Case Note & Summary
The National Company Law Appellate Tribunal (NCLAT) heard an appeal against an order of the Adjudicating Authority (NCLT, Chandigarh Bench) dated 01.07.2024, which allowed an application filed by the Central Bank of India (Respondent) for re-constitution of the Committee of Creditors (CoC) by excluding the Appellants, who were personal guarantors of the corporate debtor M/s Ram Hari Auto Pvt. Ltd. The Appellants, Mr. Suresh Kumar and Mr. Raj Kumar, challenged this order. The brief facts are that a Corporate Insolvency Resolution Process (CIRP) was initiated against the corporate debtor. The Central Bank of India, a financial creditor, filed an application seeking exclusion of the personal guarantors from the CoC. The Adjudicating Authority allowed the application, directing re-constitution of the CoC by excluding the Appellants. Aggrieved, the Appellants filed the present appeal. The legal issue was whether personal guarantors can be members of the CoC in the CIRP of the corporate debtor. The Appellants argued that they are financial creditors and entitled to be in the CoC. The Respondent contended that personal guarantors are not financial creditors of the corporate debtor and cannot be part of the CoC. The NCLAT analyzed Section 21(2) of the Insolvency and Bankruptcy Code, 2016, which defines the composition of the CoC, and held that only financial creditors are members. Personal guarantors are not financial creditors of the corporate debtor; their liability arises from a guarantee, not from a debt owed by the corporate debtor. The court also referred to Section 60(2) of the IBC, which provides for separate proceedings against personal guarantors. The NCLAT concluded that the Adjudicating Authority erred in allowing the application for exclusion, as personal guarantors were never entitled to be members of the CoC. The appeal was allowed, and the impugned order was set aside. The NCLAT directed that the CoC be constituted in accordance with law, excluding the personal guarantors.
Headnote
A) Insolvency and Bankruptcy Code - Committee of Creditors - Exclusion of Personal Guarantors - Section 21(2) of IBC, 2016 - The issue was whether personal guarantors of a corporate debtor can be members of the Committee of Creditors in the CIRP of the corporate debtor. The NCLAT held that personal guarantors are not entitled to be members of the CoC as per Section 21(2) of the IBC, which only includes financial creditors. The Adjudicating Authority's order directing re-constitution of CoC by excluding the appellants (personal guarantors) was set aside. (Paras 1-15) B) Insolvency and Bankruptcy Code - Personal Guarantors - Separate Proceedings - Section 60(2) of IBC, 2016 - The court noted that proceedings against personal guarantors are separate and can be initiated under Section 60(2) of the IBC. The presence of personal guarantors in the CoC of the corporate debtor is not contemplated under the Code. (Paras 10-12)
Issue of Consideration
Whether personal guarantors of a corporate debtor can be excluded from the Committee of Creditors during the Corporate Insolvency Resolution Process of the corporate debtor under the Insolvency and Bankruptcy Code, 2016.
Final Decision
Appeal allowed. Impugned order dated 01.07.2024 set aside. The Committee of Creditors to be constituted in accordance with law, excluding personal guarantors.
Law Points
- Personal Guarantors are not members of Committee of Creditors in CIRP of corporate debtor
- Section 21(2) of IBC
- 2016 does not include personal guarantors
- Section 60(2) of IBC
- 2016 provides for separate proceedings against personal guarantors
- Insolvency and Bankruptcy Code
- 2016
