The Hon’ble National Company Law Tribunal, Jaipur (“NCLT”) has by its order dated February 22, 2022, in the matter of Shapoorji Pallonji Finance Private Limited v. Rekha Singh [IA No. 229/JPR/2021 in C.P. No. (IB) – 25/95/JPR/2021] held that no insolvency proceedings can be initiated under the Insolvency and Bankruptcy Code, 2016 (“IBC”) against personal guarantors of Non-Banking Financial Companies (“NBFCs”) unless threshold of asset size of INR 500 Crores is satisfied.

Facts

The present interim application was filed by Rekha Singh, the personal guarantor (“Applicant/ Personal Guarantor”) against Shapoorji Pallonji Finance Private Limited (“Petitioner/ Financial Creditor”) seeking dismissal of company petition filed under Section 95 of the IBC against the Applicant (“Petition”) on account of being non-maintainable.

The Petition was filed by the Financial Creditor to initiate insolvency resolution process in the case of the Applicant under Sections 60 and 95 of the IBC read with Rule 7(2) of Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtor) Rules, 2019.

The Personal Guarantor had, through a personal guarantee, secured repayment of a term loan advanced by the Petitioner to Jumbo Finvest (India) Limited (“Jumbo Finvest”), a NBFC, under a facility agreement. However, Jumbo Finvest had failed to make payment of interest amounts for the months of September, 2020 and October, 2020 and also failed to repay the principal amount instalment for the quarter ending in September, 2020.

The Petitioner was heard on June 17, 2021, and the following order was passed:
“[…] The Petitioner shall file a short affidavit with regard to the page reference of; the relevant demand notice, acknowledgement of the receipt of the said demand notice and the relevant emails within two weeks. The Petitioner shall also file copy of the master data of the Corporate Debtor for which the Respondent is a personal guarantor along with the affidavit…”.

On July 12, 2021, the Applicant filed an interim application to set aside the aforesaid order on the basic premise that the same had been passed without hearing the Applicant. The said interim application was heard on July 20, 2021 and dismissed on the anvil.

Subsequently, after receipt of notice in the main Petition, the Applicant filed the present interim application seeking dismissal of the Petition.

Issue

Whether insolvency resolution process can be initiated against any personal guarantor of Jumbo Finvest, which is a NBFC and a financial services provider (“FSP”), by the Petitioner/ Financial Creditor under Section 95 of the IBC, particularly in absence of any corporate insolvency resolution process (“CIRP”) against the NBFC.

Arguments

Contentions raised by the Applicant:

Firstly, Jumbo Finvest is a NBFC registered with the Reserve Bank of India (“RBI”). As per the provisions of Section 3(7) of the IBC, the provisions of the IBC are not applicable to a NBFC. Secondly, there is no on-going insolvency process with respect to Jumbo Finvest and, therefore, the Petition filed by the Petitioner is not maintainable. Thirdly, as per Section 60 of the IBC, insolvency of a personal guarantor can be filed before the Hon’ble Adjudicatory Authority only if either CIRP or liquidation proceedings are pending against the corporate debtor before the National Company Law Tribunal. Therefore, no insolvency application can be filed against the personal guarantor of a NBFC and, hence, the Petition which had been filed by the Financial Creditor, under Section 95 of the IBC against the Applicant is not admissible.

The Applicant further submitted that a bare perusal of Section 60(2) of the IBC would go to show that it is necessary that CIRP has already been initiated against the corporate debtor prior to the filing of the insolvency application against the personal guarantor. As far as Section 60(1) of the IBC is concerned, the same does not deal with the situation as to when an insolvency resolution or bankruptcy against the personal guarantor can be initiated. It merely deals with the territorial jurisdiction with the NCLT for dealing with insolvency application.

The Applicant submitted that the notification no. S.O. 4139(E) dated November 18, 2019, issued by Ministry of Corporate Affairs (“FSP Threshold Notification”) would go to show that CIRP can only be initiated against FSPs by the RBI, where the asset size of the NBFC is INR 500 Crores or more as per the last audited balance sheet. In this regard, it was submitted that as per the last audited balance sheet of Jumbo Finvest, the asset size as per the balance sheet as at March 31, 2020, is approximately INR 487 Crores and, therefore, the FSP Threshold Notification is not applicable in the present facts and circumstances. Further, even for the balance sheet as ending on March 31, 2021, as per the unaudited figures, the total asset size of Jumbo Finvest is approximately INR 407 Crores, which is far below the threshold limit as specified in the FSP Threshold Notification. In view of the aforesaid, it was clear that even the RBI is not empowered to initiate CIRP against Jumbo Finvest and accordingly, no personal insolvency application can be filed against the Personal Guarantor. Furthermore, even assuming though not admitting that CIRP can be initiated against Jumbo Finvest, even then, since no application either under Section 7 or 9 of the IBC is pending against Jumbo Finvest, the present application filed by the Petitioner is not maintainable and the same is required to be dismissed.

Lastly, it was submitted that the provisions of the Indian Contract Act, 1872 (“ICA”) had nothing to do with the initiation of the insolvency against the Applicant.

