Liability of Personal Guarantors of a Corporate Debtor during the Corporate Insolvency Resolution Process

State Bank of India (‘SBI’) had sanctioned a loan to Lohia Machines Limited (‘LML’) which was guaranteed by the directors of LML. Upon non repayment, SBI approached the Debt Recovery Tribunal, Allahabad (‘DRT’). However, in parallel, LML also filed an application before the National Company Law Tribunal (‘NCLT’), Allahabad Bench, to initiate a corporate insolvency resolution process (‘CIRP’) in respect of itself. In response to the CIRP being admitted, although the DRT stayed the proceedings against LML, it continued to hear the matter in relation to the enforcement of personal guarantees given by the directors of LML. Aggrieved by DRT, the personal guarantors filed a writ petition before the Allahabad High Court. The Allahabad High Court passed an order[1] dated September 6, 2017, staying the DRT proceedings against the personal guarantors and stated: (i) under Section 60(1) of the Insolvency and Bankruptcy Code, 2016 (‘IBC’), NCLT is the adjudicating authority for resolution of insolvency and liquidation of a corporate person (including a personal guarantor); (ii) when liability is co-extensive and proceedings are still in a fluid stage, two split proceedings cannot go on simultaneously before the DRT and the NCLT for the same cause of action; and (iii) the scope of the CIRP order passed by NCLT imposing a moratorium on all legal proceedings, extends beyond the properties of the corporate debtor and suits/proceedings pertaining to the corporate debtor. Accordingly, the Allahabad High Court stayed the DRT proceedings against the personal guarantors till the finalisation of the CIRP or till approval of the resolution plan by NCLT or passing of an order for liquidation of LML by NCLT, as the case may be.

[1]     Sanjeev Shriya v. State Bank of India, Writ–C Nos. 30285 and 30033 of 2017


Published In:Inter Alia - Quarterly Edition - October 2017 [ English Chinese japanese ]
Date: October 1, 2017