Moratorium u/s 14 of the Insolvency and Bankruptcy Code 2016 not apply to a personal guarantor of a corporate debtor – SC

Moratorium u/s 14 of the Insolvency and Bankruptcy Code, 2016 not apply to a personal guarantor of a corporate debtor – Supreme Court

ABCAUS Case Law Citation:
ABCAUS 2467 (2018) 08 SC

The instant appeal involved the question whether Section 14 of the Insolvency and Bankruptcy Code, 2016 (the Code), which provides for a moratorium for the limited period mentioned in the Code, on admission of an insolvency petition, would apply to a personal guarantor of a corporate debtor?

The respondent was the Managing Director (MD) of the corporate debtor (the company) and also the personal guarantor in respect of credit facilities that had been availed from the Appellant Bank. The Guarantee Agreement had been duly entered into between the Appellant Bank and the MD.

As the Company did not pay its debts in time, its account was classified as a non-performing asset (NPA). Consequent thereto, the Appellant Bank issued a notice under Section 13(2) of the SARFAESI Act demanding the outstanding amount from both the company and the MD within the statutory period of 60 days.  However, since no payment was made, a possession notice under Section 13(4) of the SARFAESI Act was issued.

Under these circumstances, the corporate debtor (the company) filed an application under Section 10 of the Code to initiate the corporate insolvency resolution process against itself. The petition was admitted, followed by the moratorium that is imposed statutorily by Section 14 of the Code. While the said proceedings were pending, an interim application was filed by MD as personal guarantor to the corporate debtor, in which he took up the plea that Section 14 of the Code would apply to the personal guarantor as well, as a result of which proceedings against the personal guarantor and his property would have to be stayed.

The National Company Law Tribunal (NCLT) held that since under Section 31 of the Code, a Resolution Plan made thereunder would bind the personal guarantor as well, and since, after the creditor is proceeded against, the guarantor stands in the shoes of the creditor, Section 14 would apply in favour of the personal guarantor as well. The interim application filed by the MD was allowed, and the Appellant Bank was restrained from moving against the MD.

On appeal by the Bank, the National Company Law Appellate Tribunal (NCLAT) dismissed it. The Appellate Tribunal relied upon Section 60(2) and (3) of the Code as well as Section 31 of the Code to find that the moratorium imposed under Section 14 would apply also to the personal guarantor. The reasoning was that since the personal guarantor can also be proceeded against, and forms part of a Resolution Plan which is binding on him, he is very much part of the insolvency process against the corporate debtor, and that, therefore, the moratorium imposed under Section 14 should apply to the personal guarantor as well.

The Hon’ble Supreme Court appointed an Amicus Curiae for the assistance in the matter. He pointed out that the whole idea of the Insolvency Code was that the history of debt recovery had shown that the earlier statutes were loaded heavily in favour of corporate debtors and that, as a result, huge outstanding debts to banks and financial institutions had not been repaid.

The Amicus Curiae pointed out Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985, and stated that as a result of the said Section applying to guarantors as well, creditors could not proceed against guarantors as well after the company had been declared sick under the said Act, without permission from the Board for Industrial and Financial Reconstruction. Now that the said Act has been repealed, and the fact that several later enactments, including the Companies Act, 2013 had omitted a provision akin to Section 22, would show that the enactment of Section 14 of the Code was deliberate, and that the idea was that there should be no stay of proceedings against the guarantor while the corporate debtor is undergoing an insolvency proceeding.

The Hon’ble Supreme Court observed that Section 14 refers to four matters that may be prohibited once the moratorium comes into effect. In each of the matters referred to, be it institution or continuation of proceedings, the transferring, encumbering or alienating of assets, action to recover security interest, or recovery of property by an owner which is in possession of the corporate debtor, what is conspicuous by its absence is any mention of the personal guarantor. Thus, a plain reading of the said Section, therefore, leads to the conclusion that the moratorium referred to in Section 14 can have no manner of application to personal guarantors of a corporate debtor.

