NCLAT Upholds Validity of Insolvency Proceedings Against Personal Guarantors in LIC HFL Trustee Case

Tribunal Dismisses Appeals, Affirms Liability of Personal Guarantors as Co-Extensive with Corporate Debtor  

In a significant judgment, the National Company Law Appellate Tribunal (NCLAT) in Chennai has dismissed the appeals filed by Mr. B. Nirmal Kumar and others, challenging the insolvency proceedings initiated against them as personal guarantors for the corporate debtor, M/s. JBM Homes Private Limited. The decision, rendered by Justice Sharad Kumar Sharma and Member Jatindranath Swain, affirms the validity of proceedings under Section 95 of the Insolvency and Bankruptcy Code, 2016.  

The appeals were directed against the National Company Law Tribunal's (NCLT) order that initiated the insolvency resolution process against the appellants, who acted as personal guarantors to JBM Homes. The appellants contended that the proceedings were invalid, citing issues of default, conversion of debentures, and limitations.  

The tribunal found that the appellants, as personal guarantors, were liable under Section 128 of the Contract Act, 1872, which establishes the co-extensive liability of guarantors with that of the principal debtor. The tribunal noted that the default was established and affirmed by the records filed with the Information Utility, confirming the debt due as of September 27, 2018.  

The judgment also delved into the nature of Optionally Fully Convertible Debentures (OFCDs) involved in the case, which are part equity and part debt. The tribunal directed the NCLT to ascertain the actual amount due from personal guarantors during the preparation of the payment plan, considering the hybrid nature of OFCDs.  

Respondents, LIC HFL Trustee Company Private Ltd and Vistra ITCL (India) Limited, had initiated the proceedings, asserting the default on the OFCDs issued by JBM Homes. The tribunal upheld the initiation of proceedings as valid, dismissing the arguments of the appellants on grounds of default date notification and service of notice.  

The judgment is seen as a reaffirmation of the principles governing personal guarantors under the IBC, emphasizing their liability as synonymous with that of corporate debtors. The tribunal’s decision highlights the importance of adhering to contractual terms and timelines in financial agreements.  

The NCLAT’s ruling underscores the need for clarity in financial documentation and the responsibilities of personal guarantors, setting a precedent for similar cases involving insolvency and bankruptcy proceedings.  

Bottom Line:

Proceedings under Section 95 of the Insolvency and Bankruptcy Code, 2016 against personal guarantors of corporate debtors are valid when default is established, and liability under Section 128 of the Contract Act is co-extensive with that of the principal debtor.

Statutory provision(s): Insolvency and Bankruptcy Code, 2016 - Section 95, Section 100; Contract Act, 1872 - Section 128; Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 - Rule 3

Mr. B. Nirmal Kumar v. LIC HFL Trustee Company Private Ltd, (NCLAT)(Chennai) : Law Finder Doc Id # 2809080