India: Applicability Of Moratorium To Personal Guarantors Of The Corporate Debtor Under Section 14 Of Insolvency And Bankruptcy Code, 2016

Last Updated: 17 May 2018
Article by Aishwarya Mishra and Rahul Pandey

Most Read Contributor in India, July 2018

INTRODUCTION

The Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as "the Code"), was passed with the objective of consolidating and amending laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all stakeholders. However, within a year of its enactment, the Code has run into several roadblocks creating a deadlock between different authorities as regards to its interpretation. One such deadlock is the question regarding the applicability of the imposition of moratorium under Section 14 of the Code to the personal guarantors of the corporate debtors. "Moratorium" in plain language is defined as a legal authorization to debtors to postpone payment to creditors; a suspension of activity or a waiting period set by an authority 1. The wording of the said provision has created a sea of confusion and ambiguity regarding its application, with National Company Law Tribunals in different parts of the country giving varying directives on the same.

JUDICIAL INTERPRETATION

A contract of guarantee is defined under Section 126 of the Indian Contract Act, 1872, as a contract to perform the promise or discharge the liability of a third person in case of his default. The person who gives the guarantee is called the 'surety'; the person in respect of whose default the guarantee is given is called the 'principal debtor', and the person to whom the guarantee is given is called the 'creditor'. Section 128 of the Indian Contract Act, 1872 provides that the liability of the surety is co-extensive with that of the principal debtor unless provided otherwise by the contract.

In Central Bank of India v. C L Vimla 2, the Supreme Court observed that, "The creditor has a right to obtain a decree against the surety and the principal debtor. The surety neither has the right to restrain execution of the decree against him until the creditor has exhausted his remedy against the principal debtor nor does he have a right to dictate terms to the creditor as to how he should make the recovery and pursue his remedies against the principal debtor at his instance. Thus, we are of the view that guarantor cannot escape from her liability as a guarantor for the debt taken by the principal debtor." Thus, it has been established beyond doubt that the creditor has the discretion to proceed against either the principle debtor or the guarantor as he deems fit.

However, Section 14 of the Code limits the rights of the creditor, to proceed against the debtor, once the period of moratorium has been imposed. It lays down that-

(1) Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date3, the Adjudicating Authority4 shall by order declare moratorium for prohibiting all of the following, namely:—

(a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;

(b) transferring, encumbering, alienating or disposing off, by the corporate debtor, any of its assets or any legal right or beneficial interest therein;

(c) any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;

(d) the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.

In light of the said provision, the question which arises is whether the aforementioned provision also limits the right of the creditor to proceed against the guarantor during the period of moratorium?

This issue has been discussed comprehensively in various decisions. The Ld. NCLAT, in an appeal against judgment of Ld. NCLT, Mumbai Bench, in the case of Alpha & Omega Diagnostics (India) Ltd. v. Asset Reconstruction Company of India Ltd. & Ors. 5 opined upon the question regarding treatment of properties of the guarantors during a moratorium under Section 14 of the Code. In the said case, the personal properties of the promoters had been given as security to the banks. The question before the Ld. NCLT Mumbai was whether such properties that are not owned by the corporate debtor would fall within the ambit of a moratorium under the Code. Applying the principle of strict interpretation, the Ld. NCLT Mumbai held that the term "its" under Section 14(1)(c) of the Code refers to the property of the corporate debtor undergoing a Corporate Insolvency Resolution Process ("CIRP"). Accordingly, the property not owned by the corporate debtor would not fall within the ambit of the moratorium imposed under the Code. Upholding the decision of the Ld. NCLT, the Ld. NCLAT held that the moratorium would not be applicable to any assets, movable or immoveable, that do not belong to the corporate debtor.

