NCLT: No Jurisdiction Under Section 95 of the IBC Without CIRP Against Corporate Debtor

Introduction

The case UCO Bank v. Subrata Das[i] decided by the National Company Law Tribunal (‘NCLT’), Kolkata Bench, on 17.12.2024, discussed the scope of jurisdiction under the Insolvency and Bankruptcy Code, 2016 (‘IBC’), regarding personal guarantors (‘PGs’) of corporate debtors (‘CDs’). It examines the maintainability of insolvency proceedings under s. 95(1) of the IBC against a personal guarantor (‘PG’) where no Corporate Insolvency Resolution Process (‘CIRP’) is initiated, pending or concluded against the CD and resolves the jurisdictional conflict between the National Company Law Tribunal (‘NCLT’) and the Debt Recovery Tribunal (‘DRT’).

Facts

UCO Bank, the financial creditor (‘FC’), had sanctioned a cash credit facility of Rs. 250 Lakhs to M/s Haridra Vintrade Private Limited (‘CD’), a corporate entity. To secure the loan, Subrata Das (‘PG’) executed a personal guarantee agreement on 28.07.2022. Upon default by the CD, the FC invoked the guarantee on 13.05.2024 and initiated proceedings under s. 95(1) of the IBC.
The FC filed an application under s. 95(1) on 14.09.2024 before the NCLT to initiate insolvency proceedings against the PG, as they were seeking recourse under IBC provisions. The application was supported by a resolution professional’s report, which confirmed the financial default. However, a critical fact emerged during the proceedings that no CIRP had been initiated against the CD. This absence of CIRP formed the crux of the jurisdictional and legal questions in the present case.
During the hearing, the FC argued that the NCLT was the appropriate forum for insolvency proceedings against PGs, even in the absence of a CIRP against the CD. On the other hand, the opposing party argued that in the absence of a CIRP against the principal borrower, a petition under s. 95, seeking to initiate insolvency proceedings against the PG of the principal borrower is not maintainable. The jurisdiction should rest exclusively with the DRT as given under s. 179 of the IBC.

Issues

Whether the proceedings against the PG of the principal borrower, initiated under s. 95, are maintainable even when no CIRP proceedings have been initiated against the CD/Principal Borrower?
Whether the NCLT has jurisdiction to hear such matters or if the correct forum is the DRT under the present set of facts?

Held

Firstly, NCLT began by analysing the interplay between ss. 60 and 179 of the IBC, which govern the jurisdiction of NCLT and DRT, respectively. As per s. 60(1), the NCLT serves as the adjudicating authority (‘AA’) for matters involving CDs and their PGs, but only when CIRP is initiated or pending against the CD. Whereas s. 179 designates the DRT as the AA for individuals and firms except where the provisions of s. 60 apply.
Secondly, to resolve the jurisdictional question, NCLT referred to several precedents to clarify the appropriate forum for initiating insolvency proceedings against PGs. In Rohit Nath v. KEB Hana Bank[ii], the Court clarified that in cases where no CIRP is initiated against the CD, proceedings against the PG must be brought before the DRT. According to this case, NCLT’s jurisdiction over PGs is contingent upon the existence of an ongoing or concluded CIRP against the CD. Further, the NCLT referred to Embassy Property Developments Pvt. Ltd. v. State of Karnataka[iii], which focused upon the legislative intent of consolidating proceedings involving CDs and their PGs before a single forum. This consolidation aims to prevent conflicting outcomes that may arise if multiple forums adjudicate related matters simultaneously. The NCLT also examined the decisions in State Bank of India v. Mahendra Kumar Jajodia[iv] and Mahendra Kumar Agarwal v. PTC India Financial Services Ltd.[v], where CIRP had already been initiated or concluded against the CD. However, these cases were distinguished on the ground that the existence of CIRP was a critical factor in conferring jurisdiction on the NCLT. Since no such proceedings had been initiated against the CD in the present case, the NCLT concluded that the DRT had jurisdiction over the PG.
NCLT noted that the IBC’s legislative intent was to ensure coherence in insolvency resolution processes involving CDs and their PGs. However, this intent does not extend to situations where no CIRP exists against the CD. In such cases, DRT retains jurisdiction under s. 179.
To illustrate the jurisdictional distinction, NCLT highlighted the relationship between CIRP status and adjudicatory authority:

CIRP Status of Corporate Debtor	Jurisdiction over Personal Guarantor	Relevant Section
CIRP is initiated and pending	NCLT	s. 60(1)
CIRP is initiated but concluded	NCLT	s. 60(1)
No CIRP initiated	DRT	s. 179

Our Analysis

One of the key principles reaffirmed in this case is the co-extensive liability of guarantors with principal debtors under s. 128 of the Indian Contract Act, 1872. However, the NCLT noted that co-extensiveness of liability does not imply automatic jurisdiction of the NCLT. The jurisdictional requirement under s. 60 is contingent on a CIRP being initiated or pending against the CD.

This decision carries broader implications for both FCs and PGs. It focuses on the procedural safeguards in the IBC that ensure insolvency proceedings are brought before the correct forum. For creditors, it emphasized the importance of initiating CIRP against CDs before taking action against PGs. For PGs, it provided clarity on the adjudication process and the appropriate forum to which they may be subject, depending on whether a CIRP had been initiated.

End Notes

[i] 2024 SCC OnLine NCLT 3993 dated 17.12.2024.

[ii] [2021] 129 taxmann.com 98 (Madras).

[iii] [2020] 157 SCL 445 (SC).

[iv] 171 SCL 232 (NCLAT).

[v] [2023] 154 taxmann.com 666 (NCLAT - Chennai).

Authored by Muskaan Jain, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.