‘Section 14 refers only to debts due by corporate debtors, who are limited liability companies, and it is clear that in the vast majority of cases, personal guarantees are given by Directors who are in management of the companies. The object of the Code is not to allow such guarantors to escape from an independent and coextensive liability to pay off the entire outstanding debt, which is why Section 14 is not applied to them.’
The Supreme Court has held that 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 not apply to a personal guarantor of a corporate debtor.
The bench of Justice Rohinton Fali Nariman and Justice Indu Malhotra also observed that Section 14(3) of the Code (introduced vide 2018 amendment) which states that provisions of sub-section (1) of Section 14 shall not apply to a surety in a contract of guarantee for corporate debtor, is retrospective.
When the SARFAESI Proceedings were pending, the Corporate Debtor initiate the corporate insolvency resolution process against itself. Moratorium was imposed statutorily invoking Section 14 of the Code. In these proceedings, the Personal Guarantor, the Managing Director of the Corporate Debtor, filed an application contending 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. National Company Law Tribunal allowed his plea observing 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. This view was upheld by National Company Law Appellate Tribunal.
Advocate Sanjay Kapur, who appeared for the bank before the Apex court (in State Bank Of India vs. V. Ramakrishnan), contended 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. Heavy reliance was placed on Bombay High court judgment in M/s. Sicom Investments and Finance Ltd. v. Rajesh Kumar Drolia and Anr. On the other hand, the other side relied upon a judgment of the Allahabad High Court in Sanjeev Shriya v. State Bank of India.
Section 14 Moratorium Has No Application To Personal Guarantors
The bench headed by Justice RF Nariman extensively referred to provisions of the Code and observed that a plain reading of Section 14 of the codes leads to the conclusion that the moratorium referred to in Section 14 can have no manner of application to personal guarantors of a corporate debtor.
Disagreeing with the views of NCLT and NCLAT, the bench observed: “Section 60 of the Code, in sub-section (1) thereof, refers to insolvency resolution and liquidation for both corporate debtors and personal guarantors, the Adjudicating Authority for which shall be the National Company Law Tribunal, having territorial jurisdiction over the place where the registered office of the corporate person is located. This sub-section is only important in that it locates the Tribunal which has territorial jurisdiction in insolvency resolution processes against corporate debtors. So far as personal guarantors are concerned, we have seen that Part III has not been brought into force, and neither has Section 243, which repeals the Presidency-Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920. The net result of this is that so far as individual personal guarantors are concerned, they will continue to be proceeded against under the aforesaid two Insolvency Acts and not under the Code. Indeed, by a Press Release dated 28.08.2017, the Government of India, through the Ministry of Finance, cautioned that Section 243 of the Code, which provides for the repeal of said enactments, has not been notified till date, 20 and further, that the provisions relating to insolvency resolution and bankruptcy for individuals and partnerships as contained in Part III of the Code are yet to be notified. Hence, it was advised that stakeholders who intend to pursue their insolvency cases may approach the appropriate authority/court under the existing enactments, instead of approaching the Debt Recovery Tribunals.”
As regards Section 31, which was referred by the Tribunal in favour of the guarantor, the bench observed: “Section 31(1), in fact, makes it clear that the guarantor cannot escape payment as the Resolution Plan, which has been approved, may well include provisions as to payments to be made by such guarantor. This is perhaps the reason that Annexure VI(e) to Form 6 contained in the Rules and Regulation 36(2) referred to above, require information as to personal guarantees that have been given in relation to the debts of the corporate 23 debtor. Far from supporting the stand of the Respondents, it is clear that in point of fact, Section 31 is one more factor in favour of a personal guarantor having to pay for debts due without any moratorium applying to save him.”
Contrasting Sections 96 and 101 of the Code with Section 14, the court further observed: “When an application is filed under Part III, an interim-moratorium or a moratorium is applicable in respect of any debt due. First and foremost, this is a separate moratorium, applicable separately in the case of personal guarantors against whom insolvency resolution processes may be initiated under Part III. Secondly, the protection of the moratorium under these Sections is far greater than that of Section 14 in that pending legal proceedings in respect of the debt and not the debtor are stayed. The difference in language between Sections 14 and 101 is for a reason. Section 14 refers only to debts due by corporate debtors, who are limited liability companies, and it is clear that in the vast majority of cases, personal guarantees are given by Directors who are in management of the companies. The object of the Code is not to allow such guarantors to escape from an independent and coextensive liability to pay off the entire outstanding debt, which is why Section 14 is not applied to them. However, insofar as firms and individuals are concerned, guarantees are given in respect of individual debts by persons who have unlimited liability to pay them. And such guarantors may be complete strangers to the debtor – often it could be a personal friend. It is for this reason that the moratorium mentioned in Section 101 would cover such persons, as such moratorium is in relation to the debt and not the debtor.”
The bench also noted that Part III of the Code has not been brought into force, and neither has Section 243, which repeals the Presidency-Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920. The Court upheld the Bombay High court judgment cited before it and disagreed with the views of Allahabad High court in Sanjeev Shriya v. State Bank of India.
2018 Amendment To The Code Retrospective
Another argument was that the amendment of 2018 to the Code (Section 14(3)), which states that provisions of sub-section (1) of Section 14 shall not apply to a surety in a contract of guarantee for corporate debtor, is retrospective. The bench referring to the report of the Insolvency Law Committee, said that the object of the amendment was to clarify and set at rest what the Committee thought was an overbroad interpretation of Section 14 and such clarificatory amendment is retrospective.