Similarly, in Schweitzer Systemek India Pvt. Ltd. v. Phoenix ARC Pvt. Ltd. 6, the Ld. NCLT, Mumbai Bench interpreted the benefit of the moratorium to be limited only to corporate debtors. Reiterating the same principle, the Ahmedabad Bench of Ld. NCLT in IDBI Bank Ltd. v. BCC Estate Pvt. Ltd. 7 held that "The liability of Guarantor is coextensive with that of the Principal Borrower. It is for the creditor to choose against whom he wants to proceed. There is thus, no bar in the law which prevents any creditor to proceed against both, the Principal Borrower and Guarantors". A contention that the resolution plan for Principal Borrower, undergoing CIRP (i.e. Corporate Debtor), would also include corporate guarantor, was rejected by NCLT as the corporate guarantor is an independent corporate body.

From the aforementioned adjudications, it seemed that the settled principle of law was that the imposition of moratorium would not preclude the creditor from proceeding against the guarantors.

However, this principle underwent a sea of change after the judgment of the Hon'ble Allahabad High Court in the case of Sanjeev Shriya v. State Bank of India 8 ("Sanjeev Shriya Case").The factual matrix of the said matter is as follows- M/s. LML Ltd. ("LML") was declared as a 'sick industrial company' by the Board for Industrial Financial Reconstruction on May 8, 2007. Under the provisions of the RDDBFI Act, 1993 9, State Bank of India ("SBI") filed an application before the Ld. DRT for recovery of the dues jointly and severally from LML as well as from the personal guarantors. LML filed an application to initiate the corporate insolvency process under Section 10 of the Code. On May 30, 2017, the Ld. NCLT - Allahabad Bench admitted the application and imposed a moratorium upon proceedings against LML. In view of the NCLT's order, the Ld. DRT stayed the proceedings but only against LML and observed that there was no order to restrain the proceedings against the personal guarantors. The personal guarantors challenged this order of the Ld. DRT before the Hon'ble Allahabad High Court.

While staying the proceedings at the Ld. DRT against even the personal guarantors, the Hon'ble Allahabad High Court observed that in cases where the insolvency resolution process has already begun and the liability has not been crystallized against either the principle debtors or the guarantors, then the proceedings pending before the Ld. DRT cannot go on and are stayed until the finalization of the corporate insolvency resolution process or till the Ld. NCLT approves the resolution plan under Section 31(1), of the Code or passes an order for liquidation under Section 33 of the Code.

The Hon'ble Allahabad High Court relied on Sections 60(1) and 60(2) of the Code, which provide that the Adjudicating Authority in relation to personal guarantors shall be the NCLT and observed that in cases where the insolvency resolution process has already begun, the application relating to insolvency resolution of a personal guarantor would also lie before the same NCLT. Based on this reasoning, the proceedings at the Ld. DRT even against the personal guarantors were stayed.

Following the lead of the Hon'ble Allahabad High Court in the Sanjeev Shriya case, the Ld. NCLAT, New Delhi in State Bank of India v. V Ramakrishnan and Ors. 10 upheld the order of the Ld. NCLT, Chennai. The Ld. NCLT, in this instance, had ordered the initiation of insolvency proceedings against Veesons Energy Systems Pvt. Ltd., and SBI, one of the majority creditors, submitted its claim after the CIRP was initiated. The promoter and managing director, Mr. V. Ramakrishnan, had given a personal guarantee for the said loan. SBI had initiated action to the sell the assets of the promoter given as personal guarantee. Mr. Ramakrishnan moved the Ld. NCLT against the action of SBI. The Ld. NCLT ruled in favor of Mr. Ramakrishnan and offered the reasoning that in case a guarantor's personal property is sold to realize the dues from the principal debtor during the moratorium period of the principal debtor, then the guarantor would have a charge upon the property of the principal debtor for recovering such amounts. Thus, a charge on the assets of the principal debtor would be created in favor of the guarantor, during the continuance of the moratorium period, which is prohibited under Section 14 of the Code. The Ld. NCLAT stated that, "We hold that the 'Moratorium' will not only be applicable to the property of the 'Corporate Debtor' but also on the 'Personal Guarantor."

