- Mr. Barun Mitra of the National Company Law Appellate Tribunal, New Delhi, recently held that Section 10A of the Insolvency and Bankruptcy Code, 2016 is not applicable to proceedings against personal guarantors under Section 95 of the Code.
- The Appellant was the Personal Guarantor for a loan of INR 2.30 Crores advanced by the Financial Creditor Siemens Financial Services Pvt. Ltd to CMI Ltd. CMI failed to pay the interest and was declared a non-performing asset (NPA) on September 11, 2020.
- Siemens filed a petition under Section 95 of the Code against the personal guarantor for Rs. 2.44 crores. The Resolution Professional were appointed by the NCLT and Interim Moratorium was imposed.
- It was argued on behalf of the Personal Guarantor that because Section 10A of the Code prohibits the initiation of a Corporate Insolvency Resolution Professional against the Corporate Debtor, no CIRP can be initiated against the Personal Guarantor.
- It was also argued on behalf of the Personal Guarantor that the commencement of CIRP against the principal borrower is a prerequisite for proceedings against the Personal Guarantor, and that when the default of the Principal Borrower is covered by Section 10A, the same shall apply to the Personal Guarantor as well.
- On behalf of Siemens, it was argued that Section 10A only applies to Corporate Debtor proceedings and thus cannot be applied to Personal Guarantor proceedings.
- The Bench noted that the purpose of Section 10A is well known, and Section 10A was inserted under IBC to protect Corporate Debtors from the effects of COVID-19.
- It was also discovered that when Section 10A was added to Chapter II, no corresponding changes were made to Part III of the Code.
- NCLAT concluded that Section 10A is only capable of one interpretation, which is the suspension of CIRP only for the Corporate Debtor and not for the Personal Guarantor, and thus dismissed the Personal Guarantor's appeal field.
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