In a significant ruling having widespread ramifications, the Hon’ble Supreme Court (Court) on 14 August 2018 pronounced its judgment in the case of State of Bank of India v V. Ramakrishnan & Anr (Civil Appeal No. 3595 of 2018). The Court held that the period of moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (Code) would not apply to the personal guarantors of a corporate debtor.
In February 2014, Mr. V. Ramakrishnan, the Managing Director of M/s. Veesons Energy Systems Private Limited (Veesons) signed a personal guarantee in favour of State Bank of India (SBI) with respect to certain credit facilities availed by Veesons from SBI.
Veesons, however, failed to pay its debts in time, pursuant to which SBI initiated proceedings against Veesons under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) demanding an outstanding amount of about INR 61 crores.
In the meantime, an application was filed by Veesons under Section 10 of the Code for the initiation of voluntary corporate insolvency resolution proceedings (CIRP). This application was admitted, following which a period of moratorium under Section 14 of the Code was imposed.
During the pendency of the CIRP, an interim application was also filed by Mr. Ramakrishnan, wherein it was argued that provisions of Section 14 of the Code would also apply to the personal guarantors of a corporate debtor and therefore, any proceedings against him and his property would have to be stayed.
By an order dated 18 September 2017, the National Company Law Tribunal (NCLT), Chennai Bench allowed the application filed by Mr. Ramakrishnan and restrained SBI from moving against him until the period of moratorium was over.
An appeal was preferred by SBI, against the order of the NCLT, before the National Company Law Appellate Tribunal (NCLAT). The NCLAT delivered its judgment (Impugned Judgment) on 28 February 2018 refusing to interfere with the order passed by the NCLT. In doing so, the NCLAT relied on Section 60 and Section 31 of the Code to hold that the moratorium imposed under Section 14 would also apply to the personal guarantor.
The Impugned Judgment was challenged by SBI before the Hon’ble Supreme Court. Interestingly, even as the appeal filed by SBI remained pending, the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 (Ordinance) was promulgated on 6 June 2018. By this amendment, amongst other changes, Section 14(3) of the Code was substituted to read that the provisions of Section 14(1) would not apply to a surety in a contract of guarantee to a corporate debtor.
Decision of the Hon’ble Supreme Court
Upon hearing the parties at length, the Court proceeded to decide the issues as follows:
On the interpretation of Section 14 of the Code
On the scheme of Section 60
On the amendment to Section 2(e) of the Code
On Sections 96 and 101 of the Code
On the argument under Section 31 of the Code
On the Amendment Ordinance
For the reasons explained above, the Court set aside the Impugned Judgment and accordingly, allowed the appeals.
The judgment provides clarity and settles the confusion caused as a result of conflicting decisions on this issue. It also assumes significance in as much as it paves the way for the Ordinance, promulgated on 06.06.2018, to have retrospective operation at least in the context of Section 14 citing the ‘clarificatory’ nature of the amendment.
Interestingly, the judgment also highlights the ‘difficulty’ faced by the Court when hearing the matter owing to the fact that different provisions of the Code were brought into force on different dates. In particular, the question of whether Part III of the Code was in force also caused some confusion during the hearing, pursuant to which the Court decided to appoint an amicus curiae to assist them in the matter.