India: Liabilities Fluid; Guarantors Protected Under IBC: Allahabad HC

Last Updated: 19 September 2017
Article by Kumar Saurabh Singh, Rajeev Vidhani, Soumava Chatterjee and Ashwij Ramaiah

Most Read Contributor in India, October 2017

In a first, the Allahabad High Court (Court), in the case of Sanjeev Shriya v State Bank of India was presented with the question as to whether the grant of a moratorium on any claim / suit or enforcement of security interest against a corporate debtor under section 14 of the Insolvency and Bankruptcy Code, 2016 (Code) implies an embargo on the rights of the lenders to institute parallel proceedings against guarantors of the corporate debtor.

The Court, while adjudicating upon this question, opined that in view of the moratorium, since the liability of the corporate debtor and the guarantor are still in a 'fluid situation' and not crystallised, two parallel proceedings, viz. under the Code against the corporate debtor and recovery proceedings against the Guarantors before the Debt Recovery Tribunal (DRT) should be avoided and therefore, the Court stayed the proceedings pending before DRT against the guarantor, and deferred it to the outcome of the corporate insolvency resolution process initiated under the Code.

Brief Background

The petitioners were the director-guarantors (Guarantors) of LML Limited (Company) and had executed a deed of guarantee on 28 March 2005 (Guarantee Deed) in favour of the State Bank of India (SBI) to guarantee repayment obligations of the Company under a loan agreement entered with SBI on the same date. The Company was declared a 'Sick Industrial Company' by the Board of Industrial and Financial Reconstruction on 8 May 2007. Subsequently, SBI had filed an application sometime in 2017 before the DRT, Allahabad against the Company and the Guarantors under section 19 (3) of the Recovery of Debts Due to Banks and Financial Institution Act, 1993 (RDDBFI Act) for recovery of the amount due from the Company, under the loan agreement. The DRT accepted SBI's application and had initiated proceedings against the Company and the Guarantors. 

Meanwhile, the Company approached National Company Law Tribunal, Ahmedabad (NCLT) under section 10 of the Code seeking initiation of corporate insolvency resolution process under the Code. The NCLT vide its order dated 30 May 2017 admitted the application of the Company and ordered for commencement of 'moratorium' under section 14 of the Code.

Following the order of NCLT, the Company and the Guarantors preferred an application before the DRT to stay the proceedings against them in light of the moratorium imposed by NCLT. The DRT allowed stay of its proceedings against the Company but ordered that the proceedings against the Guarantors shall continue as the moratorium is only applicable in relation to the Company. Aggrieved by the findings of the DRT, the Guarantors filed an appeal invoking the writ-jurisdiction of the Court to determine the position.

Moratorium vis-ŕ-vis Liability of Guarantors of a Corporate Debtor under the Code

In a detailed ruling, the Court appreciated the arguments advanced by the counsels of the Guarantors including, that the proceedings against the Guarantors before the DRT 'were per se bad' specially during the continuation of moratorium against the Company, as until the resolution process under the Code is consummated, the DRT would not be able to adjudicate any claims of disputed debt owed by the Guarantors to SBI and as such the entire exercise would be counter-intuitive. They further argued that the adjudicating authority for corporate persons (which include the Company and the Guarantors) is the NCLT in terms of section 60(1) of the Code and as such the proceeding against Guarantors before the DRT should be stayed.

On the other side, the counsel for SBI argued that the Code pertains to insolvency resolution whereas, the RDDBFI Act pertains to recovery of dues and as such there is no overlap between the two statutes. Further, the counsel for SBI relied on the text of the Guarantee Deed to argue that it allowed simultaneous and concurrent proceedings against the Company and the Guarantors.

After considering arguments from both sides, the Court held that a moratorium issued under Section 14 of the Code stays all the proceedings initiated against personal guarantors. Its finding was based inter alia on the ground that the liability of the Company only crystallizes once the NCLT approves the resolution plan under Section 31(1) of the Code or passes an order for liquidation of the Corporate Debtor under Section 33 of the Code. The Court avowed that until the liability of the Company is conclusively crystallised, the Guarantors cannot be held liable and as such the recovery proceedings against the Guarantors before the DRT should be stayed, as it cannot allow the creditor to pursue two remedies on the same cause of action.


The judgment by the Court, to a great extent addresses the uncertainties around the liabilities of the guarantors during an ongoing insolvency resolution process initiated against a corporate debtor. It confers legal protection to guarantors who have provided surety for the debt in question during the moratorium period. The Court could have provided more clarity and analysed the interplay of the Code vis-ŕ-vis the RDDBFI Act or on the guiding principle and approach of the NCLT, while acting as the adjudicating authority for the Guarantors under the Code or addressing recovery proceeding against the Guarantors under the RDDBFI Act.

It is also interesting to note that under the erstwhile Sick Industrial Companies (Special Provisions) Act 1985 (SICA), protection to guarantors was available only by way of a bar on 'suits' and not against any 'recovery proceedings' and the guarantors could not claim immunity, in case any recovery proceedings were initiated before the DRT. The judgment, therefore, in this context has departed from this position and offered wider protection to the guarantors during the ongoing insolvency resolution process against the corporate debtor.

This being a high court judgment, it remains to be seen if the other High Courts agree or dissent from this view and how the Supreme Court finally settles this. Even an appropriate amendment may put the issue to rest.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.