Delhi High Court Rules in Favour of State Bank of India, States, 'Liability of a Guarantor is Coextensive with the Principal Debtor'

Delhi HC Rules in Favour of State Bank of India, States, 'Liability of a Guarantor is Coextensive with the Principal Debtor'

The Delhi High Court, on 2nd November, 2020, by two judges bench ruled in favour of State Bank of India (Respondent) and held, that neither Section 14 nor Section 31 of the Insolvency and Bankruptcy Code place any fetters on Banks/Financial Institutions from initiation and continuation of the proceedings against the guarantor for recovering their dues.

The question which arose for consideration of the following writ petition was, whether a bank/financial institution can institute or continue with proceedings against a guarantor under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ('SARFAESI Act'), when proceedings under the Insolvency and Bankruptcy Code 2016 ('IB Code') have been initiated against the principal borrower and the same are pending adjudication.

In the instant case, respondent (No.4) M/s Metenere Ltd. is the principal borrower. Respondent No.4 ('Principal Borrower') had obtained loans from the respondent/State Bank of India ('Bank'). The petitioner, Mrs. Kiran Gupta, who is the wife of the promoter of the principal borrower, stood as a guarantor for repayment of the loans. The Bank filed an insolvency petition against the principal borrower under the provisions of the IB Code before the NCLT, Delhi.

The petitioner contended, that proceedings against the Principal Borrower under the IB Code and against the Guarantor under the SARFAESI Act cannot be instituted and continued simultaneously; unless the proceedings under the IB Code does not comes to an end and it was decided that the company cannot be revived, proceedings against the Guarantor alone cannot go on; that if the Resolution Plan is accepted, then under Section 31 of the IB Code, all the Guarantees become ineffective as the Resolution Plan is binding on the Guarantors.

It was therefore, submitted by the petitioner that proceedings against the guarantor under SARFAESI Act should await the final decision under the IB Code. If the resolution process is accepted, then the guarantor is discharged of all his liabilities, but on the other hand, if the resolution process fails, then the Bank would be free to proceed against the principal borrower and the guarantor. The petitioner concluded that Sections 14 and 31 of the IB Code would warrant a stay on all proceedings against the Guarantor under the SARFAESI Act during the continuation of the Insolvency Resolution Process.

However, on the contrary the respondent submitted that the liability of a Guarantor is 'co-extensive' with the Principal Debtor. He stated that the issue raised by the petitioner is no longer res integra and that the words of Sections 14 and Section 31 of the IB Code do not bar initiation and continuation of the SARFAESI proceedings against the Guarantor.

The High Court after examining all the facts and circumstances noted that Section 128 of the Contract Act provides that the liability of a Guarantor is coextensive with that of the Principal Debtor. The court clarified the liability of a guarantor is co-extensive with that of the principal debtor and not in the alternative, it cannot be said that proceedings in the NCLT against the principal debtor can be a bar to institution or continuation of proceedings against the guarantor under the SARFAESI Act.

The court expressed that neither Section 14 nor Section 31 of the IB Code place any fetters on Banks/Financial Institutions from initiation and continuation of the proceedings against the guarantor for recovering their dues and that the petitioner cannot escape form her liability qua the respondent/bank in such manner hence finding no merit in the petition, the court dismissed the petition.