Introduction
In a recent ruling in the case of Central Bank of India v. Mr. P.K. Iyer and Anr[i], the Hyderabad Bench of the National Company Law Tribunal (‘NCLT’) examined a critical issue regarding the initiation of the corporate insolvency resolution process (‘CIRP’) against personal guarantors (‘PGs’) and the procedural requirements under s. 95 of the Insolvency and Bankruptcy Code, 2016 (‘IBC’). In its decision, the NCLT also scrutinised the roles and responsibilities of both the resolution professional (‘RP’) and the adjudicating authority (‘AA’), highlighting the importance of strict adherence to procedural compliance in insolvency proceedings.
Brief Facts
Deccan Chronicle Holdings Limited, the corporate debtor (‘CD’), secured various credit facilities from the Central Bank of India (‘Petitioner’), including a loan of Rs.50 crores.
To ensure repayment, Mr. P.K. Iyer, the Respondent, and the PG executed a personal guarantee, committing to indemnify against all losses, damages, costs, claims, and expenses that the lenders may suffer, pay, or incur by reason of or in connection with any default on the part of the CD. By 2012, however, the CD’s accounts were classified as non-performing assets (‘NPA’).
The Petitioner subsequently sought legal remedies under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘SARFAESI Act) before the Debt Recovery Tribunal (‘DRT’), Hyderabad, and filed their recovery claim for approximately Rs. 57 crores from both the CD and the PG. A recovery certificate was issued in 2020, stating that the total dues amount, including interest and costs, was Rs. 159 crores as of 2021.
The Petitioner also initiated a CIRP against the CD, following which it issued demand notices to the Respondent in 2020 and 2021, demanding payment of the defaulted amount.
The Petitioner filed a petition under s. 95 of the IBC read with r. 7(2) of the Insolvency & Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtor) Rules, 2019 (PGI Rules), to initiate the CIRP against the PG.
Upon receiving the petition, NCLT appointed an interim resolution professional (‘IRP’), and such notice was subsequently served on the PG.
The IRP submitted his report recommending the admission of the petition based on the fact that the PG was served with demand notices for repayment, following which NCLT directed the Petitioner to serve a notice on the PG.
Issue
Whether the Application for initiation of IRP against the PG at the behest of the Petitioner deserve to be admitted?
Held
The NCLT rejected the petition, stating that it lacked the necessary legal foundation for admission due to the failure to comply with the mandatory statutory requirement of serving a demand notice under s. 95(4)(b) of the IBC. Although the petitioner claimed to have issued a demand notice to the Respondent, the postal tracking report revealed that the notice was returned, indicating that the notice remained unserved. The RP failed to verify if the notice was served and concluded that the debt remained unpaid.
Furthermore, as per s.95(4)(c) of the IBC, the cause of action to proceed against the PG arises only if the CD fails to pay the debt within 14 days of service of the demand notice. In this case, since the demand notice was never served, the present application was left without a cause of action as non-maintainable.
Our Analysis
The NCLT's decision to dismiss the application filed to initiate the CIRP against the PG in the present case is significant. It underscores the importance of adhering to procedural compliance in insolvency proceedings.
Under s. 95(4)(b) of the IBC, serving a demand notice on the PG is a non-negotiable essential for initiating proceedings against the CD, which arises only if the CD fails to pay the debt within 14 days of such service, as stipulated in s. 95(4)(c) of the IBC. In this case, the notice was returned unserved, nullifying the petition's legal foundation.
This procedural lapse goes beyond mere technicality; it underscores the essential role of both the RP and the AA. NCLT's reliance on the Supreme Court's ruling in Dilip B Jiwrajka v. Union of India and Ors.[ii] (2023) further emphasises that the AA must conduct an independent assessment rather than solely relying on the RP's report. This decision serves as a crucial reminder that adherence to procedural mandates is not just a formality but a substantive requirement that safeguards the integrity of the CIRP.
End Notes
[i] MANU/NC/3600/2024.
[ii] 2023 SCC OnLine SC 1530.
Authored by Shreya Manchanda, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.
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