Application u/s 95 of IBC can be Filed by Beneficiaries of Personal Guarantee: NCLAT [Read Order]

In a recent case, the New Delhi bench of the National Company Law Appellate Tribunal (NCLAT) has held that beneficiaries of personal guarantee can initiate Personal Insolvency Resolution Process (PIRP) against Personal Guarantor under section 95 of the Insolvency and Bankruptcy Code, 2016 (Code).

Under the terms of the Facility Agreement dated July 20, 2017, Piramal Finance Limited ("PFL") provided Hema Engineering Industries Limited ("HEIL") (the "Corporate Debtor") with a Loan Facility.  PHL Fininvest Private Limited (now Piramal Enterprises Ltd.), the Respondent No. 1 in this case, was given the Facility Agreement dated 20.07.2017, which was initially signed between PFL and HEIL, under the Assignment Agreement dated 22.03.2019.

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The Respondent No. 1 offered HEIL a term loan facility of Rs. 400 cr in accordance with the Facility Agreement dated 20.07.2017.  A Personal Guarantee dated 20.07.2017, executed by Krishan Kumar Jajoo (Appellant) in favor of Piramal Trusteeship Services Private Ltd. ("PTSPL"), the designated Security Trustee, secured HEIL's obligation to repay the loan and all other amounts owed under the aforementioned Facility Agreement.

On June 21, 2021, Respondent No. 1 submitted an application under Section 95(1) of the Code to initiate personal insolvency proceedings against the Appellant. The application was admitted, and the current appeal has been filed against it.

According to the appellant, there was no privity of contract between the parties because the Deed of Guarantee dated 20.07.2017 ("Guarantee Deed") was signed by the appellant in favor of PTSPL (the Security Trustee) rather than Respondent No. 1.  If the Guarantee is not properly invoked, an application under Section 95 of the Code cannot be maintained.

Read More: Relief under IBC 60(5) on Liquidator Rejection of Claims Unavailable when Remedy under IBC 42 is not Used: NCLAT

Furthermore, it was contended that Respondent No. 1's application under Section 95 of the Code could be rejected since the original Board Resolution does not give Respondent No. 1 the power to take action against the Appellant.

In contrast, the respondent argued that the Appellant, as the Corporate Debtor's personal guarantor, had defaulted on the debt, which was owed and payable from HEIL ("Corporate Debtor").

The bench of Justice Rakesh Kumar Jain (Judicial Member), Mr. Naresh Salecha (Technical Member) and Mr. Indevar Pandey (Technical Member) noted that the security trustees are keeping "Security" for the advantage of the financial creditor or lender, not for their own benefit.  Therefore, even if he is not a party to the trusteeship arrangement, the lenders can nonetheless enforce the security documents.

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The Appellant could not attempt to avoid his obligations under the Assignment Agreement or the transfer of rights and obligations under the Facility Agreement since they were binding on the Corporate Debtor, the Tribunal noted after consulting the pertinent provisions of the Agreement.

It further noted that a simple reading of the agreement's provisions establishes the separate rights of creditors in addition to the trust. The appellant (as guarantor) cannot, by any means, claim that a creditor, including its assignee, cannot exercise his rights against the appellant.

Relying on the Supreme Court's ruling in United Bank of India v. Naresh and Ors. (1996), which held that a corporation could ratify the action, expressed or implied, of pleadings being signed by one of its officers, it rejected the argument that the Respondent lacked the authority to file the application under section 95 of the code.

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