Insolvency Proceedings Cannot Be Commenced Against The Legal Heirs Of A Personal Guarantor Under The Insolvency And Bankruptcy Code 2016: Bank Of Baroda, Stressed Asset Management Branch (Samb) V Ms Divya Jalan, Legal Heir Of Personal Guarantor Late Sandeep Kumar Jalan1

Background

Kilburn Chemicals Limited obtained credit facilities of c. ₹103 Crores from, inter alia, Bank of Baroda, which were guaranteed by, inter alia, Mr Sandeep Kumar Jalan.

The Guarantor passed away and in August 2021, the Bank issued a demand notice against his legal heirs on the basis that the guarantee agreement provided an exhaustive list of legal heirs and also stated that upon demise of the Guarantor, the Bank would be entitled to recover from his legal heirs.

On this basis, the Bank filed an application under §95(1) of the Insolvency and Bankruptcy Code 2016 (IBC) “for initiating the Insolvency Resolution Process against viz., Ms Divya Jalan, legal heir of Personal Guarantor”.

The NCLT's Decision

The NCLT, Calcutta dismissed the application saying:

  1. The definitions of a “personal guarantor”, in 5(22) of the IBC and Rule 3(1)(e) of the Insolvency & Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules 2019, does not include legal heirs of the personal guarantor.
  1. Upon admission of an application under 95 of the IBC, there is a moratorium on the assets of the personal guarantor and if the legal heirs were to be put in the shoes of the personal guarantor, then the personal assets of such heir would be hit by the moratorium which would gravely prejudice the heir's rights.
  1. The IBC is clear in as much as it refers to the “estate/assets of the Personal Guarantor”
  1. Accordingly, the definition of “personal guarantor” in the guarantee agreements are inconsistent with the definition of a “personal guarantor” under the IBC.

Conclusion

One has to wait and see if the decision is appealed to the NCLAT and the view taken by the NCLAT on this issue.  

Footnote

1 Decision dated 11 February 2022 passed by the National Company Law Tribunal, Kolkata Bench in CP (IB) No. 363/KB/2021.

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