In SBI v. R Inderjeet 11, where the creditor i.e. SBI had moved an application under Section 7 of the Code to initiate insolvency proceedings against the personal guarantors of the corporate debtors, the Ld. NCLT Chennai, referring to the decision in Sanjeev Shriya case, observed that, "SBI should not proceed against the personal guarantors till the moratorium period comes to an end or till the Adjudicating Authority approves a resolution plan under Sub Section 1 of Section 31 or passes an order for liquidation of corporate debtor under Section 33."

The Kolkata Bench of the Ld. NCLT also passed a decision along similar lines in the case of ICICI Bank v. Vista Steel Ltd. 12, holding that, "In this case, insolvency petition has already been admitted under Section 7 against the principal borrower. Therefore, another insolvency proceeding against the corporate guarantor is barred on account of moratorium order passed under Section 14 (1)(a) of the Code against the principal borrower". The Ld. NCLT further held that "It is clear that the present petition filed against the corporate debtor who happens to be a corporate guarantor of the principal borrower which is barred by the provisions of the moratorium order passed under Section l4(1) (c) of Code. Therefore, we hold that at the moment the petition under Section 7 is not maintainable until finalization of insolvency proceedings against the principal borrower. Thus, the petition filed under Section 7 of the Code deserves to be dismissed with liberty to file a fresh petition, when the moratorium already in force is vacated."

ANALYSIS

The Hon'ble Allahabad High Court in the Sanjeev Shriya Case stayed proceedings in the Ld. DRT against the guarantors on the ground that the liability has not been crystallized against either the principle debtors or the guarantors, therefore the proceedings pending before the Ld. DRT cannot go on and the same were stayed until the finalization of the corporate insolvency resolution process or till the Ld. NCLT approves the resolution plan under Section 31(1), of the Code or passes an order for liquidation under Section 33 of the Code.

In Northway Spaces & Anr. v. Sicom Spaces and Anr. 13 the Ahmedabad bench of the Ld. NCLT while dismissing the application filed by the appellants seeking a direction against the respondent to stop them from taking possession of the properties of the appellants, who were the guarantors of the corporate debtor, held that, "By any stretch of analogy, the said decision (Sanjeev Shriya) is not at all applicable to the proceeding initiated by the applicants or to the prayer made by the applicants. In short, the prayer of the applicants is to extend the moratorium order imposed in respect of the properties of the Corporate Debtor also to the properties of the guarantors/ Applicants without there being any proceeding in respect of the guarantors for initiation of CIRP before this Authority. Therefore, the above said decision relied upon by the applicants is not applicable to the facts of this case." The Bench also held that, "The moratorium order passed under Section 14(1) of the Code applies only to the security interest created by the Corporate Debtor in respect of its properties but not to the properties of the guarantors."

CONCLUSION

From the aforementioned judgements, it appears that there are a host of new issues in the Code which need further consideration to render a purposive and final interpretation of the provisions, including relating to Section 14 of the Code.

Footnotes

1 Oxford Dictionary

2 (2012) 11 SCC 511

3 As per Section 5(12) of the Code insolvency commencement date means the date of admission of an application for initiating corporate insolvency resolution process by the Adjudicating Authority under Sections 7, 9 or 10 of the Code as the case may be.

4 As per Section 5(1) of the Code Adjudicating Authority means the National Company Law Tribunal.

5 Company Appeal (AT) (Insol.) No. 116 of 2017

6 Company Appeal (AT) (Insolvency) No. 129 of 2017

7 CP. (I.B) No. 80/7/NCLT/AHM/2017

8 2017 141 CLA 305 (All.)

9 Recovery of Debt Due to Banks and Financial Institutions Act, 1993

10 Company Appeal (AT) (Insolvency) No. 213 of 2017

11 MANU/NC/0668/2018

12 MANU/NC/2661/2017

13 C.P. (I.B) No. 28/14, 19 & 20/NCLT/AHM/20

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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

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

Authors
Similar Articles
Relevancy Powered by MondaqAI
Vaish Associates Advocates
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Vaish Associates Advocates
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions