be read with Sub-Section (3) of Section 97, that itself would be sufficient grounds for the Appellant to file a Company Petition as against the proceedings initiated against him under Section 95 of the Code.

The NCLAT considered the arguments of the appellants and considered them as logically correct.  But NCLAT observed that the Appellants admitted the fact that there had been a credit facility extended to the Corporate Debtor of which the Appellants  are personal guarantors and that the account was declared as a Non-Performing Asset on 29.08.2022, the Financial Creditor initiated proceeding under Section 95 of the Code.  The same has not been challenged by the appellants.  They confined only to the appointment of Interim Resolution Professional.

For this purpose, the NCLAT referred the case law in DILIP B JIWRAJKA VERSUS UNION OF INDIA & ORS. - 2024 (1) TMI 33 - SUPREME COURT, in which the Supreme Court held that Section 95 to Section 100 of the Code are not having any element of judicial adjudication of any right of the party against whom the proceedings are expected to draw under Section 95 of the Code.  The Supreme Court further held that no person can have a cause to file a petition until or unless there is an admission of Section 95 proceedings by passing of an order under Section 100.           

Thus, the stages of the proceedings from Section 95 to Section 100 do not have any adjudicatory effect and since it would be inclusive of Section 97 in itself, the entire cause agitated by the Appellant in the Company Petition as well as in the Company Appeal cannot be subjected to a judicial scrutiny either by the Adjudicating Authority or the NCLAT as against the order passed by the Adjudicating Authority, the NCLAT held.            

The entire power of appointment of Interim Resolution Professional is being exclusively vested with the Adjudicating Authority and particularly, the personal guarantor has got no role to play till the stage under Section 100 is achieved, and accordingly the NCLAT held that the proceedings drawn by the Appellant by way of the aforesaid Company Petition is not tenable.  The NCLAT further observed that all objections at the hands of the Appellant have been left open to be agitated, once the Resolution Professional submits the report under Section 99 of the Code.   On submission of the report by the Interim Resolution Professional, the Adjudicating Authority may, after considering the report, may accept the application or reject the application. This does not materially affect any personal right of the Appellants to enable them to file Company Petition and the consequential Company Appeal too, as all their rights are safeguarded by raising an objection to the report of Interim Resolution Professional. 

Owing to the fact that up to the stage of Section 99, which obviously includes within itself Section 97 too, the Appellants cannot be said to be aggrieved persons since the proceedings not being judicial proceedings their appeals are not sustainable.  No prejudice is caused to the Appellants.  The NCLAT dismissed both the appeals since they lacked merit.