Moratorium To Guarantor's Assets vis-à-vis Interests Of The Secured Creditors


6 March 2018 4:17 AM GMT

  • Moratorium To Guarantors Assets vis-à-vis Interests Of The Secured Creditors

    A question that is repeatedly arising after the enactment of Insolvency and Bankruptcy Code (IBC) is as to whether the security of guarantee (Personal or Corporate) is no longer a preferred security or convenient security for the secured creditors? The latest judgement of the Honourable National Company Law Appellate Tribunal (NCLAT) in the case of State Bank of India Vs V Ramakrishnan...

    A question that is repeatedly arising after the enactment of Insolvency and Bankruptcy Code (IBC) is as to whether the security of guarantee (Personal or Corporate) is no longer a preferred security or convenient security for the secured creditors? The latest judgement of the Honourable National Company Law Appellate Tribunal (NCLAT) in the case of State Bank of India Vs V Ramakrishnan and Veesons Energy Limited[1] (28th February Order) is a direct contradiction of its own orders in the earlier cases decided by it in the matter of Scheweitzer Systemtek India Private Limited[2] and Alpha and Omega Diagnostics (India) Limited[3].

    An Order 'Per Incuriam' [Per Incuriam ~ through or characterized by lack of due regard to the law or the fact]

    It is interesting to note that in the case of Schweitzer[4], the Honourable NCLT, Mumbai while examining the aspect of Moratorium under section 14 of IBC 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 section 14 (1) (c) of the code which refers "its assets" and denoting the property owned by "Corporate Debtor". The Hon'ble Tribunal while interpreting the provision contained in Sec.14 (1) (c) pointed out that in this Section the language is so simple that there is no 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 same view of the Tribunal was upheld by the Hon'ble National Company Law Appellate Tribunal (NCLAT) vide its order dated 31.07.2017 in Alpha & Omega Diagnostics (India) Ltd Vs Asset Reconstruction Company of India Ltd. Sec. 14 (1) of IBC reads as under:

    "Sec.14 (1): Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely:—

    (a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;

    (b) transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein;

    (c) 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;"

    A plain and literal meaning of the language employed in Clause (c) above would suggest that moratorium shall be applicable in respect of any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property. The property mentioned in the section is more specifically representing the property of corporate debtor alone. As decided by the Hon'ble NCLAT in the Schweitzer's case, the whole provision to be read in connotation with the connected words. A statute is to be read word for word and is to be interpreted according to the ordinary meaning of the language, unless it explicitly defines some of its terms otherwise or unless the result would be cruel or absurd. Sec.14 (1) (c) refers to the security interest created by corporate debtor and connects it with its properties. Therefore, the earlier orders of Hon'ble NCLAT were clear and left no scope for further interference.

    Thus, the subject matter of the issue was no more 'Res Integra' while deciding the matter. In the absence of reference to either of the Orders of Hon'ble NCLAT (Schewitzer and Alpha&Omega) in 28th February Order, the Appellate Tribunal has completely disregarded the ratio decidendi and decided the matter in 'per incuriam'. The Hon'ble Appellate Tribunal went ahead and held that the 'Moratorium' will not only be applicable to the property of the 'Corporate Debtor' but also on the 'Personal Guarantor' by making it a contradicting precedent against its earlier order.

    Generally, per incuriam is applicable only in two circumstances i.e., (1) to a judgment that is passed in ignorance of a relevant statutory provision, or (2) without considering binding precedent of a coordinate or larger bench. However, the Hon'ble Supreme Court of India in the case of Sundeep Kumar Bafna vs State of Maharashtra[5] expanded the definition of 'per incuriam' and pronounced that "It cannot be over-emphasised that the discipline demanded by a precedent or the disqualification or diminution of a decision on the application of the per incuriam rule is of great importance, since without it, certainty of law, consistency of rulings and comity of Courts would become a costly casualty. A decision or judgment can be per incuriam if any provision in a statute, rule or regulation, which was not brought to the notice of the Court. A decision or judgment can also be per incuriam if it is not possible to reconcile its ratio with that of a previously pronounced judgment of a Co-equal or Larger Bench; or if the decision of a High Court is not in consonance with the views of this Court. It must immediately be clarified that the per incuriam rule is strictly and correctly applicable to the ratio decidendi and not to obiter dicta. It is often encountered in High Courts that two or more mutually irreconcilable decisions of the Supreme Court are cited at the Bar. We think that the inviolable recourse is to apply the earliest view as the succeeding ones would fall in the category of per incuriam."

