Author: Shefali Chaudhary, 2nd year, ICFAI University Dehradun.
Citation: (2018) 17 SCC 394
Date of decision: August 14, 2018
Original copy: View
Bench: R. F. Nariman & Indu Malhotra
Statutes Involved: Insolvency and Bankruptcy Code, 2016, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, Insolvency and Bankruptcy Code (Amendment) Act, 2017
Issue in question:
- Whether Section 14 of Insolvency and Bankruptcy Code, 2016, would apply to a personal guarantor of a corporate debtor?
Background of the case:
- In February 2014, Mr. V. Ramakrishnan, the Managing Director of M/s. Veesons Energy Systems Private Limited signed an individual guarantee for State Bank of India as for certain credit offices profited by Veesons from SBI.
- Veesons, be that as it may, failed to pay its debts on schedule, according to which SBI started proceedings against Veesons under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter, the SARFAESI Act) demanding a remarkable amount of about INR 61 crores.
- By the time, a application was filed by Veesons under Section 10 of the Insolvency and Bankruptcy Code, 2016 (hereinafter, the Code) for the initiation of voluntary corporate insolvency resolution proceedings (hereinafter, the CIRP). This application was conceded, following which a time of moratorium under Section 14 of the Code was forced.
- During the pendency of the CIRP, an interval application was likewise filed by Mr. Ramakrishnan, wherein it was contended that as per Section 14 of the Code any procedures against him and his property would need to be stayed.
- By an order dated September 18, 2017 the National Company Law Tribunal (hereinafter, the NCLT), Chennai Bench permitted the application recorded by Mr. Ramakrishnan and limited SBI from moving against him until the time of moratorium was finished.
- An appeal was filed by SBI, against the request for the NCLT, under the National Company Law Appellate Tribunal (hereinafter, the NCLAT). The NCLAT conveyed its judgment (impugned judgment) on February 28, 2018 declining to interfere with the order passed by the NCLT. In doing so, the NCLAT depended on Section 60 and Section 31 of the Code to hold that the moratorium forced under Section 14 would likewise apply to the personal guarantor.
- The impugned judgment was challenged by SBI under the Hon’ble Supreme Court. Strangely, even as the appeal documented by SBI stayed pending, the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 (hereinafter, the Ordinance) was proclaimed on June 6, 2018. By this amendment, among different changes, Section 14(3) of the Code was substituted to peruse that the provisions of Section 14(1) would not matter to a guarantee in a contract of guarantee to a corporate debtor.
- The Court observed that Section 14 didn’t make any reference to individual guarantors and it was just the corporate debt holder, which was alluded to in that. In such a situation, a plain perusing of Section 14 would prompt the end that the time of moratorium would have no application to the individual guarantor of a corporate debt holder.
- The Court observed that Section 60(1) of the Code, which gave that the adjudicating authority corresponding to the bankruptcy resolution and liquidation of both corporate indebted and individual guarantor will be the NCLT, was just significant in that it finds the NCLT which would have the territorial jurisdiction in proceeding against corporate debtor. In stating so, the Court turned down the agreement of Veesons and Mr. Ramakrishnan (hereinafter, the Respondents) that the time of moratorium reaches out to the guarantor also.
- With the Insolvency and Bankruptcy Code (Amendment) Act, 2017, Section 2(e) of the Code was substituted with impact from November 23, 2017 to bring personal guarantor inside the ambit of the Code. This amendment, alongside Section 60, was intensely depended upon by the Respondents to contend that the time of moratorium stretches out to the guarantor also. The Court, in response to the arguments explained above, saw that Section 2(e) will apply just for the limited reason contained in sub-sections (2) and (3) of Section 60 of the Code. Considering the Court, this was the genuine reason behind the objective to “further reinforce the corporate insolvency resolution process”.
- On the side of the argument that the time of moratorium doesn’t stretch out to personal guarantor, SBI set heavy reliance on Part III of the Code, and specifically, on Sections 96 and 101. It was contended that despite the fact that Part III of the Code was not yet in force, if any bankruptcy resolution process was to be carried against a personal guarantor, it could have been done particularly under Part III of the Code – which contains separate moratorium provisions, specifically, Sections 96 and 101. The Court acknowledged the above submission and further noticed that the protection of moratorium under the above Sections was far more noteworthy than that of Section 14.
- The Court additionally observed that, Section 31(1) clarified that the guarantor can’t get away from payment as the approved Resolution Plan may well incorporate provisions as to payments to be made by such guarantor.
- The judgment gives clearness and settles the turmoil caused because of conflicting decisions on this issue. It additionally assumes importance in however much it makes ready for the Ordinance, declared on June 6, 2018 to have retrospective operation with regards to Section 14 referring to the ‘clarificatory’ idea of the amendment.
- Interestingly, the judgment also features the ‘difficulty’ looked by the Court when hearing the matter attributable to the way that various provisions of the Code were brought into force on different dates. Specifically, whether or not Part III of the Code was in power additionally created some turmoil during the hearing, pursuant to which the Court chose to designate an amicus curiae to help them in the matter.