Insolvency Proceedings Abate Upon Personal Guarantor's Death, NCLT Reiterates

The National Company Law Tribunal recently reiterated that insolvency proceedings abate upon the personal guarantor's death, as continuing them would contravene the IBC's scheme.

An Interim Application (I.A No. 1362/2024) had been filed under Rule 53 r/w Rule 11 of the NCLT Rules 2016, praying for substitution of legal heirs/representatives of the respondent in C.P (IB) No. 514 of 2020. The applicant filed C.P. (IB) No. 514 of 2020 under Section 95 of the IBC, seeking insolvency proceedings against the personal guarantor. However, during its pendency, the personal guarantor passed away, and the applicant now seeks substitution of the legal heirs in place of the deceased.

The issue for consideration before the Tribunal was whether insolvency proceedings under Part III of the IBC abate upon the death of a guarantor or continue against the legal representatives.

The following arguments were presented on behalf of the applicant:

a.    The applicant argued that the insolvency proceedings initiated under Section 95 of the IBC should continue against the legal heirs of the personal guarantor despite the guarantor's death. The applicant sought substitution of the legal heirs to represent the estate of the deceased guarantor in the proceedings.

b.    The applicant relied upon Sections 123(5) and 169 of the Insolvency and Bankruptcy Code (IBC). It was contended that these sections provide mechanisms for insolvency proceedings involving individuals and their estates, and the legal heirs could step into the shoes of the deceased guarantor.

c.    The applicant also invoked Section 17 of the Provincial Insolvency Act, 1920, which deals with the continuation of insolvency proceedings even after the death of the insolvent. This was used to argue that insolvency proceedings could extend to the legal heirs of the deceased guarantor.

d.    The applicant cited the judgment of the Allahabad High Court in Molhar Singh vs. Raghunath (1972 SCC OnLine All 42) to support the argument that legal heirs should be substituted in place of the deceased guarantor in insolvency proceedings.

e.    The applicant contended that the objective of the Insolvency and Bankruptcy Code (IBC) is to recover debts from the estate of the debtor, and the estate of the deceased guarantor remains liable for the obligations. Therefore, the legal heirs, as representatives of the estate, should continue to be part of the proceedings.

The Tribunal observed that NCLT has previously considered whether such proceedings abate upon the death of the guarantor and relied on the following judgments and made the following observation:

a.    Alchemist Asset Reconstruction Company vs. Deepak Puri, the NCLT Principal Bench held that insolvency proceedings abate upon the personal guarantor's death, as continuing them would contravene the IBC's scheme.

b.    Similarly, the Kolkata Bench of the NCLT in Bank of Baroda vs. Ms. Divya Jalan held that there is no provision allowing legal heirs to step into the shoes of the deceased guarantor.

c.    In Bank of Maharashtra vs. Ashok Kumar Bansal, the NCLT Bench VI also dismissed a Section 95 petition due to the death of the personal guarantor.

d.    In this case, an application under Section 95 was filed against a deceased guarantor, and the definition of "personal guarantor" under Section 5(22) of the IBC applies to individuals, not their legal representatives.

e.    The Supreme Court in Vinayak Purushottam Dube (Deceased) Through Lrs vs. Jayashree Padamkar Bhat ruled that personal obligations do not extend to the estate of the deceased, making legal representatives non-liable.

f.    The applicant's reliance on Sections 123 and 169 of the IBC is misplaced, as no relevant orders (with respect to Bankruptcy) have been passed under these provisions.

g.    The Allahabad High Court's judgment in Molhar Singh vs. Raghunath (under the Provincial Insolvency Act) is not applicable.

In light of the above judgments and legal provisions no merit in the application for substitution. I.A. No. 1362/2024 in C.P. (IB) No. 514 of 2020 is dismissed without costs. C.P. (IB) No. 514 of 2020 is also closed/dismissed. All pending Interlocutory Applications in C.P. (IB) No. 514 of 2020 are dismissed as infructuous.

Counsel for the Applicant: Ms. Anandana H. Wadhwa, Mr. Keshav Gulati and Mr. Shashwat Awasthi, Counsel for the Respondent/Personal Guarantor: Adv. Arjun Syal.