High Court ruled that the NCLT lacks jurisdiction over insolvency proceedings involving personal guarantees in the context of partnership firms.
Justice M. Nagaprasanna of Karnataka High Court Single-Judge Bench ruled that the National Company Law Tribunal (NCLT) lacks jurisdiction over insolvency proceedings involving personal guarantees in the context of partnership firms, as such matters should be adjudicated by the Debts Recovery Tribunal under the relevant provisions of the Insolvency and Bankruptcy Code.
Facts of the Case:
The petitioner, formerly a promoter of Associate Décor Limited, sought a writ of prohibition from the High Court to prevent the National Company Law Tribunal (NCLT), Bengaluru, from proceeding with case C.P.(IB) 139/BB/2022. This case was filed by the 4th respondent on behalf of the 1st respondent. The petitioner had been removed from the company and contested the legal actions stemming from personal guarantees made in 2014. The petitioner argued that the personal guarantee was no longer valid and that the proceedings were barred by time. Despite this, on February 16, 2024, the NCLT appointed a Resolution Professional to oversee the insolvency process under the Insolvency and Bankruptcy Code (IBC).
Court’s Findings:
The High Court addressed the petitioner's claims that the NCLT lacked jurisdiction due to the waiver of the personal guarantee and that the proceedings were barred by limitation. The Court noted that while these issues were relevant, the writ petition was premature. The Court found that the NCLT’s appointment of a Resolution Professional was consistent with Supreme Court judgments, which do not involve judicial determination at the interim stage. Therefore, the Court dismissed the writ petition.
Maintainability of Proceedings:
The High Court also reviewed the maintainability of the proceedings under the IBC. Referring to a previous judgment in M/S Manyata Reallty v. Registrar, National Company Law Tribunal, REEDLAW 2024 Kant 03600 (W.P.No.26977 of 2023 & connected cases), the Court examined whether proceedings could be maintained against a partnership firm or its directors under Section 95 of the Code. It was determined that Sections 3(7) and 3(8) of the IBC define "corporate person" and "corporate debtor," explicitly excluding partnership firms and their directors. Consequently, Part III of the Code, which deals with insolvency for individuals and partnership firms, designates the Debts Recovery Tribunal (DRT) as the appropriate adjudicating authority, not the NCLT.
Amendments and Jurisdiction:
The Court noted the amendments introduced on November 15, 2019, which extended the Code’s provisions to personal guarantors but not to partnership firms. The interim moratorium and the role of the Resolution Professional under Sections 96 and 97 were discussed, with emphasis on strict interpretation of the Code’s provisions. The Court rejected arguments suggesting that the NCLT could determine its jurisdiction after the petition was filed. It affirmed that if the NCLT lacked jurisdiction from the outset, it should not entertain the petition. The Court concluded that the NCLT’s order was not maintainable and subsequently quashed it, clarifying that this finding was specific to the case at hand and did not set a precedent for other proceedings.
Conclusion:
The High Court’s decision underscores the importance of jurisdictional limits within insolvency proceedings and the appropriate adjudicating authority under the IBC. The Court’s dismissal of the writ petition as premature and its clarification on the jurisdiction of the NCLT reflect a strict adherence to the statutory framework and procedural correctness in insolvency matters.
Counsels:
For the Applicant/ Plaintiff/ Petitioner/ Appellant: S.Basavaraj, Sr. Advocate for Sivaramakrishnan M.S., Advocate
For the Respondent/ Defendant: S.S. Naganand, Sr. Advocate for Lomesh Kiran N., Sharan A. Kukreja and Karan Dhalla, Advocates for R-1
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