    Need of Uniform Interpretation of Legal Provision

    Therefore, the order of Hon'ble NCLAT is per incuriam and in perception cannot serve as a precedent for future cases. However, a need has arisen to resolve the confusion that is continuing with regard to treatment of 'Guarantee' during 'Moratorium' under Sec.14 of the Code. It can be noticed that the order of Hon'ble High Court of Allahabad in the case of Sanjeev Shriya v. State Bank of India & others[6] had prevented the secured creditors 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 under a different context. The Hon'ble High Court of Calcutta while dealing with an issue relating to right of representation through legal counsel by the borrowers[7] before the committees identifying the wilful defaulters made an observation on differing views of various High Courts and Benches and pointed out the importance of common interpretation of legal provision. While dealing with interpretation on legal provisions in the said case, the Hon'ble High Court commented that "There can be no doubt that the mind-set and approaches of judges of the High Courts may vary but when it boils down to the question of interpretation of a legal provision and while agreeing that the interpretation of law must keep pace with contemporary needs and challenges, such law cannot be read, interpreted and understood in a manner that would militate against statutory inhibition." As regards the contract of guarantee is concerned, the liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract mean it is not necessary for the creditor, before proceeding against the surety, to request the principal debtor to pay, or to sue him. The settled position of law thereof has not changed and continue to bind all the courts. Similarly, the ratio adopted by the Hon'ble NCLAT in Schewitzer continue to bind all the co-ordinate and lower benches. The deviation from its earlier order has led to contradiction and variation from the precedent created by the Hon'ble Tribunal.


    A guarantee is a very convenient form of security available to the creditors. It stands as second borrower to the creditors, and net worth of the guarantor plays vital role in credit assessment. The absence of clarity in IBC with regard to treatment of guarantee during moratorium declared against debtor has caused confusion and insecure feeling about guarantees to the bankers. Incidentally, the latest incidents on Guarantees/ Letter of Undertaking have still more worsened the position of acceptance of guarantees as securities. Two contradicting judgments by the same bench in the subject have created more confusion with regard to the applicability of moratorium in respect of guarantor's assets.  There is an ambiguity as to which order of the Hon'ble Appellate Tribunal to be followed as the earlier one has been decided with due regard to the literal interpretation of the provision of the statute whereas the latter one is passed without any reference to the earlier order not even in the nature of an obiter. Having said, in my opinion, the latest order of the Hon'ble NCLAT is in the nature of per incuriam and therefore the binding effect of the said order shall be subjected to further challenge. A clarity in the matter would be achieved if the Hon'ble Supreme Court clarifies the legal position if the aggrieved party and secured creditors challenge the 28th February Order by appeal.

    [1] Company Appeal (AT) (Insolvency) No. 213 of 2017

    [2] Company Appeal (AT)(Insol.) 116 of 2017(Order dt 31.07.2017)

    [3] Company Appeal (AT) (Insolvency) No. 129 of 2017 (Order dt 09.08.2017)

    [4] T.C.P. No. 1059/I&BP/NCLT/MB/MAH/2017

    [5] 2014(16) SCC 623; AIR 2014 SC 1745

    [6] WRIT - C No. - 30285 of 2017

    [7] Dynametic Overseas Private Ltd & Anr Vs State Bank of India & Ors (W.P.No.3989(W) of 2016 decided on 15th April 2016)

    The Author is Law Officer with SBI. The views are author's own and do not necessarily represent the views of the organisation he belongs.
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