2 min
High Court rules that the Insolvency and Bankruptcy Code applies to personal guarantors to corporate debtors but not to partnership firms and their directors unless explicitly stated.
The Karnataka High Court Bench of Justice M. Nagaprasanna held that the jurisdiction for insolvency resolution of individuals and partnership firms lies exclusively with the Debts Recovery Tribunal (DRT) or the Debts Recovery Appellate Tribunal (DRAT), not the National Company Law Tribunal (NCLT), thereby rendering the petition under Section 95 of the Insolvency and Bankruptcy Code (IBC) against the partnership firm and its directors as non-maintainable. The Bench observed that the Insolvency and Bankruptcy Code applies to personal guarantors to corporate debtors but not to partnership firms and their directors unless explicitly stated.
In these writ petitions, M/s Manyata Realty (the petitioner firm) and its directors challenged the actions taken by Buoyant Technology Constellation Private Limited (the Company), the second respondent, under the Insolvency and Bankruptcy Code (IBC). The dispute arose from a series of Joint Development Agreements between the petitioner firm and the Company, which eventually led to arbitration proceedings due to unresolved disputes. While arbitration was ongoing, the Company issued a legal notice under Section 95 of the IBC, demanding payment from the petitioner firm, prompting the firm and its directors to deny the claims and seek relief from the High Court.
The petitioner firm argued that the IBC does not apply to partnership firms and their directors, contending that the jurisdiction for insolvency resolution of individuals and partnership firms lies with the Debts Recovery Tribunal (DRT) or the Debts Recovery Appellate Tribunal (DRAT), not the National Company Law Tribunal (NCLT). The petitioners further asserted that they were neither personal guarantors nor corporate debtors under the IBC, thus challenging the maintainability of the Company's petition before the NCLT.
In contrast, the respondents maintained that the petitioners, by their conduct and assurances, acted as personal guarantors, thus justifying the petition under the IBC before the NCLT. The High Court examined the relevant provisions of the IBC, including the definitions of corporate persons and debtors, and clarified that the jurisdiction for insolvency resolution of individuals and partnership firms falls under the DRT and DRAT, not the NCLT - The Court emphasized that the IBC applies to personal guarantors to corporate debtors but not to partnership firms and their directors unless explicitly stated.
Ultimately, the High Court concluded that the petition filed under Section 95 of the IBC against the petitioner firm and its directors was not maintainable. The Court ruled that the NCLT did not have jurisdiction to entertain the petition and quashed the proceedings to prevent any adverse consequences arising from an invalid filing.
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