The Ambiguity on Jurisdiction of NCLT and DRT Under IBC

Posted On - 23 November, 2021 • By - Souvik Ganguly

The problem of Non-performing Assets (NPAs) in the Indian banking system is one of its foremost predicaments. In order to allow lending institutions to recover such NPAs in an expeditious manner, the Indian Government established Debt Recovery Tribunals (DRT) under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDBFI Act), and subsequently the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act) for a speedier enforcement of secured assets of the debtor as well as the guarantor. Under SARFAESI Act, a bank or a financial institution could take possession of the secured assets of the borrower or their guarantors and auction the same for realizing the outstanding debt. However, if the guarantor has not created any security interest over the property but owns property and other assets, the bank or financial institution will have to approach the DRT under the RDDBFI Act for claiming an interest over such guarantor’s assets.

However, the efficient recovery of dues by banks and financial institutions using the DRT process was rarely achieved. Incidentally, the Bankruptcy Law Reforms Committee had in its November 2015 report (read here) noted that loan recovery rates in India were among the lowest in the world, with lenders barely managing to recover 20% (twenty percent) of the value of the debt in the event of a default. The report had attributed the dismal recovery rate to the highly fragmented bankruptcy and recovery framework in India and had recommended that there must be a single forum that hears and decides the rights of debtors as well as creditors. This eventually led to the Insolvency and Bankruptcy Code, 2016 (Code), a unified legislation to resolve insolvency and bankruptcy in India.

The Code has been brought into effect in phases and with effect from 01 December 2019, creditors were permitted to seek relief under the Code by initiating insolvency resolution process against personal guarantors of corporate debtors. The Code has designated the National Company Law Tribunal (NCLT) and also the DRTs as the Adjudicating Authorities for resolution of insolvency, liquidation and bankruptcy of corporate persons and firms and individuals. The Code has laid down express provisions to identify when the creditors can approach NCLT (for insolvency of corporate debtors and personal guarantors) or DRT (for insolvency of individuals and partnership firms). It further provides that if NCLT has jurisdiction over a matter, then the matter cannot be heard by DRT.

However, in light of the recent conflicting judgments of the NCLTs and the High Court, there is now ambiguity regarding the jurisdiction of NCLT and DRT with regards to personal guarantors.

Adjudicating Authority under the Code

The interplay between the jurisdiction of DRT and NCLT under the Code are set out in Section 179 and Section 60 of the Code. Section 179 provides that, subject to Section 60 of the Code, DRTs will have jurisdiction to entertain insolvency matters of individuals and partnership firms. Section 60 of the Code provides that the NCLT would be the adjudicating authority, in relation to insolvency resolution and liquidation for corporate persons including corporate debtors and personal guarantors. It further provides that where insolvency or liquidation proceeding of a corporate debtor is pending before a NCLT, an application relating to the insolvency of the corporate / personal guarantor of such corporate debtor shall also be filed or stand transferred before the same NCLT. This implies that whenever Section 60 is attracted, the provision of Section 179 of the Code shall not be applicable, and the jurisdiction shall vest with NCLT and not the DRT.

In Altico Capital India Ltd. v. Rajesh Patel & Ors. (Altico case), and also in Insta Capital Pvt. Ltd. v. Ketan Vinod Kumar Shah (Insta Capital case), the NCLT, Mumbai bench was faced with the question as to which forum is the appropriate adjudicating authority for insolvency proceedings of a personal guarantor in the event an application seeking insolvency / liquidation of the corporate debtor is filed before the NCLT, but such an application is still pending. In the said matters, NCLT held that an application for insolvency of the personal guarantor is not maintainable unless insolvency / liquidation is ongoing against the corporate debtor. NCLT opined that filing of applications seeking insolvency of personal guarantors without the corporate debtor undergoing insolvency / liquidation would be tantamount to vesting NCLT with jurisdiction of DRT. A similar view was also taken by the Madras High Court in Rohit Nath v. KEB Hana Bank Ltd

