Kerala High Court Verdict Attempts To Resolve Personal Insolvency Loophole

The Kerala High Court has clarified that a simple submission of an application under the Insolvency and Bankruptcy Code (IBC) for personal insolvency does not initiate a moratorium immediately. With this ruling, the High Court has plugged a loophole that defaulters use to defend personal assets.

In its ruling, the Kerala High Court has cleared its position that the interim moratorium begins when the application is duly numbered by the tribunal.

This order, when jointly implemented with the recent Supreme Court ruling on personal guarantees, would help creditors to exercise their rights.

Justice N Nagaresh had pronounced on Friday that guarantors or promoters won't receive an interim moratorium until the application is formally numbered by the National Company Law Tribunal (NCLT).

According to Section 96 of the IBC, if once an application is filed under Section 94, a temporary halt to all debts is put even prior to the admission of the application.

The ruling by HC has a lot of significance considering the fact that the  Supreme Court affirmed the constitutional validity of IBC provisions, allowing creditors to initiate insolvency proceedings against personal guarantors.

Over 200 petitions challenging the provisions of IBC were dismissed by the SC earlier this month.

In the case presented in front of the High Court, Jeny Thankachan, who holds 20 per cent share in a Limited Liability Partnership, had availed a loan and initiated insolvency proceedings under Section 94 of the IBC at the NCLT after the LLP has defaulted in repayment of the loan repayment.

The court highlights that the person filing the case is a business partner, seeking to declare that the rules of the Insolvency and Bankruptcy Code, 2016 should have precedence over the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act), 2002.

This is because the rules to deal with individuals started on 15 November 2019. However, the high court rejected this claim, pointing out that until the NCLT officially numbers the application, the temporary halt to legal actions cannot take place. Therefore, lenders should not stop their financial actions.

Siddharth Mody, Partner at J Sagar Associates said that HC case highlights that both the IBC and SARFAESI Act, have certain overlapping in objectives but still they maintain distinct operational domain and can be executed simultaneously in appropriate scenarios.

Mody added that this case is important in the sense that the Court has interpreted and ruled that IBC does not entirely override the SARFAESI Act, especially when there is no clear conflict between the two statutes. The court has clarified the distinction stating that the non-obstante clause in the IBC does not completely override the SARFAESI Act.

He further mentioned that this is because the SARFAESI proceedings were targeting her role as a personal guarantor, which is not protected by the IBC's provisions.

Data from Insolvency and bankruptcy board of India(IBBI) shows that out of total 282 admitted personal insolvency cases, 90 have been closed. Seven were withdrawn, 62 have been closed due to plan rejection, and in 21 cases repayment plans are approved, with creditors involving Rs 91.27 crore or 5.22 per cent of their claims. From July to September 2023, seven personal insolvency cases led to a recovery of 68.17 crore.