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SUPREME COURT OF INDIA
R.F. Nariman, Indu Malhotra, JJ.
STATE BANK OF INDIA – APPELLANT
VERSUS
V. RAMAKRISHNAN & ANR. – RESPONDENTS
CIVIL APPEAL NO. 3595 OF 2018 WITH CIVIL APPEAL NO. 4553 OF 2018
Decided On : 14-08-2018
(b) Insolvency and Bankruptcy Code, 2016 – Section 60(2) – Provision refers to bankruptcy proceedings under Presidency-Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920 repeal of which u/s 243 not yet been notified – Such applications for bankruptcy shall stand transferred to Adjudicating Authority dealing with the insolvency resolution process or liquidation proceedings of such corporate debtor – Not an application under SARFAESI Act – Held, proceedings against the guarantor under the SARFAESI Act can continue. (Para 19, 20, 21)
(c) Insolvency and Bankruptcy Code, 2016 – Section 31 – Binding nature of a Resolution Plan on corporate debtor as well as the guarantor – Held, personal guarantor cannot escape payment. (Para 22)
(d) Insolvency and Bankruptcy Code, 2016 – Section 101 and 14 – Section 14 cannot apply to a personal guarantor – Section 14 speaks of moratorium on debtor in case of corporate debts where personal guarantors have coexistent liability with the corporate debtor while section 101 concerns with personal debts and guarantors where the guarantors may be strangers to the debtor – Even though section 101 has not been brought into force it is open to contrast it with section 14 because “a law ‘made’ by the Legislature is a law on the statute book even though it may not have been brought into force” – Held, section 14 not applicable to personal guarantors of corporate debtors. (Para 23, 24, 25)
(2012) 7 SCC 106; (2016) 4 SCC 1 – Relied upon
(2017) SCC Online Bom 9725 – Cited with approval
(2018) 2 All LJ 769 – Overruled
(e) Section 14(3), (amendment of 2018) –– Held, amendment of 2018 is clarificatory – Hence retrospective. (Para 29)
(2003) 5 SCC 461; (2015) 1 SCC 1 – Relied upon [Para 29]
Facts of the case:
Respondent No.1 is the Managing Director of the corporate debtor, namely, the Respondent No.2 Company, and also the personal guarantor in respect of credit facilities that had been availed from the Appellant.
As the Respondent No.2 Company did not pay its debts in time, the account of Respondent No.2 was classified as a non-performing asset. Consequent thereto, the Appellant issued a notice under Section 13(2) of the SARFAESI Act demanding an outstanding amount of Rs.61,13,28,785.48 from the Respondents within the statutory period of 60 days. As no payment was forthcoming, a possession notice under Section 13(4) of the SARFAESI Act was issued.
An application was filed by Respondent No.2, the corporate debtor, under Section 10 of the Code to initiate the corporate insolvency resolution process against itself. This petition was admitted, followed by the moratorium that is imposed statutorily by Section 14 of the Code. While the said proceedings were pending, an interim application was filed by Respondent No.1 as personal guarantor to the corporate debtor, in which Respondent No.1 took up the plea that Section 14 of the Code 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 National Company Law Tribunal held that Section 14 would apply in favour of the personal guarantor as well. The interim application filed by Respondent No.1 was thus allowed, and the Appellant was restrained from moving against Respondent No.1.
An appeal filed to the National Company Law Appellate Tribunal was dismissed.
Finding of the Court:
Section 14 is not applicable to personal guarantors of corporate debtors.
Result: Appeal allowed.
