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In case of State Bank of India v. Mr. V. Ramakrishnan and Others (decided on August 14, 2018), the Hon’ble Supreme Court resolved the issue relating to applicability of moratorium passed under Section 14 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) on the corporate debtor, against the personal guarantor, where the insolvency proceedings have commenced prior to coming into force of Insolvency and Bankruptcy Code (Amendment) Act, 2018 (“Amendment Act, 2018”).
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, and consequent thereto, the Creditor issued a notice under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, (“SARFAESI Act”) against the Personal Guarantor for recovering the outstanding dues. As no payment was made, 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 IBC before the National Company Law Tribunal (“NCLT”), Chennai to initiate the corporate insolvency resolution process against itself. The NCLT, Chennai 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 the 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, Chennai for stay of proceedings under the SARFAESI Act and pleaded that moratorium 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 application was allowed and the Creditor was restrained from proceeding against the Personal Guarantor till the period of moratorium was over. The Creditor filed an appeal in the National Company Law Appellate Tribunal (“NCLAT”), which was dismissed on the ground 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 therefore, the moratorium imposed should apply to the Personal Guarantor as well. Aggrieved by the decision of the NCLAT, the Creditor filed an appeal to the Supreme Court and following issue came up for determination:
Whether Section 14 of the IBC, which provides for a moratorium for the limited period, on admission of an insolvency petition, would apply to a personal guarantor of a corporate debtor?
The Creditor argued that the Corporate Debtor and Personal Guarantor are separate entities and a Corporate Debtor undergoing insolvency proceedings under IBC would not mean that a Personal Guarantor is also undergoing the same process. Relying upon Section 128 of the Indian Contract Act, 1872, the Creditor submitted that as the guarantor’s liability is distinct and separate from that of the Corporate Debtor, a suit can be maintained against the surety, though the principal debtor has not been sued. The Creditor also relied upon Sections 96 and 101 under Part III of the IBC and submitted that an insolvency resolution process against a personal guarantor can be initiated only under Part III of the IBC and therefore moratorium passed under Section 14 of the IBC cannot possibly attach to a personal guarantor. Section 101 of the IBC does not speak of a ‘debtor’ but speaks ‘in relation to the debt’ and is not only wider than Section 14, but would attach only if Part III proceedings were to be instituted against the personal guarantor. The Creditor also submitted that Amendment Ordinance dated June 6, 2018 substituted Section 14(3) of the IBC, which now excludes the applicability of moratorium passed under Section 14, to a surety in a contract of guarantee to a corporate debtor. For this, the Creditor relied upon the Insolvency Law Committee proceedings, which referred to the impugned judgment of the NCLAT in the present matter and led to the aforesaid amendment. Amicus Curie appointed in the present matter also supported the contention of the Creditor.
The Personal Guarantor relied upon Section 60(2) (insolvency proceedings against the personal guarantors to be filed in the same NCLT as that of corporate debtor) and Section 31 (resolution plan for corporate debtor to be binding on guarantors) of the IBC and argued that the said sections precludes the Creditor from proceeding against the Personal Guarantor under SARFAESI Act or any other Act outside the IBC. He also relied upon a judgment of the Allahabad High Court in Sanjeev Shriya v. State Bank of India and Others (decided on September 6, 2017), which stated that as a proceeding relatable to the corporate debtor is pending adjudication in two forums, it is not permissible to proceed against the personal guarantor. The Personal Guarantor submitted that as per Amendment Act, 2018, which came into effect on November 23, 2017, Section 2(e) was substituted so as to include in the applicability of the IBC, the personal guarantors to corporate debtors. He also relied upon the statement of objects of the Amendment Act, 2018, which was, inter alia, to extend the provisions of the IBC to personal guarantors of corporate debtors, to further strengthen the corporate insolvency resolution process.
Summary of the judgment:
Upon hearing the parties at length, the Court proceeded to decide the issues as follows:
On the interpretation of Section 14 of the Code
The court observed that Section 14 did not make any reference to personal guarantors and it was only the corporate debtor, which was referred to therein. In such a scenario, a plain reading of Section 14 would lead to the conclusion that the period of moratorium would have no application to the personal guarantors of a corporate debtor.
