Personal Guarantor's Foreign Citizenship No Bar to Bankruptcy Proceedings Under IBC, Rules NCLT Hyderabad - 2025-11-03

Laws, Courts & Judgments.

NCLT Hyderabad Declares US Citizen Bankrupt, Rejects Jurisdictional Challenge in ₹372 Crore SBI Loan Default Case

Hyderabad, Telangana - In a significant ruling clarifying the scope of the Insolvency and Bankruptcy Code (IBC), 2016, the National Company Law Tribunal (NCLT), Hyderabad Bench has declared Shri Yarlagadda Madhu Mohan, a US citizen and personal guarantor to M/s. YKM Entertainment & Hotels Private Limited, as bankrupt. The bench, comprising Hon’ble Rajeev Bhardwaj (Member, Judicial) and Hon’ble Sanjay Puri (Member, Technical), dismissed the guarantor's contention that his foreign citizenship exempts him from proceedings under the IBC.

The order was passed in an application filed by the State Bank of India (SBI) to initiate bankruptcy proceedings against Mr. Madhu Mohan after he failed to propose a repayment plan for a debt exceeding ₹372 crores.

Case Background

The case stems from a massive financial default by the corporate debtor, M/s. YKM Entertainment & Hotels Private Limited, which had availed credit facilities from SBI. Mr. Yarlagadda Madhu Mohan had executed a personal guarantee agreement to secure these loans.

Following the default, SBI initiated a Corporate Insolvency Resolution Process (CIRP) against the company, which was admitted by the NCLT in January 2022. Subsequently, the bank filed an application under Section 95 of the IBC to initiate an insolvency resolution process against Mr. Madhu Mohan as the personal guarantor. This process failed as Mr. Madhu Mohan did not submit a repayment plan, prompting SBI to file the current application for bankruptcy under Section 121 of the IBC.

Key Arguments

Personal Guarantor's Defense: A Jurisdictional Challenge

The primary defense put forth by Mr. Madhu Mohan was that the NCLT lacked jurisdiction over him as he has been a citizen of the United States of America since 2011. His counsel argued: - The IBC's applicability, as defined in Section 2, does not explicitly include foreign nationals, even if they are personal guarantors to Indian corporate debtors. - Cross-border insolvency provisions under Sections 234 and 235 of the Code have not been invoked, and no reciprocal agreement exists between India and the USA for such matters. - An appeal challenging the earlier insolvency order was pending restoration before the National Company Law Appellate Tribunal (NCLAT), and he requested the current proceedings be held in abeyance.

Financial Creditor's Rebuttal: Jurisdiction and Estoppel

SBI countered these arguments, stating: - The guarantor’s foreign citizenship was a belated and irrelevant plea, not raised during the initial insolvency proceedings. Therefore, he was estopped from raising it at this stage. - Section 2(e) of the IBC explicitly states the code applies to "personal guarantors to corporate debtors" without any exception for nationality. - Once CIRP is initiated against a corporate debtor, Section 60(2) of the IBC grants the NCLT exclusive jurisdiction over the personal guarantor's insolvency, overriding other provisions. - The guarantor's appeal before the NCLAT had been dismissed, and the mere pendency of a restoration application, without a stay order, could not halt the current proceedings.

Tribunal's Findings and Rationale

The NCLT bench found the guarantor's contentions "wholly misconceived and devoid of merit." The tribunal clarified the legal position on several key aspects.

On the Applicability of IBC to Foreign Citizens

The bench held that the guarantor's interpretation of the law was erroneous. > "Section 2(e) explicitly stipulates that the provisions of the Code apply to the 'personal guarantor to corporate debtors,' a category into which the Respondent squarely falls. Section 3(23) merely defines the term 'person' to include 'a person resident outside India.' It does not create any exception for foreign citizens, as erroneously inferred by the Respondent."

The tribunal further clarified that the cross-border insolvency provisions in Sections 234 and 235 are enabling and procedural; they do not restrict the NCLT's jurisdiction over a personal guarantor based on their citizenship, especially when the guarantee was executed in India for a loan to an Indian company.

On Pending Appeal

The NCLT rejected the plea to halt the proceedings, noting that the appeal against the initial insolvency order was dismissed for non-prosecution. Since no stay had been granted by the NCLAT, the request to keep the bankruptcy application in abeyance was deemed "untenable."

The Final Order

Observing that the insolvency resolution process had failed due to the non-submission of a repayment plan by Mr. Madhu Mohan, the NCLT found it just and proper to initiate bankruptcy proceedings.

The tribunal ordered: - Declaration of Bankruptcy: Shri Yarlagadda Madhu Mohan was declared bankrupt. - Appointment of Trustee: Shri Sivarama Prasad Bhamidi was appointed as the Bankruptcy Trustee to manage the bankrupt's estate. - Vesting of Estate: The estate of the bankrupt, barring exempted assets, will vest with the trustee, who is directed to take custody of all assets and properties. - Legal Moratorium: No new legal proceedings can be initiated against the bankrupt or his property without the leave of the NCLT. - Disqualifications: The bankrupt will be subject to disqualifications and restrictions as prescribed under Sections 140 and 141 of the IBC.

This order reinforces the principle that personal guarantors cannot evade their liabilities under the IBC by citing foreign citizenship, particularly when the underlying financial transactions and guarantees are rooted in India.