By Shreya Routh & Vallari Dubey, (firstname.lastname@example.org)
Brief facts of the case
Petitioners had filed a writ petition with the Allahabad High Court, challenging the order passed by the Debt Recovery Tribunal (“DRT”). Petitioners are the guarantors of M/s LML Limited, Kanpur (hereinafter referred as the “Company”). The State Bank of India filed an application before the Debt Recovery Tribunal, Allahabad against the Company as the principal borrower and Sanjeev Shriya and others (hereinafter referred to as the “Petitioners”) as the guarantors. On 6.7.2017 DRT heard both the parties and passed the impugned order, staying the proceeding against the Company on the basis of the order passed by NCLT Allahabad dated 30.05.2017 imposing Moratorium on legal proceedings under Section 14 of the Insolvency and Bankruptcy Code, 2016. Subsequent to this, Corporate Insolvency Resolution Process began for the corporate debtor being the Company. As far as the resolution process for the personal guarantors was concerned, the interpretation of Section 60 of the Code provided for admitting such application to NCLT. However, since such provisions are not yet notified, being an individual, initiation of insolvency proceedings were placed before DRT.
The guarantors filed a writ petition under the Allahabad High Court. The High Court passed orders that two insolvency proceedings cannot be in initiated at the same time, dismissing the insolvency proceedings of the personal guarantor. Such order was passed as per the provisions of Section 14 of the Insolvency & Bankruptcy Code, 2016 (“Code”).
Main contentions of the appellant
The Appellants pleaded on the ground of Section 14 of the Code which inter alia states that on initiation of corporate insolvency resolution process of a corporate debtor all pending proceedings against it shall come to an end. Since, Section 60 of the Code is not yet notified, the personal guarantor cannot be held accountable for the default of the corporate debtor by its creditors. The petitioners instead of filing reply opted to prefer one petition under the Insolvency and Bankruptcy Code, 2016 after initiation of recovery proceedings by certain bank.
Relevant extract of Moratorium
In the said proceeding, an order dated 30.5.2017 was passed by the NCLT in the Company Petition in question. The relevant portion of the order reads as under:-
“6. In view of the above stated factual and legal position of the case, we find that the corporate debtor has complied with requirement of Section 10 of the Code. In view of the above the present Application deserved to be allowed hence is allowed. We admit the petition for declaring Moratorium with Consequential Directions which are given as under:-
- That the order of moratorium u/s 14 shall have effect from 30.05.2017 till the completion of corporate insolvency resolution process or until this Bench approves the resolution plan under sub-section (1) of Section 31 or passes an order for liquidation of corporate debtor under Section 33 as the case may be.
- That the Bench hereby prohibits the institution of suits or continuation of pending suit 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, transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein, 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 SARFESI Act, 2002, the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.
- That the supply of essential goods or services to corporate debtor, if continuing, shall not be terminated or suspended or interrupted during the Moratorium period.
- That the provisions of Section 14 sub-section (1) shall not apply in such transactions as may be notified by the Central Government in consultation with any financial sector regulator.
- That this Bench hereby appoints Mr. Anil Goel, ***
- That the public announcement of corporate insolvency resolution process be made immediately as specified under Section 13 of the Code and calling for submissions of claim under Section 15 of the code.
- An authentic copy of this order be issued to parties including Interim Resolution Professional after the completion necessary formalities. In view of the above, the Application is admitted and accordingly stand disposed of.”