However, in PNB Housing Finance Ltd. v. Mr. Mohit Arora and Ors. (Mohit Arora case), the NCLT, Delhi Bench held that the moment an insolvency / liquidation application in relation to the corporate debtor is pending before the NCLT, the provisions of Section 60 get attracted and the jurisdiction to entertain insolvency / liquidation process against the personal guarantor would also lie with the NCLT and not with the DRT. The NCLT, Delhi Bench had opined that Sections 60(1), 60(2) and 60(3) of the Code, lay down three different circumstances where the power to hear the matter will lie with the NCLT and not the DRT, as illustrated below:

  • Section 60(1) – When an application “in relation” to insolvency / liquidation for corporate debtors is pending before the NCLT;
  • Section 60(2) – When insolvency / liquidation process of a corporate debtor is pending before the NCLT; and
  • Section 60(3) – When insolvency / liquidation process of a corporate debtor is pending before the NCLT and similar proceedings against the corporate guarantor or personal guarantor, as the case may be, of the corporate debtor are pending in any court or tribunal pending.

It is pertinent to note that the Supreme Court, while upholding the provisions of the Code for insolvency and bankruptcy of personal guarantors in Lalit Kumar Jain v. Union of India and Ors. (Lalit Kumar case) had opined that the Code treats ‘personal guarantors’ differently from ‘ individual’. The Supreme Court held that personal guarantors are “a separate species of individuals, for whom the Adjudicating Authority was common with the corporate debtor to whom they had stood guarantee”. In other words, the Adjudicating Authority for both the corporate debtors and their personal guarantors would be the NCLT and not the DRT.

The legislative intent to have NCLT as a single forum to deal with insolvency / liquidation of corporate debtors and their personal guarantors is further indicated from Section 60(4) of the Code which vests all the powers of DRT with NCLT and also vests NCLT with powers under Part III of the Code (insolvency resolution and bankruptcy for individuals and partnership firms). This will allow the NCLT to consider the nature of all the assets available with the corporate debtor and its personal guarantors and this would facilitate the Committee of Creditors of the corporate debtor in framing realistic plans, keeping in mind the prospect of realizing some part of the corporate debtors’ dues from its personal guarantors. Therefore, the Supreme Court’s judgment in Lalit Kumar case, and the NCLT, Delhi Bench judgment in Mohit Arora case seem to be aligned with the legislative intent of the Code, i.e., common oversight of insolvency processes of the corporate debtor, its corporate guarantor, and personal guarantors, through a single forum.

Our thoughts

In the Mohit Arora case, the NCLT, Delhi Bench based its judgments on its interpretation of Section 60(1) of the Code which provides that the Adjudicating Authority “in relation to” the insolvency resolution and liquidation for corporate persons including corporate debtors and personal guarantors thereof shall be the NCLT. In the NCLT, Delhi Bench’s considered view, the words “in relation to” depicts a situation where the insolvency or liquidation process has not been initiated against the corporate debtor and therefore even in such a case an application against the personal guarantor would also lie before the NCLT. One can argue that this reasoning is in line with the objective of the Code i.e., to consolidate cases related to the insolvency of an entity before a single forum. Therefore, the moment a creditor decides to approach NCLT for insolvency / liquidation of corporate debtor, then any subsequent or parallel insolvency action against the guarantor of such corporate debtor should be before the same NCLT too. Supreme Court, in Lalit Kumar case, has recognized the dynamics and the interwoven connection between the corporate debtor and the guarantor to hold that ‘personal guarantors’ are different from ‘individual’ and reasoned that the Code provides for NCLT as the common forum for insolvency / liquidation of both corporate debtor and the personal guarantor. However, it does not clarify when the NCLT should be approached by the creditors as opposed to the DRT. Undoubtedly, the judgment in the Mohit Arora case bears good news for all creditors who would prefer to approach the NCLT, which will also have jurisdiction to deal with cases related to the corporate debtor. However, given the contrary judgements on this issue and the fact that there would be several cases involving the same issue, it is strongly hoped that the Supreme Court of India will consider this issue at the earliest for efficient implementation of creditors rights without any unnecessary delay!

Authors: Souvik Ganguly and Altamash Qureshi

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