Section 14 of the I&B Code does not apply to personal guarantors

state-bank-of-india-vs-vramakrishnan-case-analysis

Status as on- 04/07/2021

Case Analysis-

(Decision by Hon’ble Supreme Court of India in Civil Appeal No. 3595 and 4553 of 2018 on 14.08.2018)

Brief facts of the case

  1. V. Ramakrishnan, Managing Director of M/s. Veesons Energy Systems Private Limited (Veesons), signed a personal guarantee in favor of State Bank of India (SBI) in February 2014, in relation to certain credit facilities obtained by Veesons from SBI.
  2. Veesons, on the other hand, did not pay its debts on time, so SBI initiated proceedings against Veesons under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), demanding an outstanding amount of approximately INR 61 crores.
  3. Meanwhile, Veesons filed an application under Section 10 of the Code for the initiation of voluntary corporate insolvency resolution proceedings (CIRP). This application was granted, and a moratorium was imposed under Section 14 of the Code as a result. During the pendency of the CIRP, Mr. Ramakrishnan filed an interim application in which he argued that the provisions of Section 14 of the Code would also apply to personal guarantors of a corporate debtor, and thus any proceedings against him and his property would have to be stayed.
  4. By order dated September 18, 2017, the National Company Law Tribunal (NCLT), Chennai Bench granted Mr. Ramakrishnan’s application and barred SBI from proceeding against him until the moratorium period
  5. SBI filed an appeal with the National Company Law Appellate Tribunal against the NCLT’s decision (NCLAT). On February 28, 2018, the NCLAT issued its decision (Impugned Judgment), refusing to interfere with the NCLT’s order. The NCLAT did so by relying on Sections 60 and 31 of the Code to hold that the moratorium imposed under Section 14 would also apply to the personal guarantor. SBI filed an appeal with the Supreme Court against the impugned judgement. Surprisingly, while SBI’s appeal was pending, the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 (Ordinance) was promulgated on June 6, 2018. Among other changes made by this amendment, Section 14(3) of the Code was amended to state that the provisions of Section 14(1) do not apply to a surety in a contract of guarantee to a corporate debtor.

Held

The Hon’ble Supreme Court in this case first noted that different provisions of the Insolvency and Bankruptcy Code, 2016 (IBC) went into effect on different dates, and that some of the provisions had not yet gone into effect on the date of the judgement.

(Note: Section 14 of the Code empowers adjudicating authorities to issue a moratorium order prohibiting the institution or continuation of suits against corporate debtor, the transfer of corporate debtor’s property, or any action to foreclose or enforce any security interest.)

  1. According to the Supreme Court, section 14 of the Code does not apply to personal guarantors. The Hon’ble Court also referred to the Allahabad High Court’s decision in Sanjeev Shriya v. State Bank of India, in which the Allahabad High Court held that when a Corporate Insolvency Resolution Process (“CIRP”) is underway against a corporate debtor, the debt owed by the corporate debtor is not final until the resolution plan is approved, and thus the surety’s liability would avert. As a result, the guarantor’s liability is not triggered until the corporate debtor’s liability crystallizes.
  2. While overturning these judgments, the Supreme Court concluded that in a guarantee contract, the liability of the surety and that of the principal debtor are coextensive, and thus the creditor can proceed against assets of either the principal debtor, the surety, or both, in any order.
  3. The Court observed that Section 60(1) of the Code, which provided that the NCLT shall be the adjudicating authority in relation to the insolvency resolution and liquidation of both corporate debtors and personal guarantors, was only significant in that it identifies the NCLT as the territorial jurisdictional authority in proceedings against corporate debtors. In doing so, the Court rejected Veesons’ and Mr. Ramakrishnan’s (the Respondents’) argument that the moratorium applies to the guarantor as well.
  4. The court stated that Section 2(e) shall apply only for the limited purpose specified in Section 60 subsections (2) and (3) of the Code. According to the Court, this was the true intent behind the goal of “further strengthening the corporate insolvency resolution process.”

Impact of this case

This case helped to shed light on the issue of the personal guarantor’s eligibility for a moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016. The Supreme Court finally resolved the aforementioned issue in this judgement by holding that the moratorium passed under unamended Section 14 of the IBC will not apply to the personal guarantor and that the clarificatory amendment to Section 14 of the IBC brought by the Amendment Act, 2018 is retroactive in nature.

Conclusion

This judgement is a welcome decision for creditors because it allows them to enforce personal guarantors’ securities even if the corporate insolvency resolution process had begun against the corporate debtor prior to the Amendment Act, 2018, the decision provides clarity and resolves the confusion caused by conflicting decisions on this issue. It is also significant in that it paves the way for the Ordinance, which was promulgated on June 6, 2018, to have retrospective application, at least in the context of Section 14, which cites the ‘clarificatory’ nature of the amendment.

If there is a stay of proceedings against the personal guarantor‘s assets during the corporate insolvency resolution proceeding, the surety may file a frivolous application to protect their assets. The Supreme Court has rectified the situation by clarifying that Section 14 does not intend to bar actions against guarantors’ assets and that the amendment in this regard is retroactive to June 6, 2018.

 

Disclaimer– The above article is based on the interpretation of related laws which may differ from person to person. The readers are expected to take legal advice before placing reliance on it. For more information, please reach at support@centrik.in

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