Tribunal holds guarantor’s liability co-extensive with borrower’s debt, initiates insolvency resolution process and imposes moratorium under IBC
The National Company Law Tribunal (NCLT), Chennai Bench, has admitted a petition filed by Mrs. V. Lakshmi, a personal guarantor to loans availed by Vahanashree Marketing Services Private Limited, and initiated insolvency resolution proceedings against her under Section 94(1) of the Insolvency and Bankruptcy Code, 2016 (IBC).
The Tribunal, comprising Judicial Member Jyoti Kumar Tripathi and Technical Member Ravichandran Ramasamy, noted that the applicant had furnished personal guarantees for credit facilities extended by Tamilnad Mercantile Bank Limited (TMB) and that the corporate debtor had defaulted in repayment. The defaulted amounts included Rs. 1,13,52,633.58 and Rs. 53,75,428/-, with dates of default recorded as 14.11.2023 and 02.01.2025.
According to the order, the applicant had disclosed her assets and liabilities and had also acknowledged that the debts were not “excluded debts” under the IBC. The Tribunal had earlier appointed Resolution Professional Mr. Prabhu S. to examine the application and submit a report under Section 99 of the Code. The RP confirmed compliance with the statutory requirements and recommended admission of the petition.
TMB opposed the application, arguing that the guarantor had suppressed the fact that the bank had already partly recovered its dues through auction of mortgaged property. The bank also contended that the petition was an attempt to circumvent SARFAESI proceedings. However, the NCLT rejected this objection, observing that the sale of the mortgaged property did not bar the initiation of insolvency proceedings against the personal guarantor.
The Tribunal further held that the fact that the corporate debtor’s default was below the threshold for initiating CIRP under Section 4 of the IBC did not prevent the commencement of insolvency resolution proceedings against the personal guarantor. It reiterated that an application under Sections 94/95 of the IBC can be filed independently, without any prior CIRP against the corporate debtor.
Relying on Section 128 of the Indian Contract Act, 1872, the NCLT observed that the liability of the surety is co-extensive with that of the principal debtor unless otherwise provided by contract. On that basis, it held that Mrs. V. Lakshmi was jointly and severally liable for the debts guaranteed by her.
Finding the petition to be within limitation and satisfied that the statutory conditions were met, the Tribunal admitted CP(IBC)/52(CHE)/2025 and ordered initiation of the insolvency resolution process against the personal guarantor. It also declared moratorium under Section 101 of the IBC, restraining legal proceedings in respect of the debts and prohibiting the guarantor from transferring or encumbering assets during the moratorium period.
The Tribunal directed the Resolution Professional to issue public notice inviting claims from creditors, prepare the list of creditors, facilitate a repayment plan, and conduct further proceedings in accordance with the IBC. It also directed the petitioner to deposit Rs. 3,00,000 towards the RP’s fees and expenses.
Bottom Line :
Insolvency resolution process for personal guarantor initiated under Section 94(1) of Insolvency and Bankruptcy Code, 2016 - Personal guarantor liable for corporate debtor's default - Section 128 of Indian Contract Act, 1872 affirmed liability of surety as co-extensive with principal debtor.
Statutory provision(s): Section 94(1), Section 99, Section 101, Section 102, Section 104, Section 105, Section 106, Section 107, Section 108, Section 109, Section 110, Section 111, Section 112, Section 114, Section 128 of the Indian Contract Act, 1872, Section 4, Section 13(2), Section 79(15)(e), Section 208 of the Insolvency and Bankruptcy Code, 2016, Rule 6 of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019, SARFAESI Act, 2002
