NCLAT: Foreign citizenship cannot facilitate an escape from the liability of a personal guarantor

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Whether the Respondent can initiate proceedings under Section 95(1) of the Code against the Appellant, given that Appellant is a foreign citizen?

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Whether it was necessary for the Central Government to enter into an agreement with the Government of Singapore as is required under Section 234 and 235 of the Code to enable the adjudicating authority to proceed under Section 95(1) of the Code against the Appellant?

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Section 3(23) of the Code defines ‘person’ to include a person resident outside India. Further, section 3(25) of the Code defines ‘person resident outside India’ as a person other than a person resident in India. Furthermore, Section 2 of the Code which provides for applicability of the Code, extends its applicability to ‘personal guarantors to corporate debtors’.

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Section 60(1) of the Code provides that the adjudicating authority in relation to insolvency resolution for corporate persons including personal guarantors shall be the National Company Law Tribunal having territorial jurisdiction over the place where the registered office of the corporate person is located. The mere fact that the Appellant is a citizen of the Republic of Singapore is irrelevant for initiating proceedings against the Appellant as the residence of the personal guarantor is not a relevant factor. Since the registered office of the Corporate Debtor is within the territorial jurisdiction of the NCLT Kolkata, insolvency proceedings could be initiated against the personal guarantor in the same tribunal. Further, the adjudication of disputes related to a personal guarantor under Section 60(1) of the Code does not have any nexus to the personal guarantor’s residency status.

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The scheme of the Code does not indicate that a personal guarantor shall be absolved from his liability on the pretext that he has obtained citizenship of a foreign country.

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The Hon’ble Supreme Court of India in Lalit Kumar Jain v. Union of India & Ors. (2021) 9 SCC 321, held that insolvency proceedings against a personal guarantor should be considered by the same adjudicating body dealing with the insolvency proceedings of the corporate debtor.

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The applicability of Section 234 of the Code arises if the assets or property of a personal guarantor are situated outside India. In the present case, the assets of the personal guarantor were not situated outside India and the said personal guarantor could not take refuge under Section 234 and 235 of the Code.

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The NCLAT held that “the right given to the financial creditor under the Code to initiate proceedings under Section 95(1) of the Code is independent” and the financial creditor can always invoke special proceedings “despite there being availability of any other forum or proceedings in this context”.