Key Points: - Section 14 moratorium applies only to the corporate debtor and not to personal guarantors of a corporate debtor (!) [1000612220016] - Proceedings against personal guarantors under the SARFAESI Act can continue despite corporate insolvency resolution process, as Section 60(2) refers only to bankruptcy under repealed Insolvency Acts [1000612220019][1000612220020] - A Resolution Plan approved under Section 31 is binding on the corporate debtor, its guarantors, and other stakeholders (!) [1000612220021] - Section 14 cannot apply to personal guarantors, as contrasted with Sections 96 and 101 of Part III of the IBC, which provide separate moratorium for individuals even if not yet in force [1000612220022][1000612220023] - The 2018 amendment to Section 14(3) explicitly excluding sureties in contracts of guarantee to corporate debtors is clarificatory and retrospective [1000612220026][1000612220028] - Historical context shows deliberate omission of moratorium protection for guarantors, unlike Section 22 of the Sick Industrial Companies Act, 1985 [1000612220024] - Personal guarantor's liability is co-extensive and independent under Section 128 of the Contract Act [1000612220005][1000612220021]
JUDGMENT
R.F. NARIMAN, J.
1. The present appeals revolve around whether Section 14 of the Insolvency and Bankruptcy Code, 2016, which provides for a moratorium for the limited period mentioned in the Code, on admission of an insolvency petition, would apply to a personal guarantor of a corporate debtor.
2. The factual backdrop of the present appeals is that the Respondent No.1 is the Managing Director of the corporate debtor, namely, the Respondent No.2 Company, and also the personal guarantor in respect of credit facilities that had been availed from the Appellant. The Guarantee Agreement entered into between the Appellant and the Respondent No.1 is dated 22.02.2014.
3. As the Respondent No.2 Company did not pay its debts in time, the account of Respondent No.2 was classified as a non-performing asset on 26.07.2015. Consequent thereto, the Appellant issued a notice dated 04.08.2015 under Section 13(2) of the SARFAESI Act demanding an outstanding amount of Rs.61,13,28,785.48 from the Respondents within the statutory period of 60 days. As no payment was forthcoming, a possession notice under Section 13(4) of the SARFAESI Act was issued on 18.11.2016.
4. As matters stood thus, an application was filed by Respondent No.2, the corporate debtor, under Section 10 of the Code on 20.05.2017 to initiate the corporate insolvency resolution process against itself. On 19.06.2017, this petition filed under Section 10 was admitted, followed by the moratorium that is imposed statutorily by Section 14 of the Code. While the said proceedings were pending, an interim application was filed by Respondent No.1 as personal guarantor to the corporate debtor, in which Respondent No.1 took up the plea that Section 14 of the Code 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 National Company Law Tribunal, by its order dated 18.09.2017, held that since under Section 31 of the Code, a Resolution Plan made thereunder would bind the personal guarantor as well, and since, after the creditor is proceeded against, the guarantor stands in the shoes of the creditor, Section 14 would apply in favour of the personal guarantor as well. The interim application filed by Respondent No.1 was thus allowed, and the Appellant was restrained from moving against Respondent No.1.
5. An appeal filed to the National Company Law Appellate Tribunal resulted in the appeal being dismissed. By the impugned judgment dated 28.02.2018, the Appellate Tribunal relied upon Section 60(2) and (3) of the Code as well as Section 31 of the Code to find that the moratorium imposed under Section 14 would apply also to the personal guarantor. The reasoning was 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 that, therefore, the moratorium imposed under Section 14 should apply to the personal guarantor as well.
6. Shri Sanjay Kapur, learned counsel appearing on behalf of the Appellant in C.A. No. 3595 of 2018, and Shri C.U. Singh, learned Senior Advocate appearing on behalf of Appellant in C.A. No. 4553 of 2018, both argued that the corporate debtor and personal guarantor are separate entities and that a corporate debtor undergoing insolvency proceedings under the Code would not mean that a personal guarantor is also undergoing the same process. 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. For this purpose, they relied upon Section 128 of the Indian Contract Act, 1872. They also relied heavily upon the reasoning contained in a judgment by a Single Judge of the Bombay High Court in M/s. Sicom Investments and Finance Ltd. v. Rajesh Kumar Drolia and Anr, (2017) SCC Online Bom 9725 (decided on 28.11.2
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