One of the significant feature of Insolvency and Bankruptcy Code (“IBC”) is that the commencement date of the Corporate Insolvency Resolution (“CIR”) is the beginning of moratorium or a calm period for 180 days (further extendable to 90 days by an order of Adjudicating Authority) during which all suits and legal proceedings etc. against the Corporate Debtor (“CD”) are kept in abeyance to give time to the entity to resolve its status. The objective behind the provision of moratorium is to give an opportunity to the Corporate Debtor to explore the possibility of reviving the business activity by treating it as a ‘Going Concern’. However, IBC has not specifically provided the treatment of guarantors or enforcement of assets of guarantors during moratorium. The provision of applicability of moratorium to guarantor’s assets is not clear in view of the various orders/ judgments of the different courts/tribunals. The judgment of Hon’ble High Court of Allahabad and National Company Law Tribunal (“NCLT”), Chennai during recent times which contradicts the orders passed by the NCLT, Mumbai and NCLAT on the subject has opened up new controversies in enforcing the security interest created by guarantors during moratorium.
Where CIR is initiated, it stalls the other recovery measures of the secured creditors at least for a period of 180 days or till such period where at any time during the corporate insolvency resolution process (i.e., during 180 days period), if the adjudicating authority approves the resolution plan or passes an order for liquidation of corporate debtor. Sec.14 of IBC provides that on the insolvency commencement date, the Adjudicating Authority shall, by order declare moratorium for prohibiting any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. There may be situations where the credit facilities granted to the Corporate Debtor may be backed by the corporate and/or personal guarantee. A guarantor or surety, in common law, is in no better footing than the principal debtor. It is universally accepted principle that the liability of the guarantor towards the creditor is co-extensive with that of principal debtor, unless it is otherwise provided in the contract of guarantee. As such, the creditors always have the right to enforce the security of the guarantor’s assets against the dues of borrower in case of failure to pay on demand.
A surety’s liability to pay the debt is not removed by reason of the creditor’s omission to sue the principal debtor. The creditor is not bound to exhaust his remedy against the principal before suing the surety, and a suit may be maintained against the surety though the principal has not been sued1. In the case of CIR under IBC, the creditor is barred from filing any suit or initiating or continuing any enforcement of any security interest created by Corporate Debtor in respect of its properties. However, as the liability of guarantor is co-extensive, the creditors are not directly barred from initiating actions against the guarantor. Having said that, the enforcement of security interest created by guarantors is possible during moratorium or not has not reached any logical conclusion as there are difference of views by various courts in the matter. The IBC also is not clear about the treatment of guarantor’s asset during moratorium as the status of corporate debtor does not absolutely become ‘Insolvent’ until the order of liquidation is passed and the amount due to the creditors are not crystallised until such order.
It would be relevant to refer Sec.60(1) of the IBC, in terms of which the Adjudicating Authority, in relation to insolvency resolution and liquidation for corporate persons including corporate debtors and personal guarantors thereof shall be the NCLT having territorial jurisdiction over the place where the registered office of the corporate person is located. Further, as per Sec.60(2) where a corporate insolvency resolution process or liquidation proceeding of a corporate debtor is pending before a NCLT, an application relating to the insolvency resolution or bankruptcy of a personal guarantor of such corporate debtor shall be filed before such NCLT. However, the provisions relating to individuals are yet to be notified as such the application/claim against the guarantors could not be filed before the NCLT leading to file before DRTs.
In the above backdrop, the question of applicability of moratorium to the properties which are not owned by ‘Corporate Debtor’ came up for consideration before the NCLT, Mumbai in the case of Scheweitzer Systemtek India Private Limited v. Phoenix ARC Private Limited2. The Tribunal while examining the aspect of moratorium under Sec.14, held that the moratorium has no application on the properties beyond the ownership of Corporate Debtor. The basis for arriving such conclusion by the NCLT is the language used in Sec.14 (1) (c) of the Code which refers “its assets” thereby denoting the property owned by the “Corporate Debtor”. The Tribunal went on further to say that every word is to be read and interpreted as it exists in the statute with the natural meaning attached to the word. Rather in this Section the language is so simple that there is not scope even to supply ‘casus omissus’. Further, in the Tribunal’s opinion the doctrine of ‘Noscitur a Sociis’ is somewhat applicable that the associated words take their meaning from one another so that common sense meaning coupled together in their cognate sense be interpreted. As a result, “its” denotes the property owned by Corporate Debtor. The property not owned by Corporate Debtor do not fall within the ambits of the Moratorium.
The view expressed by NCLT, Mumbai was reiterated by the same Tribunal in Alpha & Omega Diagnostics (India) Ltd Vs Asset Reconstruction Company of India Ltd3 which was confirmed by the National Company Law Appellate Tribunal (NCLAT). However, subsequently, the High Court of Allahabad in the case of Sanjeev Shriya v. State Bank of India & others4 had an opportunity to examine the issue on whether the secured creditors can be allowed to pursue proceedings under Section 19 (3) of the Recovery of Debts Due to Banks and Financial Institutions Act of 1993 (“RDDBFI Act”) for recovery of loan amount taken by the company (Corporate Debtor) before the Debt Recovery Tribunal (DRT) against guarantors during moratorium. The Hon’ble High Court vide its judgment dated 06.09.2017 observed that when the NCLT has already issued moratorium under Section 14 of the IBC and stayed proceedings against the company, the liability is still in fluid situation and the same has not been crystallized. Then in such situation two parallel/split proceedings in different jurisdiction should be avoided, if possible. In an independent case, a similar view of the High Court of Allahabad was taken by the NCLT, Chennai in the case of V. Ramakrishnan v. M/s Veesons Energy Systems Pvt. Ltd & State Bank of India5 vide its order dated 18th September 2017, though the order was based on the different perspective.
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