PARTNERSHIP FIRMS EXEMPT FROM IBC UNDER SECTION 95: NCLT HYDERABAD
In a significant ruling, the National Company Law Tribunal (NCLT), Hyderabad bench, clarified in the case ,that partnership firms are excluded from the scope of section 95 of the Insolvency and Bankruptcy Code (IBC)(It allows creditors to initiate insolvency proceedings against personal guarantors of corporate debtors). The judgment came in response to a petition filed by Appellant (financial creditor) under section 95 of the IBC against Respondent, a partnership firm that acted as a personal guarantor to a Smart India Pvt. Ltd. (corporate debtor).
BACKGROUND
The case arose when Appellant sought to initiate insolvency proceedings against Respondent, a partnership firm that had provided a personal guarantee for a loan given to the Corporate Debtor. The loan, guaranteed by Respondent on December 27, 2016, amounted to ₹71.84 crores. After Corporate Debtor’s default on the loan, the Appellant filed a petition under section 95 of the IBC, claiming that Respondent, as the personal guarantor, was liable for the defaulted loan amount.
Following the default in repayment by the corporate debtor in 2016, its account was classified as a Non-Performing Asset (NPA). Subsequently, the Corporate Insolvency Resolution Process (CIRP) was initiated against the corporate debtor in 2018. However, when no resolution plan was approved, the corporate debtor was ordered into liquidation in June 2019, and the liquidation process was completed in August 2020.
The Resolution Professional (RP) involved in the case recommended the admission of insolvency proceedings against Respondent under section 95 of the IBC.
ISSUES RAISED
Whether section 95 of the IBC can be invoked against a partnership firm, given that the section pertains to personal guarantors of corporate debtors?
OPPOSING PERSPECTIVES ON THE ISSUE
The Appellant argued that Respondent, had signed a guarantee deed, which was fully liable for the outstanding loan as a personal guarantor. They contended that since the corporate debtor defaulted, the guarantor should be held accountable under the IBC.
Respondent challenged the petition, arguing that section 95 of the IBC only applies to individual personal guarantors, not partnership firms. They submitted that the definition of a personal guarantor under section 5(22) of the IBC (a “personal guarantor” as an individual who provides a guarantee in respect of a corporate debtor’s obligations). The respondent further argued that the insolvency petition was legally unsustainable as they did not fall within the category of “personal guarantor” under the IBC.
NCLT’S LEGAL ANALYSIS
The NCLT examined the relevant provisions of the IBC, including section 79, which designates the Debt Recovery Tribunal (DRT) as the adjudicating authority for individuals and partnership firms. The tribunal also referred to section 5(22), which defines a personal guarantor as an “individual” who acts as surety in a guarantee contract for a corporate debtor.
The NCLT highlighted that partnership firms are not included under the term “personal guarantor” as defined by section 5(22). The tribunal further referred to a 2019 notification from the Ministry of Corporate Affairs, which made the provisions of the IBC applicable to individual personal guarantors of corporate debtors but did not extend this to partnership firms.
Upon a thorough review of these provisions, the NCLT concluded that section 95 of the IBC applies exclusively to individual personal guarantors and does not cover partnership firms.
HELDING
The NCLT held that the petition under section 95 of the IBC against Respondent was not maintainable as partnership firms are not covered by section 5(22) of the IBC. Consequently, the tribunal dismissed the petition, observing that insolvency proceedings under section 95 cannot be initiated against partnership firms. Instead, such matters should be brought before the Debt Recovery Tribunal (DRT), as specified under section 79 of the IBC.
This judgment serves as an important clarification, reaffirming that the scope of section 95 of the IBC is limited to individual personal guarantors, thereby excluding partnership firms from its purview.
For more information or queries, please email us at
[email protected]