Contentions raised by the Petitioner/ Financial Creditor:

The Petitioner contended that Section 60(1) of the IBC provides that insolvency resolution or liquidation of personal guarantors of corporate persons will go before the same National Company Law Tribunal having territorial jurisdiction where the registered office of the corporate person is located. Further, Section 60(1) of the IBC makes it clear that there is no necessity for a CIRP to exist against a corporate person for a CIRP to be entertained against the personal guarantor of such corporate person. It shows that Section 60(1) of the IBC would include in its ambit an individual covered by Section 95 of the IBC, if being sued in his capacity as a personal guarantor.

Furthermore, the contention of the Petitioner stating that in light of changes made to the IBC read with the Insolvency and Bankruptcy (Insolvency and Bankruptcy Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019 (“FSP Rules”), the Petitioner, being barred by law from initiating CIRP against a NBFC like Jumbo Finvest, can in no way mean that no CIRP can be initiated against personal guarantors of NBFCs till the RBI has initiated CIRP against the requisite NBFC.

The Financial Creditor further submitted that in addition to the provisions of the IBC, the contract of guarantee provided by the Applicant is also covered under the ICA. Section 128 of the ICA stipulates that the liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract. In the present case, the liability of the Applicant is as if she herself was a co-obliger along with Jumbo Finvest. Thus, the Applicant can be proceeded against even under the ICA.

Observations of the NCLT

The NCLT observed that Jumbo Finvest is a FSP in terms of the FSP Rules. The FSP Threshold Notification clarified that insolvency resolution and liquidation proceedings of NBFCs with asset size of INR 500 Crores or more, as per last audited balance sheet, shall be undertaken in accordance with the provisions of the IBC read together with the FSP Rules. As per the last audited balance sheet of Jumbo Finvest for year ending on March 31, 2020, and as per unaudited figures for the year ending March 31, 2021, Jumbo Finvest is excluded from the ambit of the FSP Threshold Notification.

In view of the above, Jumbo Finvest, the principal borrower, does not stricto sensu qualify within the tight definition of corporate person under the IBC, as the said definition excludes FSP. Further, the FSP Threshold Notification does not sweep it back into inclusion as a corporate person. So, as per debt being carried, such NBFC does not qualify as a corporate debtor.

Moreover, even if Jumbo Finvest is excluded by virtue of the FSP Threshold Notification, the generic inclusion by virtue of Rule 4 of the FSP Rules enunciates that in all the provisions relating to insolvency and liquidation proceedings under the IBC, the expression “corporate debtor” wherever it occurs, shall mean “FSP”. This cannot lead to a situation that the phrase corporate debtor in IBC is contextually read as FSP, while the FSP Threshold Notification excludes certain FSPs. The FSP Rules are applicable only to the extent that the concerned NBFC/ Housing Finance Company qualifies under FSP Threshold Notification of asset size of INR 500 Crores or more. In the present case, as stated earlier, Jumbo Finvest does not fall within the ambit of the category of NBFC having asset size of INR 500 Crores or more and, therefore, the FSP Rules shall not be applicable to it. It is clear that Jumbo Finvest is not a corporate debtor in the present case.

Further, personal guarantor means an individual who is a surety in a contract of guarantee to a corporate debtor. Therefore, in order for an individual to be a personal guarantor, all the following pre-requisites are required to be fulfilled: (a) the individual has to be a surety; (b) there has to be a contract of guarantee; and (c) the individual has to be a guarantor to a corporate debtor. In this case, the guarantors to Jumbo Finvest do not strictly fall within the definition of personal guarantors and have existence as individuals only.

Insolvency resolution process can be initiated against the personal guarantor of a NBFC/ FSP irrespective of CIRP against the NBFC, provided that the concerned NBFC falls within the category of those FSPs having assets size of INR 500 Crores or more. The definition of personal guarantors under Section 5(22) of the IBC cogently implies that they can be recognised as personal guarantors under the IBC, subject to the condition, and only if, the person or entity for whom they have given guarantee is a corporate debtor. Therefore, as it is amply clear that Jumbo Finvest is not a corporate debtor, the guarantors of the aforesaid company cannot be considered as personal guarantors under provisions of the IBC. Since consequences of CIRP are drastic and almost penal for any entity, whether corporate or individual, definitions must be strictly construed.

Decision of the NCLT

In view of entirety of the foregoing, the NCLT held that, since Jumbo Finvest does not fall within the ambit of the category of NBFC having asset size of INR 500 Crores or more, it is not a corporate debtor, and hence the guarantors of Jumbo Finvest cannot be considered as personal guarantors under provisions of the IBC. Therefore, no insolvency proceedings can be initiated against them. The interim application filed by the Applicant was allowed and accordingly disposed of. The Petition by the Financial Creditor against the Applicant was not maintainable and was accordingly dismissed.

VA View:

The NCLT has, through this judgment, answered two critical questions pertaining to initiation of CIRP under the IBC. Firstly, application(s) for insolvency resolution process can be initiated against any personal guarantor to a corporate debtor irrespective of CIRP against the corporate debtor. Secondly, insolvency resolution process can be initiated against the personal guarantors of NBFCs/ FSPs, provided the concerned NBFC meets the criteria specified in the FSP Threshold Notification. In light of the above, financial creditors shall, before initiating any insolvency proceedings against personal guarantors, ensure that the NBFC falls within the category of those FSPs having asset size of INR 500 crores or more, and thus being included in the definition of corporate debtor under the IBC.

For more information please write to Mr. Bomi Daruwala at [email protected]

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