There is a debate on the framework governing insolvency of individuals and personal guarantors

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lakshmiprasad S

National Company Law Tribunal benches are not enlarged lightly, but because the institution itself recognises that the questions before it deserve an answer that will outlive the immediate dispute. The proceedings concerning Subhash Chandra have travelled from a split Bench to a third member and now to a five-member Bench, which has stayed the implementation of the repayment plan.The immediate dispute concerns the repayment plan of a personal guarantor (PG). The larger debate concerns the interpretation of Part III of the Insolvency and Bankruptcy Code (IBC), the framework governing insolvency of individuals and personal guarantors. Should an economic statute be interpreted by reference to its words alone, or also by the commercial purpose which Parliament intended it to serve? This dichotomy lies at the heart of the present reference.Nearly 50 years ago, Justice VR Krishna Iyer observed in Kanta Goel v. B.P. Pathak that “the legislative project and purpose turn not on niceties of little verbalism but on the actualities of rugged realism” and that the statutory construction must be “illumined by the goal, though guided by the word.” That insight is as relevant today as it was in 1977. Every economic statute influences behaviour in the marketplace, and its words must be read in the light of the purpose Parliament intended them to serve.The difference between the judicial member and the technical member reflected two different conceptions of the level of scrutiny expected from a Resolution Professional (RP) and, ultimately, from the Adjudicating Authority itself. The third member sought a middle course. Whether that course fully answers the concerns raised by the technical member is what now falls for consideration before the larger Bench.The fault linesThe judicial member confined himself to the statutory text: if the claims admitted by the RP satisfied the statutory framework and the requisite majority, the jurisdiction of the Adjudicating Authority was necessarily limited.The technical member’s concern went to the integrity of the creditor constituency itself. Her opinion raises a series of questions concerning asset tracing, forensic scrutiny, the admission of guarantees in favour of allegedly connected entities and the acceptance of claims on behalf of more than 1,200 individuals without independent verification.The Code recognises the wife of the PG’s brother as an ‘associate’ for the purposes of the Code. On the judicial member’s construction, a company controlled by that very associate would escape scrutiny merely because the PG himself held no shares in it. The technical member felt that section 79(2)(g) required a purposive construction that recognised not only direct ownership, but also the aggregate ownership and control exercised through associates.She reasoned that the nature of the purported guarantees was extortionate, stipulating interest at 12 per cent per annum from invocation. This led her to question whether these entities ought to have been treated as independent creditors without a more searching enquiry, an approach consistent with the principle recognised by the Supreme Court in Phoenix ARC Pvt. Ltd. v. Spade Finance Services Ltd.The third member’s opinion is no manifesto for literalism. Instead, it repeatedly reaffirms the supervisory role of the Adjudicating Authority, recognises that commercial wisdom cannot override statutory requirements and cautions against converting the RP into a forensic investigator and the insolvency process into an open-ended enquiry. Insolvency proceedings cannot become hostage to speculative allegations or endless investigations. That approach has much to commend it.But the technical member’s concerns do not altogether disappear. While the third member repeatedly asks whether there is convincing material establishing concealment, suppression or statutory non-compliance, the technical member asks at what point objectively verifiable circumstances require the RP to ask more searching questions. That enquiry precedes any finding of fraud or wrongdoing. It concerns the standard of professional scrutiny which the Code expects of an RP.Knotty issueThat brings one to the real difficulty. The absence of conclusive evidence regarding the role of the associates, the nature of their guarantees and their entitlement to sit on the creditors’ Committee leads once to ask whether the objective circumstances before the RP required him to investigate the matter further.As regards net worth, the PG disclosed a personal net worth of about ₹31.79 crore. But statements furnished to RBL Bank in 2017 and Canara Bank in 2018 reflected approximately $7.17 billion and ₹40,562 crore respectively. The PG’s explanation that the earlier statements reflected investments held through promoter group companies rather than assets personally owned by him does not, by itself, answer the concern. If that financial strength formed part of the representation upon which substantial credit was obtained, why does it become wholly irrelevant under Part III?The guarantees illustrate the same point. They form part of the objective commercial relationship between the PG and the entities in whose favour substantial liabilities were voluntarily assumed. Therein lies the technical member’s central point. Rule 4 of the PG Rules and the Explanation to section 5(24A) read with section 79(2)(g) recognise certain familial relationships and exclude their vote from the creditors committee. In her view, private familial arrangements cannot efface statutorily recognised relationships. If the PG’s brother’s wife is herself an associate, can a company overwhelmingly controlled by her escape statutory consequence merely because the PG holds no shares in it? The technical member felt that such a construction would permit the very mischief which section 109(4)(b) was enacted to prevent.One further aspect deserved more direct engagement. The procedural chronology raises a similar concern. The RP filed his report the day after the repayment plan was submitted. Creditors were given six days before the meeting, though section 106(4)(a) prescribes a minimum of 14 days. The RP cited a resolution reducing the notice period. The technical member held that a resolution could not override a statutory requirement. The third member ruled that it was not fatal. The question is whether a creditors’ resolution can override a mandatory statutory requirement. If Parliament prescribed a minimum period for creditor deliberation, that safeguard could not be displaced.Interestingly, the third member did not regard the process as entirely beyond criticism. He agreed that the claims of Anil Kumar and Sunil Jain, representing over 1,200 individuals, could not be admitted merely on the strength of the PG’s explanation, and directed their exclusion. That raises a larger question: if the RP’s duty of verification required exclusion of claims constituting 0.8 per cent voting share, why did the same duty not warrant closer scrutiny of claims accounting for more than 60 per cent, where ‘associateship’ objections had been raised?Every insolvency process rests upon confidence in the integrity of the steps that precede the final order. Notices, verification of claims and statutory safeguards are not procedural formalities; they are the means by which confidence in the outcome is earned. The five-member Bench has before it an opportunity to define the standard of vigilance which Part III expects before commercial wisdom is permitted to prevail. That standard will shape lender confidence, professional conduct and, ultimately, the credibility of the personal insolvency framework itself.The writer is a lawyer and former Judicial Member of the National Company Law TribunalPublished on September 4, 2026