Excluding Personal Guarantees in Resolution Plans: Insights from Nitin Chandrakant Naik v. Sanidhya Industries LLP

Introduction

The case of Nitin Chandrakant Naik And Another v. Sanidhya Industries LLP And Others delivered by the National Company Law Appellate Tribunal (NCLAT) on August 26, 2021, stands as a pivotal judgment in the realm of corporate insolvency under the Insolvency and Bankruptcy Code, 2016 (IBC). This case delves into the contentious issue of whether personal properties of promoters, who have provided personal guarantees for the corporate debtor, can be included in the Resolution Plan during the Corporate Insolvency Resolution Process (CIRP). The appellants, being promoters and suspended directors of the corporate debtor 'Simrut Foods & Hospitality Private Limited', challenged the approval of a Resolution Plan that sought to transfer their personal properties as part of the insolvency resolution.

Summary of the Judgment

The appellants contested the impugned order dated November 13, 2019, issued by the Adjudicating Authority (National Company Law Tribunal, Mumbai Bench) which approved a Resolution Plan submitted by Sanidhya Industries LLP, acting as the Resolution Applicant. The core grievance was the inclusion of the appellants' personal properties in the Resolution Plan, which they argued was beyond the purview of CIRP under IBC Regulation 37, as the process is intended solely for the corporate debtor’s assets.

The NCLAT, presided over by A.I.S. Cheema, meticulously examined the legal framework and precedents to determine the validity of including personal guarantees within the Resolution Plan. The tribunal found that at the time of the Resolution Plan’s approval, Section 2(e) and Part-III of the IBC, which pertain to personal guarantors, had not been enforced. As a result, personal properties of guarantors could not be treated as part of the corporate insolvency process. Consequently, the tribunal quashed the impugned order and the Resolution Plan, directing the Adjudicating Authority to proceed with liquidation under Section 33 of the IBC.

Analysis

Precedents Cited

The judgment extensively referenced the Supreme Court case State Bank Of India v. V. Ramakrishnan to elucidate the legal position regarding personal guarantors in CIRP. In that case, the Supreme Court clarified that, prior to the enforcement of Part-III of the IBC, personal guarantors were governed by earlier insolvency laws such as the Presidency Towns Insolvency Act, 1909, Provincial Insolvency Act, 1920, and the Recovery of Debts Due to Banks and Financial Institutions Act, 1993. The Court emphasized that Section 14 of the IBC, which imposes a moratorium during CIRP, pertains exclusively to the corporate debtor and does not extend to personal guarantors unless Part-III is in force.

Key Observation: Before the enforcement of Part-III of the IBC, personal guarantors cannot be included in the corporate insolvency process. Appropriate legal proceedings under existing laws must be followed to address claims against guarantors.

Additionally, the tribunal referenced the Supreme Court judgment in Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta, which dealt with the extinguishment of personal guarantees and highlighted the binding nature of Resolution Plans on guarantors under Section 31 of the IBC.

Legal Reasoning

The NCLAT’s legal reasoning hinged on the temporal applicability of IBC provisions. At the time of the Resolution Plan's approval in November 2019, the Government had not yet enforced Part-III of the IBC, which exclusively addresses insolvency resolution and bankruptcy for individuals and partnership firms. Therefore, without this part being active, the existing laws governed the treatment of personal guarantors.

The tribunal found that the Adjudicating Authority erred by incorporating personal properties of the appellants into the Resolution Plan without adhering to the procedural safeguards required under the applicable laws. Specifically, Regulation 36(2)(f) of the CIRP Regulations mandates the inclusion of guarantee details but does not equate guarantor assets with corporate debtor assets. The absence of a proper valuation and the failure to reflect the personal assets appropriately in the Information Memorandum further compounded the irregularities.

Furthermore, the tribunal criticized the Resolution Professional and the Committee of Creditors for their collusion in approving a plan that disadvantaged the appellants by undervaluing their personal assets and incorporating them into the corporate resolution without due process.

Impact

This judgment underscores the clear demarcation between corporate insolvency proceedings and personal guarantor obligations in the absence of Part-III of the IBC. It reinforces the principle that Resolution Plans under IBC Part-II are confined to the assets and liabilities of the corporate debtor unless specific provisions for guarantors are enacted.

For future cases, this decision serves as a precedent that Resolution Plans cannot overstep their boundaries by encroaching upon the personal assets of guarantors without the appropriate legal framework facilitating such actions. It emphasizes the necessity for Resolution Professionals and Committees of Creditors to adhere strictly to the statutory mandates of the IBC and existing laws governing personal guarantees.

Additionally, this judgment may influence how personal guarantees are treated in ongoing and future insolvency proceedings, particularly highlighting the need for stakeholders to clearly understand the legal avenues available for enforcing personal guarantees outside the corporate insolvency resolution process.

Complex Concepts Simplified

Corporate Insolvency Resolution Process (CIRP)

CIRP is a process under the IBC where a financially distressed company undergoes restructuring to pay off its debts. This process is managed by an Insolvency Professional and overseen by the National Company Law Tribunal.

Personal Guarantors

Personal guarantors are individuals who provide personal assets as collateral to secure a loan for a corporate entity. If the corporate debtor defaults, creditors can claim against the guarantors' personal assets.

Resolution Plan

A Resolution Plan is a proposal submitted during CIRP outlining how the debtor's obligations will be settled, typically involving restructuring of debts and reorganization of the company's operations.

Moratorium under Section 14

Upon initiation of CIRP, a moratorium is declared, preventing creditors from initiating or continuing legal actions against the corporate debtor. However, as clarified in this judgment, this moratorium does not extend to personal guarantors unless specific IBC provisions apply.

Conclusion

The NCLAT's judgment in Nitin Chandrakant Naik v. Sanidhya Industries LLP delineates the boundaries of the Corporate Insolvency Resolution Process under the Insolvency and Bankruptcy Code, specifically in relation to personal guarantors. By invalidating the Resolution Plan that improperly included personal properties of the guarantors, the tribunal reinforced the principle that CIRP under IBC Part-II is confined to the corporate debtor unless legislative provisions explicitly extend its scope to personal assets.

This decision not only rectifies procedural lapses in the adjudication of the Resolution Plan but also safeguards the interests of personal guarantors, ensuring that their personal assets are not unjustly implicated in corporate insolvency proceedings. It serves as a crucial reminder for stakeholders to adhere to statutory confines and underscores the importance of maintaining clear distinctions between corporate and personal liabilities within insolvency frameworks.