India: Case Analysis To Clarify The Applicability Of Moratorium On Personal Guarantor Under Section 14 Of The Insolvency And Bankruptcy Code

Last Updated: 4 December 2018
Article by Parth Rawal

The case analysis of State Bank of India v. Ramakrishnan and Ors. (Decision by Hon'ble Supreme Court of India in Civil Appeal No. 3595 and 4553 of 2018 on 14.08.20181) reveal the clarity on the issue relating to applicability of moratorium under section 14 of the Insolvency and Bankruptcy Code, 2016 ("IBC"/"Code") on the personal guarantor.

Facts Of The Case

In February 2014, M/s. Veesons Energy Systems Private Limited ("Corporate Debtor"/ "Company") availed credit facilities from State Bank of India ("Financial Creditor"/ "Bank"). Mr. V Ramakrishna, the managing director of the company signed a personal guarantee in favor of State Bank of India. As the company did not pay its debts, the assets of the company were classified as non-performing assets on July 26, 2015. The bank initiated proceedings under The Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 ("SARFAESI Act") and issued notice under section 13(2) of the SARFESI Act, demanding the outstanding amount from the company and the personal guarantor. As the outstanding amount was not paid within statutory period of 60 days, the Bank issued a possession notice on November 18, 2016, thereby, taking symbolic possession of the secured assets of the company.

On May 20, 2017, the company filed an application under section 10 of the Insolvency and Bankruptcy Code, 2016 before the National Company Law Tribunal ("NCLT"/ "Tribunal") initiating corporate insolvency resolution process against itself. The Tribunal admitted the application and passed an order of Moratorium under section 14 of the IBC. Even after declaration of moratorium, the bank proceeded against property of personal guarantor under SARFAESI Act and issued a sale notice on July 12, 2017. Being aggrieved, the personal guarantor approached NCLT for stay of proceeding under SARFAESI Act. The Tribunal by its order dated September 18, 2018, prohibited the Bank from proceeding against the property of personal guarantor during moratorium period. An appeal was filed by the Bank before the National Company Law Appellate Tribunal ("NCLAT"), whereby the NCLAT relying upon section 60 and section 31 of the Code, held that moratorium under section 14 will apply to personal guarantor as well.2

The said decision was challenged before the Hon'ble Supreme Court of India by the State Bank of India on the ground that the moratorium period envisaged under section 14 is applicable only to corporate debtor and the Bank can henceforth proceed against the property of personal guarantor.

Issues Involved

Whether the period of moratorium under section 14 of Insolvency and Bankruptcy Code is applicable to Personal Guarantor?

Decision

 The Hon'ble Supreme Court first took note of the fact that different provisions of Insolvency and Bankruptcy code were brought into effect on different dates and some of the provisions were not yet brought into force on the date of the judgment. The Apex Court then proceeded to make observations on relevant sections. Section 14 of the Code authorizes adjudicating authority to pass an order of moratorium during which there is prohibition on institution of suits or continuation of pending suits against corporate debtor, transfer of property of corporate debtor or any action to foreclose or enforce any security interest. Section 96 and 101 of the Code provide for separate provision for moratorium for personal guarantor, however, these provisions have not been brought into force. In light of this, the Apex Court opined that section 14 of the Code cannot apply to personal guarantor. The Hon'ble Court also highlighted the different view of Allahabad High Court in Sanjeev Shriya v. State Bank of India, where the Allahabad High Court had held that when Corporate Insolvency Resolution Process ("CIRP") is going on against the corporate debtor, then the debt owed by the corporate debtor is not final till the resolution plan is approved, and thus, the liability of the surety would also be unclear. Hence, till the time the liability of corporate debtor is not crystallized, the guarantor's liability is not triggered. The Supreme Court while overruling these judgments concluded that in a contract of guarantee, the liability of surety and that of principal debtor is coextensive and hence, the creditor can proceed against assets of either the principal debtor, or the surety, or both, in no particular sequence. The Apex Court also took note of report of Insolvency Law Committee dated 26.03.2018 which clarified that the period of moratorium under section 14 is not applicable to personal guarantors. The court also took into consideration the Amendment Ordinance dated 06.06.2018, which amended the provision of section 14. The proviso to amended section 14 clearly states that the moratorium period envisaged in section 14 is not applicable to personal guarantor to a corporate debtor. Hence, as the provisions of section 96 and 101 have not been brought into force, the personal guarantor is not entitled to moratorium period under the Insolvency and Bankruptcy Code.3

Conclusion

The aforesaid finding of the Hon'ble Supreme Court has given much needed clarity as to the application of period of moratorium to surety of corporate debtor. If there is stay on proceedings against assets of personal guarantor during corporate insolvency resolution proceeding, then the surety may file frivolous application to safeguard their assets. The apex court has remedied this situation by clarifying that Section 14 does not intend to bar actions against assets of guarantors and that the amendment in this regards is applicable retrospectively from June 6, 2018.4

Footnotes

1 State Bank of India vs. V. Ramakrishnan and Ors. (14.08.2018 - SC)

2 State Bank of India vs. V. Ramakrishnan and Ors. (510/IB/CB/ 2017)

3 Prsindia.org. (2018). PRS | Bill Track | The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018. [online] Available at: http://www.prsindia. org/billtrack/the-insolvency-and-bankruptcy-code-amendmentordinance- 2018-5263/ [Accessed 30 Aug. 2018].

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