NCLAT (2022.09.30) K.V. Jayaprakash Vs. State Bank of India [Company Appeal (AT) (Insolvency) No. 362 of 2022]
The proceedings under SARFAESI Act are independent against the personal guarantor of corporate debtor and they are purely recovery proceedings. Therefore, it is difficult to conclude that the dispute raised by the appellant would fall within the ambit of Section 60(5)(c) of I.B.C.
The liability of the principal borrower and the Guarantor remain co-extensive and the respondent/Bank is well entitled to initiate proceedings against the petitioner under the SARFESI Act during the continuation of the Insolvency Resolution Process against the Principal Borrower.”
“We are also of the opinion that Sections 96 and 101, when contrasted with Section 14, would show that Section 14 cannot possibly apply to a personal guarantor.
Consequently, we find that imposition of Moratorium either in corporate insolvency process or liquidation process interdicts only the proceedings against corporate debtor, but not against third party like the appellant herein who is a personal guarantor of a corporate debtor.
“Section 140 of the Indian Contract Act deals with rights of surety on payment or performance. Where a guaranteed debt has become due, or default of the principal debtor to perform a guaranteed duty has taken place, the surety, upon payment or performance of all that he is liable for, is invested with all the rights which the creditor had against the principal debtor.
“In any view of the matter, in view of Section 140 of the Indian Contract Act, the appellant herein, on payment of debt due under the guranteed debt, is entitled to recover the same as if he is a creditor.
Here, no security interest, as defined under Section 3(31) was created by the corporate debtor, in any of the specified modes, thereby he cannot claim to be a secured creditor to include him as secured creditor in the creditors list to pay his share of amount.
“The appellant being a Personal Guarantor discharged part of the loan payable by the Corporate Debtor, he is entitled to recover the amount under Section 140 of the Indian Contract Act, as if he is a creditor, but not a ‘Secured Creditor’ as defined under Section 3(30) of the I.B.C, since no security interest was created in favour of the creditor.
Petitioner/Appellant is entitled to claim as Creditor of Corporate Debtor in view of Section 140 of Indian Contract Act, but not as Secured Creditor as no security interest is created in his favour, subject to limitation provided in Chapter III of IBC.
Excerpts of the Order;
This appeal under Section 61 (1) of the Insolvency and Bankruptcy Code, 2016 (for short “IBC”) is filed by K.V.Jayaprakash, who is a personal guarantor of corporate debtor, aggrieved by the order dated 03.02.2022 passed by the National Company Law Tribunal (Adjudicating Authority), Cuttack Bench in INTERLOCUTORY APPLICATION(IB).No.113/CB/2021 in TP No.255/CTB/2019 in CP (IB) No.593/KB/2017, whereby the INTERLOCUTORY APPLICATION filed by the petitioner for various reliefs was dismissed by the Adjudicating Authority.
# 2. The factual matrix is as follows:
The appellant filed the INTERLOCUTORY APPLICATION before the Adjudicating Authority with a request to direct respondent No.1 to abstain from proceeding with the public auction of properties belonging to the appellant on 11.11.2021 under Section 60 (5) of IBC read with Rule 11 of the NCLT Rules, 2016 in view of the liquidation order dated 06.12.2018 passed by the NCLT admitting Coastal Projects Limited (Corporate Debtor) into liquidation (Liquidation Order).
The Corporate Debtor availed loan facility to a tune of Rs.774.12 Crore from respondent No.1 bank, to which the appellant stood as a guarantor for the Corporate Debtor and the appellant’s property was taken as collateral security by respondent No.1. Upon default by the Corporate Debtor in repayment of the debt, respondent No.1 declared the debt as a Non-Performing Asset (for short “NPA”) on 25.01.2017, thereafter, filed application in terms of Section 7 of the IBC for initiation of Corporate Insolvency Resolution Process (for short “CIRP”) against the Corporate Debtor. The NCLT, Kolkata Bench by its order dated 05.01.2018 admitted respondent No.1’s petition initiating the CIRP against the Corporate Debtor and appointed respondent No.2 as resolution professional.
During the CIRP process, respondent No.1 had submitted its claim, most of which was admitted by the resolution professional. The list of creditors and their corresponding claims admitted by the resolution professional (RP) was uploaded on the website of the Corporate Debtor on 26.09.2018. Due to unsuccessful CIRP, the Corporate Debtor was admitted into liquidation vide Liquidation Order on 06.12.2018 by the Adjudicating Authority and respondent No.2 was appointed as Liquidator.