The Court also considered it appropriate to refer to Section 22 of the erstwhile Sick Industrial Companies (Special Provisions) Act, 1985 (SICA), which inter alia provided that no suit for the enforcement of any guarantee in respect of loans or advances granted to the industrial company shall lie/be proceeded with, except with the consent of the Board of Industrial and Financial Reconstruction (BIFR) or the Appellate Authority.
In this context, the Court noted that SICA was repealed on 1 December, 2016 and Section 14 of the Code was brought into force with effect from the same date. The court, therefore, concluded that the parliament, while enacting Section 14, had this history in mind and specifically did not provide for any moratorium along the lines of Section 22 of SICA.
On the scheme of Section 60
The Court observed that Section 60 (1) of the Code, which provided that the adjudicating authority in relation to the insolvency resolution and liquidation of both corporate debtors and personal guarantors shall be the NCLT, was only important in that it locates the NCLT which would have the territorial jurisdiction in proceedings against corporate debtors. In stating so, the Court turned down the argument of Veesons and Mr. Ramakrishnan (the respondents) that the period of moratorium extends to the guarantor as well.
The court also noticed the reference to “personal guarantors” in sub-sections (2) and (3) of Section 60 and went on to clarify the scheme of these provisions. It observed that the moment there was a proceeding pending against the corporate debtor under the Code, any bankruptcy or insolvency resolution proceeding against the individual personal guarantor would have to be transferred or filed before the NCLT, as the case maybe.
However, the Court also clarified that until Part III of the Code is brought into force the NCLT shall decide the proceedings pertaining to personal guarantors only in accordance with the Presidency-Towns Insolvency Act, 1909 or the Provincial Insolvency Act, 1920 as the case may be.
On the amendment to Section 2 (e) of the Code
By way of the Insolvency and Bankruptcy Code (Amendment) Act, 2017 (Amendment Act), Section 2 (e) of the Code was substituted with effect from 23rd November, 2017 to bring personal guarantors within the ambit of the Code. This amendment, along with Section 60, was heavily relied upon by the Respondents to contend that the period of moratorium extends to the guarantor as well. The Respondents also placed reliance on the Statement of objects of the Amendment Act, wherein one of the objectives was to extend the provisions of the Code to personal guarantors with a view to further strengthen the corporate insolvency resolution process.
The Court, in response to the arguments elucidated above, observed that Section 2(e) shall apply only for the limited purpose contained in sub-sections (2) and (3) of Section 60 of the Code. In view of the Court, this was the true purpose behind the objective to “further strengthen the corporate insolvency resolution process”.
On Sections 96 and 101 of the Code
In support of the argument that the period of moratorium does not extend to personal guarantors, SBI placed heavy reliance on Part III of the Code, and in particular, on Sections 96 and 101. It was argued that even though Part III of the Code was not yet in force, if any insolvency resolution process was to be carried out against a personal guarantor, it could have been done only under Part III of the Code – which contains separate moratorium provisions, namely, Sections 96 and 101.
The Court accepted the above submission and further noted that the protection of moratorium under the above sections was far greater than that of Section 14. This was because under these Sections, the pending proceedings in relation to the debt (and not the debtor) are stayed. In this context, the Court further observed that the object of the Code was to not allow guarantors, who in the case of corporate debtors were mostly directors in management of the company, to escape from an independent and co-extensive liability to pay off the entire outstanding debt.
The Court further relied upon the judgment in State of Kerala & Ors v/s Mar Appraem Kuri Co. Ltd. & Anr [(2012) 7 SCC 106] to substantiate the argument that even though Part III was not in force, it was certainly open for the Court to, for the purpose of interpretation, rely upon Sections 96 and 101 as any law made by the Legislature was law on the statute book even though it may not have been brought into force.
On the argument under Section 31 of the Code
The Court also considered the emphasis of SBI on Section 31 of the Code, which inter alia provides that once a resolution plan as approved by the committee of creditors take effect, it shall be binding on the corporate debtor as well as the personal guarantor.
