The Hyderabad bench of the National Company Law Tribunal (NCLT) ruled that partnership firms do not fall under section 95 of the Insolvency and Bankruptcy Code (IBC). The tribunal dismissed a petition filed by Union Bank of India (Financial Creditor) under section 95 of the IBC against KMR Enterprises (Respondent).
The petition was filed by the financial creditor under section 95 of the IBC against a partnership firm. The respondent was a personal guarantor in a loan facility provided to Smaat India Pvt. Ltd, the corporate debtor. This personal guarantee was executed by the respondent on December 27, 2016 in which the loan amount advanced to the corporate debtor was secured.The financial creditor claimed that the respondent was responsible for the loan amount to the tune of Rs. 71.84 crores as the personal guarantor.
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As the corporate debtor defaulted in repaying the loan amount on April 30, 2016, in pursuance of which its account was classified as a Non Performing Assets (NPA). Thereafter, CIRP was initiated against the corporate debtor on July 9, 2018. When no resolution plan was approved, the corporate debtor was ordered to be liquidated on June 6, 2019. The liquidation process completed on August 13, 2020.
Resolution Professional (RP) recommended admission of insolvency resolution petition under section 95 against the respondent in his report IA No.1234/2024. It was contended by the financial creditor that the respondent was liable to pay full outstanding dues as a personal guarantor to the corporate debtor. It was submitted that the respondent had signed a guarantee deed rendering itself liable for any default on part of the corporate debtor.
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It was further argued that since the corporate debtor had defaulted in the repayment, the respondent should be held responsible under provisions of the IBC. Per Contra, it was submitted by the respondent that the petition was not maintainable as section 95 of the IBC is applicable only on individual personal guarantors and not on partnership firms. It was further contended that the respondent does not fall within the purview of section 95 of the IBC.
It was further argued that provisions of the IBC related to personal guarantors were incorporated to address individuals and the respondent had not become an individual just because it had signed a valid deed of guarantee for the purpose of section 95 of the IBC. Therefore, they argued that the insolvency proceedings initiated by the financial creditor is not legally sustainable.
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The Tribunal carefully analysed legal provisions especially section 79 and section 5(22) of the IBC. Section 79 provides that Adjudicating Authority for individuals and partnership firms is Debt Recovery Tribunal (DRT) and not NCLT. Whereas section 5(22) defines a personal guarantor as an individual who is a surety in a contract of guarantee to a corporate debtor. It was noted that the term personal guarantor did not cover partnership firms therefore they do not fall under the scope of section 95 of the IBC.
After reading these two provisions and the notification together, the bench held that partnership firms are expressly excluded from the purview of section 95 of the IBC. Section 95 covers only individual personal guarantors and not partnership firms. The NCLT concluded that since partnership firms are not covered by section 5(22) of the IBC, a petition under section 95 against them cannot be maintained. The appropriate forum to proceed against them will be the Debt Recovery Tribunal as provided under section 79 of the IBC.
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