Relevant provisions of the Code
Section 14(1) of the Code, inter alia provides for the following provision in respect of initiation of moratorium period:
14(1) “Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority 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 of 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”
Insolvency proceedings for a personal guarantor in case of a situation where the insolvency proceedings of its guarantee i.e., corporate debtor has already began shall be governed under Section 60(2) of the IBC Code. The relevant provisions although not notified inter alia cover the following:
60(2) “Without prejudice to sub-section (1) and notwithstanding anything to the contrary contained in this Code, where a corporate insolvency resolution process or liquidation proceeding of a corporate debtor is pending before a National Company Law Tribunal, an application relating to the insolvency resolution or bankruptcy of a personal guarantor of such corporate debtor shall be filed before such National Company Law Tribunal”
Findings of the Bench
In Oshi Foods Limited and ors vs. State Bank of India AIR 1997 (2) MPLJ 643 learned Single Judge of the High Court of Madhya Pradesh (Gyalior Bench) held that unless and until the liability of the company is determined, the guarantors cannot be held liable. It may be possible to proceed against the guarantors, if the decree is obtained against the company which is going to be executed. Therefore, in such a situation when a composite suit has been filed and when leave of the Company Court is required for proceeding against the company then the conclusion is inescapable that the suit cannot proceed unless and until the leave of the Company Court is obtained.
The object of IBC, 2016 is categorical and as per provisions contained under Section 60 (2) the Adjudicating Authority, in relation to insolvency resolution and liquidation for corporate persons including corporate debtors and personal guarantors thereof, shall be the National Company Law Tribunal. In the present matter, admittedly, the proceeding has been initiated under the IBC 2016 and the Moratorium under Section 14 of IBC 2016 has already been issued by the NCLT. The NCLT is already ceased with the process of insolvency resolution against the company (in liq.) under IBC 2016 and moreover, the SBI has also put their appearance in the said proceedings regarding its claim. At no point of time the SBI has disassociated itself from the proceeding before the NCLT and it is actively participating in the proceeding. Also, NCLT has initiated the insolvency process against the corporate debtor.
Judgment passed by the Hon’ble Bench
The High Court was of the opinion that two parallel proceedings cannot be initiated at the same time. It disposed of the insolvency proceeding against the personal guarantor stating that money should be first recovered from the corporate debtor and then subsequently from the personal guarantor.
The Court is of the considered opinion that in the aforementioned facts and circumstances once the sufficient safeguards are provided in the IBC, 2016 & the regulations framed thereunder to the bank, and even the liability has not been crystallized either against the principal debtor or guarantors/mortgagors at present, then the proceeding, which is pending before the Debt Recovery Tribunal, Allahabad cannot go on and the same is stayed till the finalisation of corporate insolvency resolution process or till the NCLT approves the resolution plan under sub section (1) of Section 31 or passes an order for liquidation of corporate debtor under Section 33, as the case may be.
With due respect to the Hon’ble High Court, we express our dissented opinion on the matter and oppose the judgment of the Allahabad High Court, stating that parallel proceedings of both the corporate debtor and personal guarantor can be initiated at the same time. It is pertinent to note that the personal guarantor and the corporate debtor are two distinct entities. Liability of the personal guarantor is determined as per the ‘Guarantee Agreement’ and that of the corporate debtor/borrower shall be determined as per the ‘Loan Agreement’. Also, there is no such contention that in case of default in repayment the lender must first hold the borrower accountable and then the personal guarantor.
In the absence of notified Section 60, creditor(s) shall have no remedy to proceed against personal guarantors of Corporate Debtor but to file a case with DRT. The question that is pertinent and needs to be addressed by the judiciary is whether the applicability of Section 14 is wide enough to cover proceedings under separate authority against third parties (personal guarantors in this case). Nonetheless, we are of the view that such proceedings should be immune of moratorium, moratorium being applicable to the corporate debtor and not third parties such as personal guarantors.
In Pollock & Mulla on Indian Contract and Specific Relief Act, Tenth Edition, at page 728, it is observed-
“Co-extensive-Surety’s liability is co-extensive with that of the principal debtor.
A surety’s liability to pay the debt is not removed by reason of the creditor’s omission to sue the principal debtor. The creditor is not bound to exhaust his remedy against the principal before suing the surety, and a suit may be maintained against the surety though the principal has not been sued.”