In a first, the Allahabad High Court (Court), in the case of Sanjeev Shriya v State Bank of India was presented with the question as to whether the grant of a moratorium on any claim / suit or enforcement of security interest against a corporate debtor under section 14 of the Insolvency and Bankruptcy Code, 2016 (Code) implies an embargo on the rights of the lenders to institute parallel proceedings against guarantors of the corporate debtor.

The Court, while adjudicating upon this question, opined that in view of the moratorium, since the liability of the corporate debtor and the guarantor are still in a ‘fluid situation’ and not crystallised, two parallel proceedings, viz. under the Code against the corporate debtor and recovery proceedings against the Guarantors before the Debt Recovery Tribunal (DRT) should be avoided and therefore, the Court stayed the proceedings pending before DRT against the guarantor, and deferred it to the outcome of the corporate insolvency resolution process initiated under the Code.

Brief Background

The petitioners were the director-guarantors (Guarantors) of LML Limited (Company) and had executed a deed of guarantee on 28 March 2005 (Guarantee Deed) in favour of the State Bank of India (SBI) to guarantee repayment obligations of the Company under a loan agreement entered with SBI on the same date. The Company was declared a ‘Sick Industrial Company’ by the Board of Industrial and Financial Reconstruction on 8 May 2007. Subsequently, SBI had filed an application sometime in 2017 before the DRT, Allahabad against the Company and the Guarantors under section 19 (3) of the Recovery of Debts Due to Banks and Financial Institution Act, 1993 (RDDBFI Act) for recovery of the amount due from the Company, under the loan agreement. The DRT accepted SBI’s application and had initiated proceedings against the Company and the Guarantors. 

Meanwhile, the Company approached National Company Law Tribunal, Ahmedabad (NCLT) under section 10 of the Code seeking initiation of corporate insolvency resolution process under the Code. The NCLT vide its order dated 30 May 2017 admitted the application of the Company and ordered for commencement of ‘moratorium’ under section 14 of the Code.

Following the order of NCLT, the Company and the Guarantors preferred an application before the DRT to stay the proceedings against them in light of the moratorium imposed by NCLT. The DRT allowed stay of its proceedings against the Company but ordered that the proceedings against the Guarantors shall continue as the moratorium is only applicable in relation to the Company. Aggrieved by the findings of the DRT, the Guarantors filed an appeal invoking the writ-jurisdiction of the Court to determine the position.

Moratorium vis-à-vis Liability of Guarantors of a Corporate Debtor under the Code

In a detailed ruling, the Court appreciated the arguments advanced by the counsels of the Guarantors including, that the proceedings against the Guarantors before the DRT ‘were per se bad’ specially during the continuation of moratorium against the Company, as until the resolution process under the Code is consummated, the DRT would not be able to adjudicate any claims of disputed debt owed by the Guarantors to SBI and as such the entire exercise would be counter-intuitive. They further argued that the adjudicating authority for corporate persons (which include the Company and the Guarantors) is the NCLT in terms of section 60(1) of the Code and as such the proceeding against Guarantors before the DRT should be stayed.

On the other side, the counsel for SBI argued that the Code pertains to insolvency resolution whereas, the RDDBFI Act pertains to recovery of dues and as such there is no overlap between the two statutes. Further, the counsel for SBI relied on the text of the Guarantee Deed to argue that it allowed simultaneous and concurrent proceedings against the Company and the Guarantors.

After considering arguments from both sides, the Court held that a moratorium issued under Section 14 of the Code stays all the proceedings initiated against personal guarantors. Its finding was based inter alia on the ground that the liability of the Company only crystallizes once the NCLT approves the resolution plan under Section 31(1) of the Code or passes an order for liquidation of the Corporate Debtor under Section 33 of the Code. The Court avowed that until the liability of the Company is conclusively crystallised, the Guarantors cannot be held liable and as such the recovery proceedings against the Guarantors before the DRT should be stayed, as it cannot allow the creditor to pursue two remedies on the same cause of action.

Comment

The judgment by the Court, to a great extent addresses the uncertainties around the liabilities of the guarantors during an ongoing insolvency resolution process initiated against a corporate debtor. It confers legal protection to guarantors who have provided surety for the debt in question during the moratorium period. The Court could have provided more clarity and analysed the interplay of the Code vis-à-vis the RDDBFI Act or on the guiding principle and approach of the NCLT, while acting as the adjudicating authority for the Guarantors under the Code or addressing recovery proceeding against the Guarantors under the RDDBFI Act.

It is also interesting to note that under the erstwhile Sick Industrial Companies (Special Provisions) Act 1985 (SICA), protection to guarantors was available only by way of a bar on ‘suits’ and not against any ‘recovery proceedings’ and the guarantors could not claim immunity, in case any recovery proceedings were initiated before the DRT. The judgment, therefore, in this context has departed from this position and offered wider protection to the guarantors during the ongoing insolvency resolution process against the corporate debtor.

This being a high court judgment, it remains to be seen if the other High Courts agree or dissent from this view and how the Supreme Court finally settles this. Even an appropriate amendment may put the issue to rest.