Recently, National Law Company Tribunal has rejected an application for substitution of the legal representatives of the deceased Personal Guarantor.
The application was filed under Section 95 for initiation of Insolvency Resolution Process against the Personal Guarantor. However, during its pendency, the personal guarantor passed away, and the applicant sought substitution of the legal heirs in place of the deceased.
The issue for consideration is whether insolvency proceedings under Part III of the IBC abate upon the death of a guarantor or continue against the legal representatives.
The applicant relied upon Sections 123(5) and 169 of the 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.
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.
The applicant relied on the judgment of the Allahabad High Court in Molhar Singh vs. Raghunath to support the argument that legal heirs should be substituted in place of the deceased guarantor in insolvency proceedings.
Lastly, contending that the objective of the 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 Hon’ble Tribunal observed that NCLT has previously considered whether such proceedings abate upon the death of the guarantor and relied on Alchemist Asset Reconstruction Company v. Deepak Puri, wherein the NCLT Principal Bench held that insolvency proceedings abate upon the personal guarantor’s death, as continuing them would contravene the IBC’s scheme.
Similarly relying on the Kolkata Bench of the NCLT in Bank of Baroda v. Ms. Divya Jalan which held that there is no provision allowing legal heirs to step into the shoes of the deceased guarantor.
The bench found that 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.
Noting that, 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.
The bench relied on Vinayak Purushottam Dube (Deceased) Through Lrs v. Jayashree Padamkar Bhat wherein the Supreme Court ruled that personal obligations do not extend to the estate of the deceased, making legal representatives non-liable.
Highlighting that 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.
Adding that the Allahabad High Court’s judgment in Molhar Singh v. Raghunath (under the Provincial Insolvency Act) is also not applicable.
The applicant were represented by Anandana H. Wadhwa, Keshav Gulati and Shashwat Awasthi.
The respondent were represented by Arjun Syal.