NCLT Chennai: Personal Guarantors Can’t Invoke Insolvency to Stall SARFAESI Recovery Proceedings
Introduction
The National Company Law Tribunal (NCLT), Chennai Bench, has held that personal guarantors cannot misuse the insolvency framework under the Insolvency and Bankruptcy Code, 2016 (IBC) as a tool to delay or obstruct legitimate recovery actions initiated by creditors. The tribunal observed that the insolvency process is intended for genuine resolution and not for evading liability or frustrating the enforcement of valid claims under other legal mechanisms.
Factual Background
The case concerned K.C. Mohanan, who had extended a personal guarantee for the credit facilities availed by We Two Engineering Pvt. Ltd., a Kochi-based equipment manufacturer. The company had defaulted on loans amounting to nearly ₹23 crores, leading the South Indian Bank Ltd. to classify its account as a Non-Performing Asset (NPA). Upon invocation of the personal guarantee, recovery proceedings were initiated under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). In response, the personal guarantor, claiming financial incapacity, filed an application under Section 94 of the IBC seeking initiation of insolvency proceedings against himself.
Procedural Background
The Interim Resolution Professional (IRP), Madhu Desikan, recommended the admission of the application without addressing the creditor’s pending recovery proceedings or the guarantor’s conduct. The creditor bank filed objections, contending that the guarantor had made partial payments, released certain mortgaged assets, and concealed crucial details to mislead the tribunal and delay enforcement.
The matter was heard by a coram of Judicial Member Jyoti Kumar Tripathi and Technical Member Ravichandran Ramasamy, who examined the IRP’s report and the bank’s objections.
Issues
1. Whether a personal guarantor can invoke Section 94 of the IBC to initiate insolvency proceedings when recovery actions under the SARFAESI Act are already underway.
2. Whether the IRP’s recommendation for admission of the petition was valid despite failing to assess the applicant’s conduct and the pending recovery proceedings.
3. Whether Section 94 of the IBC can be used as a mechanism to delay or obstruct legitimate creditor recoveries.
Contentions of the Parties
For the Personal Guarantor: It was argued that the guarantor faced genuine financial distress and was unable to meet the repayment obligations arising from the invocation of the personal guarantee. The application was portrayed as a bona fide attempt to seek resolution under the IBC framework rather than avoid liability.
For the Respondent Bank: The bank contended that the guarantor was engaging in bad faith and had deliberately filed the insolvency petition to stall recovery under SARFAESI. The respondent highlighted that the guarantor had concealed key financial details, misrepresented liabilities, and made selective repayments while continuing to default. It argued that Section 94 was being weaponised to frustrate lawful enforcement actions.
Reasoning and Analysis
The Tribunal found that the IRP had mechanically recommended the admission of the application without examining the guarantor’s conduct or the status of ongoing recovery actions. It criticised the IRP for failing to discharge his statutory duty of verifying whether the application was filed in good faith and for not accounting for the pendency of SARFAESI proceedings.
The Bench held that Section 94 of the IBC cannot be invoked as a “safe harbour” to delay or obstruct recovery. Referring to the NCLAT’s ruling in Syed Sirajis Salikin Khadri, it reiterated that insolvency proceedings must be reserved for bona fide cases of financial distress and not used as an instrument of abuse by defaulting guarantors. The Tribunal observed, “While the IRP has mechanically recommended acceptance of the petition, his report does not take into account the conduct of the Applicant, the pending SARFAESI proceedings, or the Applicant’s attempt to use the Code as a shield against recovery, which is contrary to the legislative intent.” Accordingly, the NCLT held that the applicant’s conduct was inconsistent with the objectives of the IBC and dismissed the insolvency petition.
Implications
The decision reinforces the principle that the IBC cannot be used to obstruct or override legitimate recovery mechanisms like SARFAESI. It underscores the responsibility of insolvency professionals to critically assess the bona fides of applications filed by personal guarantors and prevent misuse of the Code. The ruling also highlights that insolvency proceedings must serve the purpose of genuine resolution, not as a refuge for willful defaulters or guarantors seeking to evade enforcement actions.