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An interim moratorium for one of the guarantors would not ipso facto apply against a co-guarantor


Delhi High Court recently held that the interim moratorium under Section 96 of IBC in respect of one of the guarantors would not ipso facto apply against a co-guarantor.


Single Judge bench comprising Justice Amit Bansal observed that Creditors would have an independent recourse against either of the guarantors and the inability to recover against one of the guarantors would not come in the way of making recoveries against the other guarantors. Even in terms of Section 43 of the Indian Contract Act, a plaintiff can choose to proceed against one of the co-promisors. Further, Sections 44 and 138 of the Contract Act provide that the discharge of one of the parties/sureties does not amount to the discharge of the other party/surety.


CS(COMM) 8/2021 was a summary suit filed on behalf of Axis Trustee Services Limited under Order XXXVII of the CPC seeking recovery of EUR 64,751,108.73 from defendants no.1 and 2. Defendants no.1 and 2 are the ex-promoters of Bhushan Steel Limited (renamed as Tata Steel BSL Limited)/the borrower.


CS(COMM) 20/2021 was a summary suit filed on behalf of Norddeutsche Landesbank under Order XXXVII of the CPC seeking recovery of EUR 44,102,086.02/- from the defendants, being personal guarantors, in respect of three Guarantee Agreements executed in favour of the plaintiff for securing payment of amounts under three separate Facility Agreements executed in favour of Bhushan Steel/the borrower. As on 29th May, 2018, the total claim of the plaintiff was EUR 103,331,481.86/-with applicable interest, out of which EUR 60,769,146.46/- was admitted and received by the plaintiff in the CIRP. The total outstanding amount as on 18th November 2020 and accordingly claimed in the suit is EUR 44,102,086.02/-, which includes applicable interest.


Plaintiff’s Submission:

Senior Counsel appearing on behalf of the plaintiffs submitted that the insolvency resolution process and bankruptcy for individuals are governed under Part III of the IBC. In terms of Sections 78 and 79, the Adjudicating Authority for Personal Insolvency matter is the DRT and not the NCLT. Therefore, the defendants cannot claim any moratorium on the basis of an application filed under Section 95 of the IBC before the NCLT, which has no jurisdiction to entertain the same.


Senior Counsel submitted that Section 60 only contemplates a situation where the CIRP in respect of the corporate debtor is pending. Otherwise, for the purposes of Part III of the IBC, the DRT alone is the adjudicating authority vested with the power to deal with an application under Section 95 of the IBC. In view of the fact that the CIRP in respect of the corporate debtor, Bhushan Steel stands concluded, the insolvency proceedings against the defendants could not have been filed before the NCLT. Resultantly, the benefit of Section 96 of IBC is not available to the defendants.


He further argued that defendant no.2 himself has objected to the maintainability of the application filed against him under Section 95 of the IBC on the ground that the NCLT does not have the jurisdiction. Therefore, defendant no.2 cannot be permitted to approbate and reprobate. Without prejudice to the above, the effect of the interim moratorium under Section 96 of the IBC would apply against all debts of a particular individual and not of any other person or a co-guarantor.


Counsel for the Plaintiff submitted that under the Personal Guarantee dated 19th May, 2011, both defendants no.1 and 2 are jointly and severally liable towards the plaintiff. The legal incapacity of defendant no.2 cannot impact the remedies against the other guarantor.


He argued that though the application under Section 95 in respect of defendant no.1 was filed on 28th May, 2022, it was registered only on 3rd October, 2022, when the judgment had been reserved in the present cases. Once the judgment has been reserved in a matter, the subsequent developments in the matter cannot come in the way of the court pronouncing the judgment. Therefore, the interim moratorium under Section 96 of the IBC in respect of defendant no.1 cannot come in the way of the Court pronouncing its judgment in the present suits.


Counsel for the plaintiff submitted that the effect of a moratorium has to be assessed by the court and the court cannot take a blinkered approach. The pronouncement of judgment in the present proceedings would not have an effect of diminishing the assets of the defendants. Reliance in this regard is placed on the judgment in SSMP Industries Limited v. Perkan Food Processors Private Limited, REED 2019 Del 07503.


Defendant’s Submission:

Counsel for the defendants contended that the interim moratorium in respect of one of the co-guarantors would also apply to the other co-guarantor for the same debt as the liability of both the co-guarantors arise from the same debt. Reliance was placed on the words “any debt‟ occurring in Section 96(1)(b) of the IBC.


