The NCLT Kolkata bench on April 9, 2022 in the matter of Bank of Baroda v. Ms. Divya Jalan while dismissing the application filed by the Bank of Baroda (“Financial Creditor”) held that the application is not maintainable against legal heirs of the personal guarantor under the Insolvency and Bankruptcy Code, 2016 (“IBC”).

In the instant case, Kilburn Chemicals Limited (“Corporate Debtor”) approached the Petitioner/Financial Creditor to provide credit facilities for setting up of Rutile Grade Titanium Dioxide manufacturing plant. A loan consortium agreement was executed to that effect. The Petitioner had sanctioned credit facilities to a sum of Rupees One Hundred Three Crore Ninety Lakh. Since the Corporate debtor and personal guarantor failed to pay the loan amount, a Petition under Section 7 of the IBC was filed before Adjudicating Authority and the Corporate Debtor was admitted into CIRP. In the meantime, due to the demise of the personal guarantor, the Petitioner issued a demand notice to his legal heirs. A petition was filed under section 95(1) of the IBC for initiating the Insolvency Resolution Process against legal heir of personal guarantor by the financial creditor.

The Bench observed that regulation 3 (1)(a)(e) of Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtor Regulation, 2019, clearly defines that a personal guarantor to a Corporate Debtor is a person against whom guarantee has been invoked and there is outstanding dues left, partly or fully. The definition does not include the ‘legal heirs’.

The NCLT Bench held that when a section 95 application is filed, the assets of the personal guarantor is hit by moratorium and if the legal heirs of the deceased personal guarantor is put into the shoes of the personal guarantor then their personal assets would also get automatically hit by moratorium, which would cause grave prejudice to the rights of the third party. The Bench also held that there is no provision in the code which envisages that the concept of legal heirs stepping into the shoes of the deceased personal guarantor.