The Court noted that this was only for the reason that otherwise, under Section 133 of the Indian Contract Act, 1872, any change made to the debt owed by the corporate debtor, without the surety’s consent, would relieve the guarantor from payment.
The Court further observed that in fact, Section 31 (1) made it clear that the guarantor cannot escape payment as the approved Resolution Plan may well include provisions as to payments to be made by such guarantor.
On the Amendment Ordinance:
The Court noted that SBI placed heavy reliance on the substitution of Section 14 (3) by way of the Ordinance dated 6 June 2018. However, the Respondents contended that the Ordinance could not have retrospective operation and therefore, would not have a bearing on the present appeals.
In response to the above argument, the Court observed that the amendment was clarificatory in nature and therefore, could be retrospective in its operation. In support of the argument that the Ordinance was clarificatory in nature, the Court also relied upon the Report dated 26/3/2018 prepared by the Insolvency Law Committee. The Committee had suggested that the intention of Section 14 was not to bar actions against assets of guarantors to the debts of the corporate debtors and had consequently, recommended that an explanation to clarify this may be inserted in Section 14 of the Code.
For these reasons, the Court set aside the impugned judgment and accordingly allowed the appeals.
The Supreme Court observed that a plain reading of Section 14 of the IBC, which refers to four matters that may be prohibited once the moratorium comes into effect, leads to the conclusion that the moratorium can have no manner of application to personal guarantors of a corporate debtor. Turning down the arguments of the Personal Guarantor, the Supreme Court observed that Section 60(2) of the IBC merely locates the NCLT which has territorial jurisdiction in insolvency proceedings against the corporate debtors. Further, under Section 60(3) of the IBC, if any bankruptcy proceeding against the individual personal guarantor is initiated before initiating the proceeding against the corporate debtor, such proceeding pending in any court or tribunal will be transferred to the NCLT where the proceeding against the corporate debtor are initiated. Hence, Section 2(e) of the IBC, as amended by the Amendment Act, 2018, when it refers to the applicability of the IBC to a personal guarantor of a corporate debtor, would apply only for the limited purpose as contained in Sections 60(2) and 60(3), as stated herein above. With regard to Section 31 of the IBC, the Supreme Court observed that this Section only states that once a resolution plan, as approved by the committee of creditors, takes effect, it shall be binding on the corporate debtor as well as the guarantor. This is for the reason that otherwise, under Section 133 of the Indian Contract Act, 1872, any change made to the debt owed by the corporate debtor, without the surety’s consent, would relieve the guarantor from payment. The Supreme Court observed that a separate moratorium is applicable in the case of personal guarantors under Sections 96 and 101 of the IBC. The protection of moratorium under these provisions is far greater than that of Section 14 of the IBC in respect of the debt. Section 14 refers only to debts due by corporate debtors, which are limited liability companies, whereas 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 a moratorium against such persons are available only under Part III of the IBC. The Supreme Court observed that the object of the IBC is not to allow the guarantors to escape from an independent and co-extensive liability to pay off the entire outstanding debt, which is why Section 14 is not applied to them. It is for this reason that the moratorium mentioned in Section 101 of the IBC would cover such persons, as such moratorium is in relation to the debt and not the debtor.
The judgment provides clarity and settles the confusion caused as a result of conflicting decisions on this issue. It also assumes significance in as much as it paves the way for the Ordinance, promulgated on 06/06/2018, to have retrospective operation at least in the context of Section 14 citing the “clarificatory” nature of the amendment.
Interestingly, the judgment also highlights the ‘difficulty’ faced by the Court when hearing the matter owing to the fact that different provisions of the Code were brought into force on different dates. In particular, the question of whether Part III of the Code was in force also caused confusion during the hearing, pursuant to which the court decided to appoint an amicus curiae to assist them in the matter.
The Supreme Court set aside the impugned judgment passed by the NCLAT and allowed the appeal by holding that the clarificatory amendment to Section 14 of the IBC brought by the Amendment Act, 2018 is retrospective in effect, which provides that a moratorium on the corporate debtor would not apply to the Personal Guarantor.