is a case concerning whether a civil suit filed by personal guarantors can be dismissed merely because insolvency proceedings are subsequently initiated against them under the Insolvency and Bankruptcy Code (IBC).
The Core Dispute
The case involved two brothers (the appellants) who had executed personal guarantees in respect of loans granted to a company by a consortium of 12 banks. After the demise of their father, the brothers contended that 8 out of the 12 banks had discharged them from their guarantees. However, the lead bank, Canara Bank, issued a demand notice seeking recovery of the outstanding dues.
Consequently, on 6 November 2024, the brothers instituted a civil suit before the Commercial Court seeking a declaration that they stood discharged from their obligations under the guarantees.
The Legal Conflict
Subsequently, on 15 January 2025, Canara Bank initiated insolvency proceedings against the brothers before the National Company Law Tribunal (NCLT). The bank contended that, in view of the interim moratorium under Section 96 of the IBC, the civil suit was not maintainable and ought to be dismissed.
Accepting this contention, the Commercial Court dismissed the suit in February 2026.
### The High Court’s Verdict
The Calcutta High Court set aside the order of the Commercial Court and restored the civil suit, holding as follows:
Stay, Not Dismissal: Where a civil suit has been instituted prior to the commencement of insolvency proceedings, Section 96 of the IBC contemplates only a stay of the proceedings during the moratorium and does not authorise dismissal of the suit.
Expiry of the Moratorium: The Court observed that the moratorium is temporary in nature.
Since the prescribed period had expired, there was no legal impediment to the continuation of the civil suit.
Partial Dismissal Impermissible: As the suit had been filed against all 12 banks, whereas insolvency proceedings had been initiated only by certain banks, the Court held that the suit could not be dismissed in part against selected defendants.
Right to Seek Declaratory Relief: The Court further held that there is no legal bar preventing a personal guarantor from instituting a civil suit seeking declaratory relief even before the creditor initiates insolvency proceedings.
Bottom Line
The High Court remanded the matter to the Commercial Court for adjudication on merits, holding that the initiation of insolvency proceedings does not extinguish a civil suit instituted prior thereto. Such proceedings are merely stayed during the subsistence of the interim moratorium under Section 96 of the IBC and may continue upon its cessation.