Corporate debt: SC stays NCLAT order allowing lenders to go after personal guarantors

K.R. Srivats | | Updated on: Mar 28, 2022

NCLAT had said there is no bar on IBC proceedings against a personal guarantor if no process on against corporate debtor

In the latest turn of events on the vexed issue of insolvency framework around personal guarantors to corporate debts, the Supreme Court has stayed the NCLAT order that allowed lenders to initiate insolvency proceedings against personal guarantors of a corporate debtor even when no insolvency proceeding is pending against the corporate debtor before the NCLT .

Fully maintainable

The National Company Law Appellate Tribunal (NCLAT) had, in January, ruled in the SBI Stressed Asset Management Branch vs Mahendra Kumar Jajodia ( personal guarantor to corporate debtor) case that there is no bar or prohibition against insolvency and bankruptcy proceedings being instituted against a personal guarantor in the absence of proceedings against the corporate debtor. 

NCLAT ruled that the application was fully maintainable under Section 60 of the IBC and could not have been rejected only on the ground that no CIRP or liquidation proceeding is pending before the NCLT. The Appellate Tribunal set aside the NCLT’s October 5, 2021 order and revived the application filed by SBI Stressed Asset Management before the NCLT.

With Mahendra Kumar Jajodia (personal guarantor) preferring an appeal before the SC against the NCLAT order, the Apex Court has now stayed the NCLAT ruling, sources close to the development said. Notices have been issued against the parties concerned.

The Apex Court granted stay on the NCLAT order last week after relying on certain observations in its landmark decision of Lalit Kumar Jain v. Union of India and Ors, they said.

Gautam Bhatikar,Partner, Phoenix Legal, said that NCLAT judgment  was a welcome since there were several contradictory decisions by the NCLT prior to this on this issue.

Major implications

“Now that the operation of the NCLAT judgment has been stayed, it would be interesting to see how the Apex Court proceeds on the present issue, given the vast implications of the NCLAT judgment”, Bhatikar said.

Pritika Kumar, Founder - Cornellia Chambers, said that a stay order does not mean that the order passed by the NCLAT is wrong or erroneous and is passed if inter alia there is a prima facie case and if irreparable loss or harm will be caused to a party if the stay is not granted. As next steps Supreme Court could decide the question of law in view of the specific facts and circumstances of the case, she said.

Tahira Karanjawala, Principle Associate - Karanjawala & Co, said this apex court move would mean that today a creditor cannot proceed against a personal guarantor of a corporate debtor, unless the CIRP is already initiated and pending against the corporate debtor. 

“While the rationale of the NCLAT seems to be sound, the Supreme Court will finally clarify any ambiguity on this issue. Perhaps the reason for the stay being granted is that until the issue is examined in detail, petitions against personal guarantors ought not to be filed which may further complicate matters in the event the Supreme Court decides to overturn the decision of the NCLAT”, she said.

Still a vexed issue
NCLAT had ruled initiation of CIRP against the Corporate Debtor is not a pre-requisite to initiate IRP against the Personal Guarantor 
NCLT ruled SBI Stressed Asset Management application against Mahendra Kumar Jajodia (personal guarantor) not maintainable in absence of CIRP against corporate debtor
Published on March 28, 2022

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