Guarantors of Sole Proprietorship Firms Cannot Invoke Interim Moratorium Under Section 96 to Stall SARFAESI Proceedings

The Madhya Pradesh High Court held that guarantors of sole proprietorship firms cannot invoke the interim moratorium under Section 96 of the Insolvency and Bankruptcy Code, 2016, to stall recovery proceedings initiated under the SARFAESI Act.

The Indore Bench of the Madhya Pradesh High Court, comprising Justice Vivek Rusia and Justice Prem Narayan Singh, while adjudicating a writ petition seeking appropriate directions, held that an application under Section 94 of the Insolvency and Bankruptcy Code, 2016 is not maintainable in respect of debts owed by sole proprietorship firms, as such entities do not fall within the definitions of "corporate person" or "corporate debtor" under Sections 3(7) and 3(8) of the Code. Consequently, the petitioner, being a guarantor to such firms, cannot invoke the interim moratorium under Section 96 to restrain recovery proceedings initiated under the SARFAESI Act.

The petitioner had approached the High Court seeking a direction to the respondents to consider his representation concerning a pending petition filed under Section 94 of the Insolvency and Bankruptcy Code, 2016 (IBC) before the National Company Law Tribunal (NCLT), Indore. The case revolved around a mortgaged residential property owned by the petitioner, which was offered as collateral security for financial facilities availed by two sole proprietorship firms—M/s Rainbow Sales and M/s Kothari Enterprises—owned by Chetan Kothari and Angoorbala Kothari, respectively. The financial assistance had been provided by Axis Bank in the form of overdraft facilities amounting to Rs. 23,00,000 and Rs. 49,10,680. By default, Axis Bank classified these accounts as Non-Performing Assets on 30.08.2023 and commenced recovery proceedings under the SARFAESI Act.

Pursuant to the bank’s action, the Additional Collector passed an order on 28.06.2024 to take possession of the secured asset with the assistance of the Tehsildar. In execution of this order, the Tehsildar issued a notice dated 27.02.2025 to the borrower and other related parties, including the petitioner. Prior to the possession date, the petitioner filed an application under Section 94 of the IBC before the NCLT, Indore, and simultaneously sought the High Court’s intervention to stay the recovery proceedings on the ground that an interim moratorium under Section 96 of the IBC had been triggered.

The petitioner’s counsel argued that under Section 96(1)(b)(i) of the IBC, once an application under Section 94 is filed, an interim moratorium automatically applies in respect of all debts and legal proceedings related thereto. He also attempted to bring the petitioner’s case within the definition of a ‘debtor’ by invoking broader statutory interpretations, arguing that personal guarantors of sole proprietorship firms should fall within the ambit of Section 3(8) of the IBC.

The Court, however, declined to accept these contentions. It held that Section 94 of the IBC was applicable only to “debtors” as defined under the Code and could not be extended to proprietorship firms, which were not included within the statutory definition of “corporate persons” under Section 3(7) and “corporate debtor” under Section 3(8). Since M/s Rainbow Sales and M/s Kothari Enterprises were sole proprietorship firms, the application under Section 94 was not maintainable, even at the instance of the petitioner, who was merely a guarantor.

The Court further observed that the stage for considering the petitioner’s representation had already passed with the issuance of the possession order by the Additional District Magistrate, who had become functus officio. The Tehsildar, being an executing authority without adjudicatory powers, was not competent to entertain or decide upon the petitioner’s objections.

Accordingly, the High Court found the writ petition to be misconceived and dismissed it.

Mr. Amit Agrawal, Senior Advocate, along with Mr. Utkarsh Joshi, Advocate, represented the Appellant.

Mr. Bhuwan Gautam, Govt. Advocate, appeared for the State.

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