The problem of Non-Performing Assets (NPAs) in the Indian banking system is one of its foremost predicaments. In order to allow lending institutions to recover such NPAs in an expeditious manner, the Indian Government established Debt Recovery Tribunals (DRT) under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDBFI Act), and subsequently the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act) for a speedier enforcement of secured assets of the debtor as well as the guarantor. Under SARFAESI Act, a bank or a financial institution could take possession of the secured assets of the borrower or their guarantors and auction the same for realizing the outstanding debt. However, if the guarantor has not created any security interest over the property but owns property and other assets, the bank or financial institution will have to approach the DRT under the RDDBFI Act for claiming an interest over such guarantor’s assets.

 

However, the efficient recovery of dues by banks and financial institutions using the DRT process was rarely achieved. Incidentally, the Bankruptcy Law Reforms Committee had in its November 2015 report, noted that loan recovery rates in India were among the lowest in the world, with lenders barely managing to recover 20% (twenty percent) of the value of the debt in the event of a default. The report had attributed the dismal recovery rate to the highly fragmented bankruptcy and recovery framework in India and had recommended that there must be a single forum that hears and decides the rights of debtors as well as creditors. This eventually led to the Insolvency and Bankruptcy Code, 2016 (Code), a unified legislation to resolve insolvency and bankruptcy in India.

Jurisdiction of Adjudicating Authority under the Code

Section 179 and Section 60 of the Code lays down the jurisdictional authority granted under the Code.

Section 179 of the Code provides that subject to Section 60 of the Code, DRT shall have the jurisdictional authority to entertain the insolvency proceedings relating to Individuals and Partnership Firms. Further Section 60 of the Code, provides that the NCLT would be the authority to entertain the insolvency proceedings in relation to the corporate persons including corporate debtor and personal guarantors. It lays down its interpretation to make it clear that where an insolvency proceedings or liquidation proceedings are pending before the NCLT, an application for the initiation of the insolvency proceedings against the corporate/personal guarantors shall also be filed or stand transferred to the same NCLT, under whose jurisdiction the proceedings of the corporate debtor are pending.

While looking at the averments in the matter of Altico Capital. India Ltd Vs. Rajesh Patel & Ors and also in the matter of Inta Capital Pvt Ltd Vs. Ketan Vinod Kumar Shah, the, NCLT, Mumbai Bench was confronted with a question, as to which would be the appropriate forum to adjudicate the insolvency proceedings of a personal guarantor, in the event an application seeking insolvency proceedings or liquidation proceedings are filed before the NCLT but is still pending. In the said matters, NCLT has held that the application for insolvency of the personal guarantor is not maintainable unless the insolvency or liquidation proceedings against the corporate debtor is ongoing. Hon’ble NCLT while reaching to the conclusion laid down its opinion that filling of application seeking insolvency against personal guarantor without the corporate debtor undergoing insolvency proceedings or liquidation proceedings would tantamount to vesting the NCLT with the jurisdiction of DRT.

 

Further in the matter of PNB Housing Finance Ltd Vs. Mr. Mohit Arora, the Hon’ble NCLT Delhi Bench, laid down its opinion that where the insolvency/ liquidation proceedings are pending before the Hon’ble NCLT, the provisions of Section 60 gets triggered and the authority to entertain insolvency /liquidation proceedings against the personal guarantors also vests with the NCLT and not with that of the DRT. The Delhi Bench opined and clarified that the code lays three circumstances wherein the authority to entertain the matter vests with NCLT as enumerated below:

Case –I: Where the application in relation to the insolvency/ liquidation of the CD is pending before the NCLT.

Case –II: Where the insolvency or liquidation proceedings are pending before the Adjudicating Authority

Case-III: where the insolvency or liquidation proceedings are pending before the Adjudicating Authority and similar proceedings against the corporate debtor or personal guarantor are also pending before the Adjudicating Authority.

The Supreme Court citing the facts and the circumstances in the matter of Lalit Kumar Jain Vs. Union of India & Ors opined that in view of the Code that Personal guarantors of the Corporate Debtor are different from that of the individuals. The Supreme Court interpreted the legislative intent of the Code that personal guarantors are separate species of individuals for whom the appropriate forum to entertain the matter was common with that of the Corporate Debtor for whom they stood as a guarantor. The legislative intent of the Code is to have NCLT as a single forum wherein the insolvency/ liquidation proceedings of the Corporate Debtor and the personal guarantors would be entertained. This would allow the NCLT to consider the nature of all the assets of the Corporate Debtor and also its personal guarantors and also facilitate the COC of the CD in framing realistic plans to fetch better resolutions, keeping in mind to realise some parts of the dues of the Corporate Debtor with that of the personal guarantors.