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Useful Update:

( Contribution by CA. (Adv) Bhimanshu Kansal )

• 										Be mindful while determing the date of transfer in computing capital gains of FY 2024-25   Read More 
  										

Useful Case-law:

( Contribution by Team Voice of CA )

Can a personal guarantor invoke IBC Section 94 to block SARFAESI action for a proprietorship loan?

The Madhya Pradesh High Court has recently clarified this issue, reinforcing the strict interpretation of the Insolvency and Bankruptcy Code, 2016.

Case Analysis: Ramesh Kothari v. State of Madhya Pradesh

Citation: [2025] 173 taxmann.com 341 (Madhya Pradesh)

• Facts of the Case:

The petitioner, Ramesh Kothari, was the owner of a property mortgaged as collateral against loans availed by two sole proprietorship firms: M/s Rainbow Sales and M/s Kothari Enterprises. These firms were owned by Chetan Kothari and Angoorbala Kothari, respectively. On default, Axis Bank classified the accounts as NPAs and initiated recovery under Section 14 of the SARFAESI Act. The Sub-Divisional Magistrate passed an order directing the Tehsildar to take possession of the secured asset. In response, the petitioner filed a Section 94 application under the IBC before the NCLT and simultaneously sought a writ from the High Court to stay recovery proceedings during the pendency of the IBC matter.

• What was held:

The High Court dismissed the writ petition on several grounds:

1. Section 94 of the IBC provides a remedy only to debtors as defined under the Code. The term "corporate debtor" under Section 3(8) refers exclusively to corporate persons, which includes companies, LLPs, or entities incorporated with limited liability. Sole proprietorships are not included in this definition.

2. The borrowers being sole proprietorship firms, no application under Section 94 was maintainable, even at the instance of the personal guarantor.

3. The stage for representation had already concluded, and the District Magistrate, having passed an order, had become functus officio.

4. The Tehsildar, executing the possession order, lacked adjudicatory powers to consider objections or representations from the petitioner.

The judgment affirms that proprietorship firms fall outside the scope of Section 94 of the IBC. 

Personal guarantors to such firms cannot use the Code to interrupt proceedings under SARFAESI. 

Judicial intervention under writ jurisdiction is not available once the statutory process has been lawfully concluded and executed by authorities without adjudicatory discretion.

									For High Court Judgment,  click here 
									

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