Ambiguous Contours of Personal Guarantors under IBC and the Consequential Implications

The Hon’ble apex court’s dictum in Lalit Kumar Jain marked the inclusion of the personal guarantors in the debt resolution and asset maximisation framework of IBC. This paved the way for personal guarantors to institute IRP proceeding against themselves, and for financial creditors and the resolution professionals to initiate IRP proceedings against personal guarantors under Sections 94 and 95 of the IBC. Yet the said framework, despite several judicial clarifications ranging from SBI v. Ramakrishnan to P. Mohanraj case, remains fraught with challenges at multiple stages for personal guarantors under the IBC. The first issue is the ambiguity surrounding the pre-requisite conditions for filing an application under Section 95 of the IBC. This ambiguity arises from the Supreme Court’s observation in Mahendra Kumar Jajodia v. SBI which settled the law that CIRP is not a pre-requisite condition for filing a Section 95 application, yet NCLAT in its recent orders, has muddled the effect of the Mahendra Jajodia case by observing that CIRP constitutes an essential condition to invoke the Section 95 application. The second issue concerns the vacuum left by quasi-judicial bodies like NCLT & NCLAT, particularly the inconsistency between the form & manner of invoking the Bank Guarantee and the void created by the absence of the terms and conditions in the Guarantee Deed, thereby creating imminent issues while invoking Section 95(4) IBC in order to institute IRP against the Personal Guarantors. In light of the aforesaid issues, among others, a much-needed clarity is sought by the quasi-judicial and the judicial bodies as well on the potential contradictions that lie between the provisions of IBC and the incidental Regulations and Rules as intended by the lawmakers and the interpretation done by NCLT, NCLAT and other judicial forums thereon. Accordingly, the author briefly outlines the judicial underpinnings, and thereby pens comments and sheds some light on the glaring inconsistencies that lie between the provisions of IBC and the judicial precedents with respect to the pre-requisite conditions for filing Section 95 application under IBC, vacuum in the Guarantee Deed and the invocation of Guarantee thereon, the scope of Interim Moratorium under Section 96 IBC.