In a recent decision, the division bench of NCLT, Delhi comprising of Rahul Bhatnagar Mahendra (Technical Member) and Khandelwal (Judicial Member), found no merit in an interim application for substitution of legal heirs of the deceased personal guarantor and dismissed it together with the company petition and other pending interlocutory applications.
The Applicant had made an application under Section 95 of the Insolvency And Bankruptcy Code, 2016 for initiation of the Insolvency Resolution Process against the personal guarantor in 2020. However, during the pendency of the matter, the personal guarantor passed away. In a bid to continue the proceedings, the Applicant filed an interim application to bring on record the legal heirs of the deceased personal guarantor.
The Applicant relied upon provisions contained in Section 123(5) (proceedings against deceased debtors legal representatives) and 169 (proceedings to continue as if bankrupt was alive) of the IBC as well as on Section 17 of the Provincial Insolvency Act, 1920 and the judgement of the Hon’ble Allahabad High Court in Molhar Singh vs. Raghunath. The Bench, however, dismissed, stating that reliance on the above was misplaced in this case, as neither was an order passed by the adjudicating authority nor was any bankruptcy order passed. Furthermore, Section 17 was in relation to the Provincial Insolvency Act, 1920 and not under the IBC.
The issue of whether, on death of a personal guarantor, proceedings initiated under IBC Part III shall abate or not has been considered previously by NCLT. In 2021, the Principal Bench of NCLT in Alchemist Asset Reconstruction Company vs Deepak Puri (Company Petition No. IB 438 (PB) of 2021) held as under:
"It has been rightly pointed out that in a case of proceedings under Section 95 of the IBC, 2016, it is case for initiation of Insolvency Resolution Process against the Personal Guarantor and it is not a case for recovery of any amount because that will go contrary to the scheme of IBC, 2016, in such situation on the demise of the Personal Guarantor, an individual who has given his guarantee in the favour of Corporate Debtor, the question of continuing the proceedings against such a dead person will not arise. Since the proceedings abate, the Section 95 also has to be closed.”
The Bench also placed reliance on a recent judgment of the Apex Court in the matter of Vinayak Purushottam Dube (Deceased), Through Lrs versus Jayashree Padamkar Bhat and Others that held as under:
“But in the case of a personal obligation imposed on a person under the contract and on the demise of such person, his estate does not become liable and therefore, the legal representatives who represent the estate of a deceased would obviously not be liable and cannot be directed to discharge the contractual obligations of the deceased.”
The implications of this ruling impact creditors who rely on personal guarantees as a means for securing their interests. Every corporate debtor will have to rethink their strategies as personal guarantors and consider other additional securities to mitigate their risk.
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