– an overview from the perspective of expert corporate lawyers in Chandigarh
The Question with respect to the liability of a personal guarantor during corporate insolvency resolution process came up where a freeze under section 14 of the Insolvency and Bankruptcy Code 2016 (“IBC”) was in force. It was decided by Allahabad High Court in the case of Sanjeev Shriya vs. State Bank of India on 6th September 2017:
The (ex) directors namely, Sanjeev Shriya, Deepak Singhania, and Anurag Kumar Singhania were guarantors to Lohia Machines Limited (“LML”) which entered into the multi-party agreement for a loan of INR 72.75 crores from State Bank of India (“SBI”). LML was declared in 2007 a ‘Sick Industrial Company’ by the Board of Industrial and Financial Reconstruction. Later in 2017 SBI filed for recovery of the loan amount in Debt Recovery Tribunal, Allahabad (“DRT “), under section 19 (3) of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993. The relief SBI asked for against the ‘sick’ company were:
- Pay sum with interest
- Sale of assets and mortgaged properties
- Appropriation of the net sale proceeds for the satisfaction of the said amount
- In case net sale insufficient, cover recover amount from the sale of personal movable and immovable properties.
In the meantime, LML approached National Company Law Tribunal (“NCLT “) and asked for:
- Order starting for corporate insolvency resolution process under section 10 of the IBC.
- Public announcement of the initiation of corporate insolvency resolution process;
- Declare a moratorium, Section 14 of the Insolvency and Bankruptcy Code, 2016.”
Allahabad NCLT allowed for the corporate insolvency resolution process, appointed an Insolvency Resolution Professional (“IRP”) and declared moratorium under section 14 of the IBC. Soon advertisement for claims from other creditors was published and in pursuant to that advertisement, SBI filled its claim too. On the other hand, DRT opined that the application by the corporate debtor before the NCLT was to create a delay in the proceedings before the DRT and stayed proceedings after a moratorium was operating under the IBC against LML, but continued the matter in against the personal guarantors, directing them to provide a list of assets. After this decision, a writ petition before the Allahabad High Court was filed by the aggrieved directors (also guarantors).
A question of law that was raised after the writ petition was filed was-can SBI be allowed to recover loan amount from the DRT against the guarantors when moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 has been issued by the NCLT?.
The Allahabad High Court stated that a personal guarantor is not liable to pay the debt if the company becomes insolvent. The reasons were:
- IBC has a definite objective and therefore the adjudicating authority is NCLT with respect to insolvency resolution proceedings and liquidation proceedings against the corporate persons i.e. corporate debtors and personal guarantors
- It has been noted that DRT failed to take notice of IBC 2016 as the provisions of the IBC 2016 prevail over the act of 1993 and hence the order passed by the DRT is a failure.
- Also, once the proceedings commence under IBC and Moratorium under Section 14 has been issued then the proceedings against the guarantors is per se bad.
- Having two parallel proceedings under different jurisdictions needs to be avoided. Therefore, the proceedings under DRT cannot continue until the corporate insolvency resolution process is complete or until the corporate debtor under section 33 liquidated or until NCLT approves the insolvency plan.
When a bank gets into a contract for a loan they often pursue security from third parties, where under a contract of guarantee a director or even a shareholder, guarantee reimbursement of the loan money to a corporate holder made by the bank. IBC, 2016 is taken to be a game changer when it comes to insolvency and bankruptcy administration in India. The Code is in its embryonic stage; thus, it is of primary importance that issues with respect to interpretations are established and resolved at the earliest to ease the functioning of the proceedings.
According to Section 60
- “The Adjudicating Authority, in relation to insolvency resolution and liquidation for corporate persons including corporate debtors and personal guarantors thereof shall be the National Company Law Tribunal having territorial jurisdiction over the place where the registered office of the corporate person is located”.
- “Without prejudice to sub-section (1) and notwithstanding anything to the contrary contained in this Code, where a corporate insolvency resolution process or liquidation proceeding of a corporate debtor is pending before a National Company Law Tribunal, an application relating to the insolvency resolution or bankruptcy of a personal guarantor of such corporate debtor shall be filed before such National Company Law Tribunal”.
- Part III of the IBC 2016 deals with insolvency resolution and bankruptcy for individuals and partnership firms where the adjudicating body is the DRT. But, Section 60 (2) 0f the code lays down an exception to the stated rule i.e. for when corporate insolvency process is pending and an application has been issued for personal guarantor’s insolvency then the NCLT will be the adjudicating authority. But the highlight that has been overlooked by the High Court in the present case is that Part III of the code has been overlooked and the court failed to escalate that creditors have no option other than approaching the DRT in the absence of part III of notification against personal guarantors.