NCLT Kochi: Creditors Can Initiate Proceedings Against Corporate Debtors and Personal Guarantors Simultaneously
The Kochi Bench of the National Company Law Tribunal (NCLT), with Justice T Krishna Valli serving as the Judicial Member
NCLT Kochi: Creditors Can Initiate Proceedings Against Corporate Debtors and Personal Guarantors Simultaneously The Kochi Bench of the National Company Law Tribunal (NCLT), with Justice T Krishna Valli serving as the Judicial Member and Shyam Babu Gautam as the Technical Member, recently made a significant ruling. They rejected an application for a stay and clarified that the...
NCLT Kochi: Creditors Can Initiate Proceedings Against Corporate Debtors and Personal Guarantors Simultaneously
The Kochi Bench of the National Company Law Tribunal (NCLT), with Justice T Krishna Valli serving as the Judicial Member and Shyam Babu Gautam as the Technical Member, recently made a significant ruling. They rejected an application for a stay and clarified that the moratorium stipulated in sections 96 and 101 of the Insolvency and Bankruptcy Code (IBC) does not impede the pursuit of legal action under sections 7, 9, or 10 of the IBC. This decision hinges on the distinction that these sections apply to entities such as companies or body corporates and not to individuals.
The Bench further observed that the phrase "in relation to debt" should be interpreted in a way that is consistent with other parts of the IBC, and that due importance should be given to the purpose and terms of a contract of guarantee and loan agreements.
Furnace Fabrica (the corporate debtor/applicant) defaulted on its loans from a consortium of banks led by the State Bank of India (SBI), including EXIM Bank, Axis Bank, and Standard Chartered Bank.
The personal guarantees of individuals secured the security credit facility. On May 11, 2023, Standard Chartered Bank initiated an insolvency resolution process under Section 95 of the IBC against one of the personal guarantors, Abdul Rehman Basheeruddin. As a result, an interim moratorium commenced in relation to all debts, as per Section 96 of the IBC.
Section 96(1)(a) of the Insolvency and Bankruptcy Code (IBC) imposes an interim moratorium on all debts of a personal guarantor during the insolvency resolution process. During this period, any legal action or proceeding pending in respect of any debt is deemed to have been stayed, and creditors of the guarantor are prohibited from initiating any legal action or proceeding in respect of any debt.
Section 3(11) of the IBC defines "debt" as a liability or obligation in respect of a claim which is due from any person and includes financial debt and operational debt.
On May 23, 2023, the State Bank of India (Respondent), the Applicant's financial creditor, filed a Section 7 application to initiate the Corporate Insolvency Resolution Process (CIRP).
The Applicant's contention centred around the request for a stay on the company petition filed under Section 7. They argued that a separate company petition stemming from the identical credit facilities provided by the same creditors, as outlined in the same documents, had already been submitted. Consequently, they contended that the application under Section 7 should be subject to the interim moratorium prescribed by Section 96 and Section 101 of the IBC.
The Respondent opposed the Applicant's submissions, arguing that it is a well-established legal principle that simultaneous proceedings can be initiated against both the corporate debtor and the guarantor for the same debt.
The Respondent contended that, in the case of Laxmi Pat Surana vs. Union Bank of India & Others, the Supreme Court established that the right of cause of action empowers a financial creditor to pursue legal action against both the principal borrower and guarantor with equal force in the event of a debt default, based on their joint and several liabilities.
The Respondent argued that the guarantor's obligation to repay the debt is coextensive with that of the principal borrower, as stated in Section 128 of the Indian Contract Act, 1872.
The Respondent also drew upon the case of Axis Trustee Services Limited vs. Brij Bhushan Singh and Others in Delhi High Court to argue that the moratorium under section 96 is specifically applicable to debts associated with a personal guarantor and does not extend to other co-guarantors, even when their liabilities originate from the same debt.
The NCLT dismissed the application, noting that the moratorium under Sections 96 and 101 of the IBC cannot prohibit the right to action under Sections 7, 9, or 10 of the IBC.
The NCLT further observed that it is now instructive to examine the scheme of the IBC, 2016. Upon reviewing the IBC, it is clear that nowhere in the code is it mentioned that the moratorium under Section 96 affects the proceedings under Sections 7, 9, or 10. In fact, there are two moratoriums: one that arises after admission under Sections 7, 9, or 10, and another that arises upon the initiation of a personal insolvency process. Both are governed by separate parts of the IBC, and hence the legislature has provided separate actions for different situations. The structure of the IBC is such that the moratorium under Section 14 arises from the primary debt of the corporate debtor, while the moratorium under Section 96 or 101 arises from the secondary debt, i.e., the default on a guarantee. If the moratorium under Section 96 or 101 is meant to prohibit Section 7 proceedings, then it would essentially invalidate the primary contract, which cannot be the object of the IBC.
The Bench held that the resolution processes for corporate debtors and personal guarantors are separate. The resolution under Section 95 arises from the guarantor's liability and does not absolve the right to initiate corporate insolvency resolution processes under Sections 7, 9, or 10 of the IBC.