The NCLT noted that a personal guarantor means an individual who is a surety to a corporate debtor in a contract of guarantee with that corporate debtor.
Through a common judgment delivered on Tuesday, the Jaipur Bench of the National Company Law Tribunal (NCLT) clarified the ambit of Non-Banking Finance Companies (NBFCs) as corporate debtors and the initiation of insolvency proceedings against personal guarantors of such financial service providers under the Insolvency and Bankruptcy Code (IBC) [Shapoorji Pallonji Finance Private Limited v. Rekha Singh].
The NCLT had to consider whether a Corporate Insolvency Resolution Process (CIRP) could be initiated by a financial creditor under Section 95 of the Code against any personal guarantor of M/s Jumbo Finvest (India) Limited, which is an NBFC and a financial service provider (FSP), particularly in the absence of any CIRP against the NBFC.
The order stated that under ordinary circumstances, FSPs were not included in the definition of corporate person under Section 3(7) of the Code, except such categories of FSPs as demarcated under the FSP Threshold Notification dated November 18, 2019, which notified the categories of FSPs, as per Rule 2 of the Insolvency and Bankruptcy (lnsolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, to which the FSP Rules would be applicable.
The FSP Threshold Notification stated that insolvency resolution and liquidation proceedings could be undertaken only for NBFCs that have an asset size of ₹500 crore or more. In the present case, it was found that the total asset size of Jumbo Finvest (India) Limited is less than ₹500 crores. Therefore, the NCLT held that Jumbo Finvest would be excluded from the ambit of the FSP Threshold Notification.
As such, it was held that Jumbo Finvest, which was the principal borrower, would not strictly fall within the scope of a corporate person under the Code, and therefore, would not qualify as a corporate debtor.
The NCLT noted that a personal guarantor means an individual who is a surety to a corporate debtor in a contract of guarantee with the latter. It held that in order for an individual to be a personal guarantor, the individual has to be a surety, there has to be a contract of guarantee and the individual has to be guarantor to a corporate debtor.
The Tribunal further held that the definition of personal guarantors under Section 5(22) of the Code expresses that they can be recognised as such, only if the person or entity for whom they have given guarantee is a corporate debtor.
Therefore, as it was held that that Jumbo Finvest was not a corporate debtor, the NCLT accordingly stated that the guarantors of the aforesaid company cannot be considered as personal guarantors under the provisions of the Code.
The order also noted that the consequences of CIRP are dire and almost penal, therefore, definitions must be strictly construed. As a result, the Tribunal dismissed the applications seeking initiation of insolvency against the personal guarantors of Jumbo Finvest.