Article by Vijay Pal Dalmia, Advocate, Supreme Court of India and Delhi High Court, Partner & Head of Intellectual Property Laws Division, Vaish Associates Advocates, India

Key Highlights

I. Moratorium applicable not only to the assets of the corporate debtor but also to the assets of the personal guarantor

II. Financial creditor has similar rights against the guarantor and the principal borrower in case of simultaneous insolvency proceedings

III. Requirement of prior notice under Section 34(5) of the Arbitration Act before filing the arbitration petition is not mandatory

IV. Fresh proceedings before NCLT under IBC admissible regardless of winding up petitions before Company Court admitted and pending disposal

I. Moratorium applicable not only to the assets of the corporate debtor but also to the assets of the personal guarantor

In case of State Bank of India v. Mr. V. Ramakrishnan and Others (decided on February 28, 2018), the National Company Law Appellate Tribunal ("NCLAT") held that the moratorium will not only be applicable to the assets of the corporate debtor but also to the assets of personal guarantor.

Facts:

State Bank of India ("Creditor") had advanced a loan to M/s. Veesons Energy Systems Private Limited ("Corporate Debtor") for which a personal guarantee was given by one of the directors of the said Corporate Debtor, Mr. V Ramakrishnan ("Personal Guarantor"). Subsequently, the Corporate Debtor defaulted on the repayment of the loan, which prompted the Creditor to invoke its right and issue a notice under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002, ("SARFAESI Act") against the Personal Guarantor for recovering the outstanding dues. This notice was challenged by the Corporate Debtor before the Madras High Court, which dismissed it. Thereafter, the Creditor issued a 'Possession Notice' under Section 13(4) of the SARFAESI Act and took symbolic possession of the secured assets.

The Corporate Debtor filed an application under Section 10 of the Insolvency and Bankruptcy Code ("IBC") before National Company Law Tribunal, Chennai ("NCLT"). The NCLT passed an order of moratorium and an 'Interim Resolution Professional' was appointed. However, the Creditor continued to proceed against the property of the Personal Guarantor by issuing a 'Sale Notice' under SARFAESI Act even after the declaration of the moratorium.

Aggrieved by the act of the Creditor, the Personal Guarantor filed an application before the NCLT for stay of proceedings under the SARFAESI Act. The NCLT passed an order restraining the Creditor from proceeding against the Personal Guarantor till the period of moratorium was over. Being aggrieved by the decision of the NCLT, the Creditor filed an appeal with the appellate body National Company Law Appellate Tribunal ("NCLAT") and following issue came up for determination: Issue: Whether the Creditor can proceed against the assets of the Personal Guarantor while the Corporate Debtor is undergoing a corporate insolvency resolution process?

Arguments:

The Creditor argued that the NCLT order in respect of the moratorium would not apply to the assets of the Personal Guarantor. On the other hand, the Corporate Debtor argued that in view of Sections 14(1)(b) and 31(1) of the IBC, the Creditor could not proceed even against the assets of the Personal Guarantor.

Observations of the NCLAT:

The NCLAT first examined Part II of the IBC which deals with 'Insolvency Resolution and Liquidation for Corporate Persons' and observed that as per Section 5 of the IBC, insolvency resolution and liquidation proceedings can be initiated only against the corporate persons and not against an individual, including the Personal Guarantor. The NCLAT then examined Part III of the IBC and observed that as per Section 60 of the IBC, where proceedings have been initiated against the corporate debtor, if simultaneous proceedings are to be initiated against the personal guarantor for bankruptcy proceedings, an application relating to the insolvency resolution or bankruptcy of a personal guarantor of such corporate debtor is required to be filed before the same adjudicating authority.

The NCLAT also examined Section 14 of the IBC which deals with moratorium and observed that the commencement of moratorium period not only prohibited institution of suits, continuation of pending suits or any proceedings against the corporate debtor but also prohibited transfer, encumbrance, alienation or disposal of any of the assets of the corporate debtor and/or any legal right or beneficial interest therein. It further noted that Sections 14(1)(c) and 14(1)(d) prohibited recovery or enforcement of any security interest created by the corporate debtor in respect of its property including the property occupied by it or in the possession of the said corporate debtor.

On a combined reading of Sections 30 and 31 of the IBC which deal with the approval of the resolution plan, the NCLAT observed that it was clear that resolution plan once approved by the committee of the creditors and thereafter by the adjudicating authority would not only be binding on the Corporate Debtor but would also cover under its ambit, employees, members, creditors, guarantors and other stakeholders involved in the resolution plan, including the personal guarantor. Thus, in light of the above, the NCLAT concluded that the effect of the moratorium would also be applicable on the Personal Guarantor, since the resolution plan of the Corporate Debtor was binding on the Personal Guarantor.

To view the full newsletter please click here.

© 2018, Vaish Associates Advocates,
All rights reserved
Advocates, 1st & 11th Floors, Mohan Dev Building 13, Tolstoy Marg New Delhi-110001 (India).

The content of this article is intended to provide a general guide to the subject matter. Specialist professional advice should be sought about your specific circumstances. The views expressed in this article are solely of the authors of this article.