The Hon’ble Supreme Court rejected the reliance placed by the respondents on Sections 2(e) and Section 60 of the Code to contend that the Code will apply to personal guarantors of corporate debtors and proceedings against such personal guarantors will show that such moratorium extends to the guarantor as well.

The Hon’ble Supreme Court stated that the scheme of Section 60(2) and (3) is clear – the moment there is a proceeding against the corporate debtor pending under the 2016 Code, any bankruptcy proceeding against the individual personal guarantor will, if already initiated before the proceeding against the corporate debtor, be transferred to the National Company Law Tribunal or, if initiated after such proceedings had been commenced against the corporate debtor, be filed only in the National Company Law Tribunal. However, the Tribunal is to decide such proceedings only in accordance with the Presidency-Towns Insolvency Act, 1909 or the Provincial Insolvency Act, 1920, as the case may be.

The Hon’ble Supreme Court further stated that it is clear that sub-section (4), which states that the Tribunal shall be vested with all the powers of the Debt Recovery Tribunal, as contemplated under Part III of the Code, for the purposes of sub-section (2), would not take effect, as the Debt Recovery Tribunal has not yet been empowered to hear bankruptcy proceedings against individuals under Section 179 of the Code, as the said Section has not yet been brought into force. Also, the Section 249, dealing with the consequential amendment of the Recovery of Debts Act to empower Debt Recovery Tribunals to try such proceedings, has also not been brought into force.

The Hon’ble Supreme Court clarified that it is clear that Section 2(e) would, when it refers to the application of the Code to a personal guarantor of a corporate debtor, apply only for the limited purpose contained in Section 60(2) and (3). This is what is meant by strengthening the Corporate Insolvency Resolution Process in the Statement of Objects of the Amendment Act, 2018.

The Hon’ble Supreme Court opined that Sections 96 and 101, when contrasted with Section 14, would show that Section 14 cannot possibly apply to a personal guarantor. According to the Court, for the purpose of interpretation, it was open to contrast Section 14 with Sections 96 and 101, as Sections 96 and 101 are laws made by the Legislature, even though they have not yet been brought into force

The Hon’ble Supreme Court further opined that the section 14 refers only to debts due by corporate debtors, who are limited liability companies, and it is clear that in the vast majority of cases, personal guarantees are given by Directors who are in management of the companies. The object of the Code is not to allow such guarantors to escape from an independent and coextensive liability to pay off the entire outstanding debt, which is why Section 14 is not applied to them. However, insofar as firms and individuals are concerned, guarantees are given in respect of individual debts by persons who have unlimited liability to pay them. And such guarantors may be complete strangers to the debtor – often it could be a personal friend. It is for this reason that the moratorium mentioned in Section 101 would cover such persons, as such moratorium is in relation to the debt and not the debtor. We may hasten to add that it is open to us to mark the difference in language between Sections 14 and 96 and 101, even though Sections 96 and 101 have not yet been brought into force.

The Court looking at the historical background of the Code stated that it is obvious that the Parliament, when it enacted Section 14, had the history in mind and specifically did not provide for any moratorium along the lines of Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985 in Section 14 of the Code.

The Hon’ble Supreme Court further dwelled upon argument that the amendment of 2018, which makes it clear that Section 14(3), is now substituted to read that the provisions of sub-section (1) of Section 14 shall not apply to a surety in a contract of guarantee for corporate debtor.

The Court observed that the Insolvency Law Committee, appointed by the Ministry of Corporate Affairs, by its Report dated 26.03.2018, made certain key recommendations, one of which was to clear the confusion regarding treatment of assets of guarantors of the corporate debtor vis-àvis the moratorium on the assets of the corporate debtor, it had been recommended to clarify by way of an explanation that all assets of such guarantors to the corporate debtor shall be outside scope of moratorium imposed under the Code. Thus, the object of the amendment was to clarify and set at rest what the Committee thought was an overbroad interpretation of Section 14.

Thus, the Hon’ble Supreme Court set aside the impugned judgment of the Tribunal and allowed the appeal.

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