High Court’s Analysis:

The High Court bench stated that Part II of the IBC deals with “Insolvency Resolution and Liquidation for Corporate Persons” and Section 60 of the IBC occurs in Chapter VI of Part II of the IBC titled “Adjudicating Authority for Corporate Persons”. The term “personal guarantor” has been defined in Section 5(22) of the IBC. Part III of the IBC deals with “Insolvency Resolution and Bankruptcy for Individuals and Partnership Firms” and the relevant portions of Sections 78 and 79 of the IBC, which are a part of Chapter I of Part III. A reference may also be made to Section 179 of the IBC, which is a part of Chapter VI of the IBC dealing with “Adjudicating Authority for Individuals and Partnership Firms.


The interplay between Section 60 and Section 179 of the IBC came up for consideration before the Supreme Court in Embassy Property Development Private Limited v. State of Karnataka and Others, REED 2019 SC 12501, wherein the Supreme Court observed that in respect of personal guarantors of corporate persons, the NCLT would be the Adjudicating Authority.


The NCLAT in its judgement dated 27th January, 2022 in Company Appeal (AT) Insolvency No. 60/2022 titled State Bank of India, Stressed Asset Management Branch v. Mahendra Kumar Jajodia, REED 2022 NCLAT Del 01619, discussed the provisions of Section 60 of the IBC and held that even if the CIRP in respect of the corporate debtor is not pending before the NCLT, the NCLT would be the appropriate forum for adjudicating an application under Section 95 in respect of a personal guarantor. The statutory appeal, being Civil Appeal No(s).1871-1872/2022, filed against the aforesaid order of the NCLAT, was dismissed by the Supreme Court vide order dated 6th May, 2022.


In view of the legal position elucidated above, it was clear that Section 179(1), which provides the jurisdiction for the DRT with respect to insolvency matters of individuals and firms, is subject to Section 60 of the IBC. Sub-section (1) of Section 60 of the IBC provides that in relation to insolvency resolution for corporate persons, including corporate debtors and personal guarantors, the Adjudicating Authority shall be the NCLT. Sub-section (2) of Section 60 provides that where the CIRP of a corporate debtor is pending before an NCLT, an application relating to the insolvency of a personal guarantor of the such corporate debtor shall be filed before the same NCLT. Sub-section (3) of Section 60 further provides that the insolvency resolution process in respect of a personal guarantor pending in any Court or Tribunal shall stand transferred to the adjudicating authority dealing with the insolvency resolution process of the corporate debtor.


On behalf of the plaintiff, reliance has been placed on sub-section (2) of Section 60 to contend that insolvency proceedings in respect of a personal guarantor of a corporate debtor shall be filed in the NCLT only if the CIRP was pending in respect of corporate debtor before the NCLT. In view of the fact that the CIRP in respect of corporate debtor, already stands concluded, insolvency proceedings in respect of its guarantors have to be filed before the DRT and not the NCLT. The aforesaid submission overlooks the fact that sub-section (2) of Section 60, IBC starts with words “without prejudice to sub-section (1)”. Clearly, sub-section (2) of Section 60 is supplemental to sub-section (1) of Section 60 and has to be read along with sub-section (1) of Section 60. A harmonious reading of the aforesaid provisions would lead to the conclusion that sub-section (1) of Section 60 applies in respect of insolvency proceedings in respect of personal guarantors of corporate debtors irrespective of the fact whether CIRP is pending against the corporate debtor. The objective of sub-sections (2) and (3) is that where proceedings in respect of a corporate debtor have been initiated in one NCLT and those against a guarantor before another NCLT or another court or tribunal while the CIRP is pending in respect of the corporate debtor before a particular NCLT, the proceedings against the personal guarantor should also be before the same NCLT.


It may also be relevant to mention here that in terms of Rule 3(1)(a) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors), Rules, 2019, it has specifically been provided that the Adjudicating Authority for the purposes of Section 60 would be the NCLT. No distinction has been made under different sub-sections of Section 60 of the IBC in this Rule with regard to the competent Adjudicating Authority.


On behalf of the plaintiffs, it was further contended that defendant no.2 himself had objected to the maintainability of the aforesaid application filed against defendant no.2 under Section 95 of the IBC on the ground that the NCLT does not have jurisdiction. The High Court bench noted that even if such a stand has been taken by defendant no.2, the same would not constitute an estoppel against defendant no.2 as it was a legal objection taken by defendant no.2 and admission in law cannot be held to be binding against a party. An estoppel can be in respect of admissions made on facts, however, there can be no estoppel on admissions based on law. In any event, the legal position has emerged only after the dismissal of the appeal by the Supreme Court in State Bank of India, Stressed Asset Management Branch v. Mahendra Kumar Jajodia, REED 2022 NCLAT Del 01619. Therefore, the judgment in Union of India and Others v. N. Murugesan and Others, (2022) 2 SCC 25 would not be of any assistance to the plaintiffs in the present case.


