Alerts & Updates 23rd Aug 2018

IBC | Case Law Alert | Moratorium is applicable to the properties of the personal guarantors too: NCLAT

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The National Company Law Appellate Tribunal (“ NCLAT”), vide an order dated February 28, 2018 in the case of State Bank of India v/s Mr. V. Ramakrishnan and Veesons Energy Systems Private Limited ( available here) has held that the moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (“ Code”) will not only be applicable to the property of a corporate debtor but also to the property of the personal guarantor.

  • Factual Matrix

    1. Mr. V. Ramakrishnan (“Personal Guarantor”), a director of Veesons Energy Systems Private Limited (“Corporate Debtor”) had given personal guarantee and had mortgaged his assets with the State Bank of India (“Financial Creditor”) against the facilities availed by the Corporate Debtor.

    2. The Financial Creditor invoked its right under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”) against the Personal Guarantor for recovery of Rs. 61,13,28,785.48/-. The Financial Creditor issued a possession notice dated November 18, 2016 under Section 13(4) of the SARFAESI Act and took symbolic possession of the secured assets.

    3. Thereafter, the Corporate Debtor filed an application under Section 10 of the Code, for initiating a corporate insolvency resolution process (“CIRP”) before the National Company Law Tribunal, Bench at Chennai (“Chennai NCLT”) which was admitted on June 19, 2017, and an order of declaring a moratorium was passed thereby.

    4. Even after the declaration of the moratorium, the Financial Creditor continued to take measures under SARFAESI Act. Being aggrieved by the same, the Personal Guarantor filed an interlocutory application before the Chennai NCLT for stay of proceedings under SARFAESI Act, which was allowed and the Chennai NCLT restrained the Financial Creditor from proceeding against the Personal Guarantor till the period of moratorium is over, vide an order dated September 18, 2017 (“ Impugned Order”) ( available here).

    5. The Financial Creditor then challenged the Impugned Order before the NCLAT. The question of law that the NCLAT had to consider was whether moratorium under Section 14 of the Code be applicable to the property of a personal guarantor of the corporate debtor.

  • Findings of the NCLAT

    1. The NCLAT observed that Part III of the Code relates to insolvency resolution and bankruptcy for individuals and partnership firms, including a person who is ‘Personal Guarantor’. In a case where proceeding has been initiated against a corporate debtor under Part II of the Code, if simultaneous proceeding were to be initiated against its personal guarantor for bankruptcy proceedings, an application in relation to the same would have been required to be filed before the same adjudicating authority, i.e. National Company Law Tribunal (“NCLT”) as per Section 60(2) of the Code.

    2. The Chennai NCLT came to the conclusion that in view of the above, though Part III of the Code is not yet notified, the NCLT is vested with all the powers of the debt recovery tribunal as contemplated under Part III of the Code for as per Section 60(4) for the purposed of Section 60(2) of the Code.

    3. Further, the NCLAT observed that it is clear that not only institution of suits or continuation of pending suits or proceedings against the corporate debtor are prohibited in terms of 14(1)(b) of the Code, but transfer, encumbrance, alienation or disposal of any of assets of the corporate debtor and/ or any legal right or beneficial interest therein are also prohibited.

    4. The NCLAT further referred to Section 30 & 31 of the Code and observed that, it is clear that if a resolution plan is approved the NCLT, it is not only binding on a corporate debtor, but also on its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan, including its personal guarantor.

    5. In view of the aforesaid observations, the NCLAT held that moratorium under Section 14 of the Code will not only be applicable to the property of the Corporate Debtor but also to the property of the Personal Guarantor.
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