The Insolvency and Bankruptcy Code, 2016 (‘IBC’) was brought into effect with an intent to consolidate laws relating to reorganisation and insolvency resolution of companies, firms and individuals. Since its promulgation, IBC has witnessed various amendments in order to clarify and facilitate a better mechanism for insolvency resolution. While the Insolvency Resolution and Bankruptcy for Individuals and Partnership Firms1 is yet to be notified, the Insolvency Resolution and Liquidation for Corporate Persons2 is in effect.

On the other hand, recovery of debts by Banks and Financial Institutions is governed by the provisions of Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (‘RDDB Act’). RDDB Act provides for establishment of Tribunals for adjudication and recovery of debts by Banks and Financial Institutions. Another Act which was promulgated for the assistance of Banks and Financial Institutions was the SARFAESI Act, 2002. The said Act was brought into force for enforcement of security interest.3 These are the two enactments under which the Debts Recovery Tribunals (‘DRTs’) function.

When an Insolvency Proceeding is initiated under the provisions of IBC, Section 14 of the Act comes into play. The said Section provides for a Moratorium for prohibiting the institution of suits or continuation of pending suits or proceedings against the Corporate Debtor. There are situations where a suit/ original application is already pending against a Corporate Debtor before DRT. In such situations, the suit/ original application as against the Corporate Debtor has to be kept in abeyance.

At initial stages of the IBC, the question whether the proceedings qua Guarantors will also be stayed under the provisions of Section 14 of IBC was determined and dealt with by various Courts and Forums. The National Company Law Appellate Tribunal (‘NCLAT’) vide its orders passed in Alpha & Omega Diagnostics India Ltd v. ARCIL4 and Schweitzer Systemtek India Pvt. Ltd. v. Phoenix ARC5 took a view that the Moratorium under Section 14 of IBC would apply only to the assets of the Corporate Debtor and not to the assets of the Guarantors. The said view of NCLAT was divergent from the view expressed by the Allahabad High Court in the matter titled Sanjeev Shriya & Ors v. State Bank of India6. The Allahabad High Court formed an opinion that when proceedings under IBC are pending against the Corporate Debtor, the dues of the Corporate Debtor not having been crystallised; proceedings against the Guarantors before DRTs should also not continue.

Pursuant to the judgment of the Allahabad High Court, Bombay High Court in the matter of Sicom Investments and Finance Ltd v. Rajesh Kumar Drolia & Ors7 gave a contrary opinion to state that the provisions under IBC would not apply to the Guarantors.

The issue of Moratorium qua Guarantors reached the Hon’ble Apex Court and was settled by the Supreme Court in the matter of State Bank of India v. V. Ramakrishnan & Anr8. The Supreme Court clarified and held that the provisions of IBC in so far as Section 14 is concerned, are applicable only to the Corporate Debtor and the effect / benefit of the same will not trickle down to the Guarantors. It is also incumbent to point out that before the decision of the Supreme Court, the Legislature brought about an amendment9 in the statute and amended Section 14 of IBC to provide that the moratorium will not apply to the Guarantors. Thus, the issue stands settled. Apart from the said issue, the judgment also dealt with a question of initiation/ continuation of Individual Insolvency. Being mindful of the fact that Chapter III of IBC dealing with insolvency of Individuals and firms has not been notified as on date, the Hon’ble Supreme Court has advised the stakeholders to pursue such proceedings under the laws already in existence.

It is imperative to also mention that the NCLAT in the matter of Standard Chartered Bank v. Satish Kumar Gupta, R.P of Essar Steel Ltd10 has laid down that where a Personal Guarantee is executed for clearance of dues of the Corporate Debtor, the same comes to an end when a Resolution Plan is passed. The said findings of the NCLAT would, in effect mean that separate proceedings against the Personal Guarantors for recovery of monies would come to an end. It is imperative to point out that against the order passed by the NCLAT, the Committee of Creditors approached the Hon’ble Supreme Court which passed an order whereby status quo has been directed to be maintained11.

It can be stated that there is still no clarity on the issue as to whether the proceedings against Guarantors will continue during the period of Corporate Insolvency Resolution Process (‘CIRP’) and the effect of passing of a Resolution Plan on the Guarantors. Along with the above-mentioned fact, there are certain practical concerns that still remain unanswered.

First and foremost, issue is that of harmonising the various laws to deal with the concept of Debt Recovery. There may arise a situation where CIRP is going on and simultaneous steps have been initiated by Banks and Financial Institutions under the SARFAESI Act and RDDB Act as against the Guarantors/ Assets of Guarantors. It is a settled law that liability of a Borrower and that of a Guarantor is joint and several. However, is it equitable to allow a Bank or Financial Institution to recover monies under various enactments and what will be the scope of accountability of different measures? Interplay between IBC and SARFAESI Act / RDDB Act needs to be fully addressed, especially in light of the Standard Chartered Bank v. Satish Kumar Gupta, R.P of Essar Steel Ltd12 judgment which provides that liability of a Guarantor ceases to exist in case a Resolution Plan qua a Corporate Debtor is approved. However, the said judgment is under challenge before the Hon’ble Supreme Court and the matter is subjudice. Further, at present, since Chapter III of the IBC has not been notified, the filing of insolvency proceedings qua Individuals before the NCLT is not permissible in law.

Apart from the aforementioned facts, it is also to be seen that once the Insolvency Resolution and Bankruptcy for Individuals and Partnership Firms is brought into effect, the DRTs will assume the role of Adjudicating Authorities. More than the issue of lack of infrastructure and the already existing pendency before the DRTs, the Fora for determination and adjudication of debt will also increase. The Corporate Debtor will be before the NCLT, the Personal Guarantor may be before the DRT (Adjudicating Authority) and there may be a third category of Corporate Guarantors against which suits/ original applications for recovery will still be in place. Further, there is a provision in the IBC which provides that if insolvency proceedings against Corporate Debtor is pending then insolvency of individual cannot be initiated before the DRT. Thus, for a single transaction, there can be multiple proceedings. In such situations, it is imperative that the Resolution Plan which is approved under IBC or the liquidation of assets that takes place ought to be accounted for in the proceedings pending before DRTs. What remains a grey area is whether DRTs should allow pleadings to be amended to incorporate the change in circumstances, and recovery of monies under the provisions of IBC. Till the time, proper guidelines are brought into effect to synchronize the laws under IBC vis-a-vis SARFAESI Act/ RDDB Act, there will remain uncertainty in the minds of both the Creditors as well as the Debtors including Borrowers and Guarantors alike.