The High Court was of the view that the NCLT would be the appropriate Adjudicating Authority in respect of insolvency proceedings initiated against the defendants in their capacity as personal guarantors for the corporate debtor. The insolvency proceedings against defendant no.2 under Section 95 of the IBC were initiated before the NCLT on 4th March, 2020, before the filing of the present suits and in view thereof, the interim moratorium under Section 96 would be operable insofar as defendant no.2 was concerned.


As for the effect of insolvency proceedings initiated against defendant no.1 was concerned, a reading of Section 96 of the IBC makes it clear that the relevant date for the interim moratorium to come into effect is the date “when an application is filed under Section 94/95”. When the legislature has specifically used the word ”filed” in respect of an application under Section 94/95, the court cannot read the same to mean the date when the application was “registered”, as is sought to have contended on behalf of the plaintiffs.


In the present case, the application against defendant no.1 has been filed under Section 95 of the IBC by the State Bank of India on 28th May, 2022, as a creditor of the corporate debtor/borrower for whom defendant no.1 stood as a guarantor. Therefore, the relevant date on which the interim moratorium under Section 96 would kick in would be 28th May, 2022.


In the present case, there was a significant development that came to the knowledge of the defendants after the judgment was reserved, which was the filing of the insolvency application against defendant no.1. This was brought to the attention of the Court by filing an additional affidavit as well as I.A. No.17487/2022. Taking cognizance of the aforesaid developments, the submissions of the parties were heard.


The mandate of Section 96 of the IBC is clear. The interim moratorium under Section 96 of the IBC kicks in as soon as an application was filed under Section 94/95 of the IBC and the effect of such an interim moratorium was that all pending legal proceedings are deemed to have been stayed. This is in contrast to the moratorium under Section 14 of the IBC, whereby the moratorium comes into effect only upon an order being passed by the NCLT declaring a moratorium.


As the counsel for the defendants had also contended that the interim moratorium in respect of one of the co-guarantors would also apply to the other co-guarantor for the same debt as the liability of both the co-guarantors arise from the same debt. Reliance was placed on the words “any debt‟ occurring in Section 96(1)(b) of the IBC. Though I need not delve into this submission in view of the fact that insolvency proceedings have subsequently been filed against defendant no.1. The Bench noted that the language of Section 96(1) of the IBC cannot be stretched so as to include all co-guarantors within the ambit of the interim moratorium. The reference to „all the debts‟ in Section 96(1)(a) has to be in respect of all debts of a particular debtor. This is clear from the language used in Section 96(1)(b)(ii) to the effect that “the creditors of the debtor shall not initiate any legal action or proceedings in respect of any debt.” Therefore, the effect of the interim moratorium is only in respect of the debts of a particular debtor. By no stretch of the imagination can it be said to include other independent guarantors in respect of the same debt of a corporate debtor. Merely because an interim moratorium under Section 96 is operable in respect of one of the co-guarantors, the same would not apply to the other co-guarantor(s).


Counsel for the defendants has relied on the following paragraphs of the judgment in State Bank of India v. V. Ramakrishnan and Another, REED 2018 SC 08560. In the aforesaid judgment, the observations made by the Supreme Court were in the context of a moratorium under Section 101 applying to guarantors of debts of individuals and firms. In the present case, defendant no.1 was not the guarantor in respect of the debt of defendant no.2. They were both independent guarantors in respect of the corporate debtor, with joint and several liabilities. Therefore, the reliance placed on the aforesaid judgment was misplaced.


Creditors would have an independent recourse against either of the guarantors and the inability to recover against one of the guarantors would not come in the way of making recoveries against the other guarantors. Even in terms of Section 43 of the Indian Contract Act, a plaintiff can choose to proceed against one of the co-promisors. Further, Sections 44 and 138 of the Contract Act provide that the discharge of one of the parties/sureties does not amount to the discharge of the other party/surety. Therefore, the High Court was of the considered view that the interim moratorium under Section 96 in respect of one of the guarantors would not ipso facto apply against a co-guarantor.


In view of the discussion above and the clear statutory mandate under Section 96 of the IBC, the proceedings in the present suit stayed against both defendants.


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