The New Delhi bench of the National Company Law Appellate Tribunal (NCLAT), comprising the Chairperson and two Technical Members, has ruled that the mere pendency of a One-Time Settlement (OTS) proposal, which has not been accepted, cannot serve as a valid reason to deny the initiation of insolvency proceedings against personal guarantors. This ruling came in response to two appeals challenging the order passed by the National Company Law Tribunal (NCLT), Chandigarh Bench, which had admitted a Section 95 application filed against the appellants, who are personal guarantors.
The appellants argued that a One-Time Settlement (OTS) proposal had been submitted by the principal borrower and approved by the bank for a total payment of Rs. 7 crores. Out of this amount, Rs. 1.75 crores had already been paid, as recorded in the OTS agreement, which was subject to the consent of the Debt Recovery Tribunal (DRT), where the application was still pending. However, the bank later backed out of the OTS, preventing it from being finalized. In response, the borrower filed a writ petition before the Punjab & Haryana High Court, challenging the bank's decision to withdraw from the OTS. The matter is still under consideration by the High Court.
The appellants contended that, in light of these facts, the personal insolvency proceedings against them should not continue. However, the tribunal observed that while it is undisputed that if the OTS is accepted and the full amount is paid, the guarantor’s liability would be extinguished, the matter is still pending before the High Court. Since the principal borrower has not yet fully settled the debt, the guarantor's liability cannot be considered nullified at this stage.
Furthermore, the tribunal clarified that the mere pendency of the OTS proposal cannot be a valid reason to prevent the initiation of insolvency proceedings against personal guarantors. The tribunal concluded that there was no error in initiating personal insolvency proceedings against the appellants. However, it allowed that if the High Court issues a favorable order for the principal borrower, the appellants may present any relevant material to the Adjudicating Authority, which will be duly considered in the insolvency proceedings of the guarantors.
Mohit Dewan v. Bank of Maharashtra and Anr.
Comp. App. (AT) (Ins) No. 2176 of 2024 & I.A. No. 8129 of 2024
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