Respondent No.1 submitted its claim to the Liquidator in response to the public announcement under Section 33 (1) (b) (ii) of the IBC for liquidation of the Corporate Debtor. Major of the amount claimed by respondent No.1 was also admitted and formed part of the claims consolidated by the Liquidator under Section 38 of the IBC and submitted a report to the Adjudicating Authority under Regulation 13 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (for short “Liquidation Process Regulations, 2016”)
Respondent No. 1 filed an application under Section 14 of SARFAESI Act before the Court of XXXVII Additional Chief Metropolitan Magistrate, Bangalore (for short “XXXVII ACMM”) against the Corporate Debtor and its guarantors, including the appellant herein, for taking possession of the Property, without honouring or even disclosing the fact that the Corporate Debtor was under liquidation, fraudulently suppressing and concealing the fact that the moratorium was in force under Section 33(5) of the IBC. Accordingly, the XXXVII ACMM, Bangalore allowed the said application under Section 14 of SARFAESI Act to take possession of the Property vide order dated 03.08.2021. Thereafter, the appellant filed an appeal against respondent No.1 under Section 17 of SARFAESI Act, challenging the order passed under Section 14 of SARFAESI Act, before the Debts Recovery Tribunal, Bangalore (for short ” DRT”) in S.A. No. 258/2021. During pendency of the said appeal, respondent No.1 on the strength of the order passed under Section 14 of SARFAESI Act, issued notice dated 29.09.2021 under Rule 8(6) of the Security Interest (Enforcement) Rules, 2002 to conduct public auction of the Property on 11.11.2021. The said notice was followed by a sale notice dated 06.10.2021 published in the ‘Deccan Herald’ and ‘Prajavani’ newspapers on 07.10.2021 at Bengaluru and also on the websites of respondent No. 1 and the Indian Banks Auctions Mortgaged Properties Information (“IBAPI”) portal. In the meantime, the appeal of the appellant before the DRT was dismissed on 04.10.2021, confirming the order passed under Section 14 of SARFAESI Act.
The appellant filed Interlocutory Application before NCLT, Cuttack challenging the action of the Respondent No. 1 and sought the following reliefs:
a) The Respondent No.1 has erroneously sought to proceed against the Appellant, a personal guarantor to the Corporate Debtor’s debt, prior to the expiry of the moratorium imposed in terms of the Liquidation Order under Section 33 of the IBC, as any recovery of the Corporate Debtor’s debt from the Appellant would result in a consequential violation of the moratorium imposed vide the Liquidation Order dt. 06.12.2018
b) The actions of the Respondent No.1 are in contravention of the provisions of the IBC as the Respondent No.1 has failed to follow the procedure prescribed therein for recovery of debt by a financial creditor during the liquidation of the Corporate Debtor.
c) In terms of section 60(2) of the IBC (as amended with effect from 06.06.2018), where a liquidation proceeding of the Corporate Debtor is pending before the Tribunal, an application relating to liquidation or bankruptcy of a personal guarantor of such Corporate Debtor shall be filed before such Tribunal. Therefore, the Respondent No.1 erroneously invoked the provisions of the SARFAESI Act by approaching a forum other than the Tribunal.
d) In view of section 60(5)(c) of the IBC, the Tribunal shall have jurisdiction to entertain or dispose of any question of law or fact arising out of or in relation to the liquidation proceeding of the Corporate Debtor.
e) Section 238 has an overriding effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force. The inconsistency between the IBC and the SAFAESI Act is that when under Section 101, the IBC provides moratorium, the provision of SARFAESI Act allows the sale of Property. Therefore, when there is an inconsistency the provisions of IBC shall prevail
f) There is difference between a surety (u/s 128 of the Contract Act) and a guarantor. The surety’s liability is co extensive with that of the principal borrower whereas, the guarantor’s liability is secondary to that of the principal borrower.
The Tribunal dismissed the Interlocutory Application, by impugned order on the following grounds.
a) The IA was neither maintainable nor sustainable as the Appellant personal guarantor was a stranger to the insolvency and bankruptcy proceedings pending between the Respondent No. 1 and the Corporate Debtor and could not invoke Section 60(5)(c) of the IBC to file the IA.
b) The Notification No.S.O.4126(E) dated 15.11.2019 (for short “Notification”) has the effect that only insolvency proceedings initiated against the personal guarantor of a corporate debtor are to be instituted under the IBC as opposed to the provisions of the Presidency-Towns Insolvency Act, 1909 (for short “PTA Act”) and the Provincial Insolvency Act, 1920 (for short “PIA Act”). The said Notification does not prohibit the financial creditor from proceeding against the personal guarantor of a corporate debtor by instituting recovery proceedings permissible under any other existing and applicable law
c) The proceedings initiated by the Respondent No.1 against the Appellant under the SARFAESI Act need not be quashed as such proceedings are not proceedings under the IBC and there is no bar against the Respondent No.1 in continuing the SARFAESI proceedings against the Appellant.
# 3. The appellant challenged the said findings raising several contentions on various grounds. However, the specific questions of law arise for consideration in the appeal are also formulated by the appellant in Paragraph No.8.2 of the grounds of appeal.
# 40. Considering rival contentions and perusing the material available on record, the points need be addressed by this Tribunal are as follows:
(1) Whether Section 60 (5) of IBC permits 3rd party to file an application and redress the grievance in the present appeal?
(2) Whether the Moratorium imposed under the provisions of IBC during liquidation process is a bar to proceed against the personal guarantor under the SARFAESI Act to recover the debt due by the Corporate Debtor?
(3) Whether respondent No.2 is under obligation to include the personal guarantor as a secured creditor in terms of Section 36 (4) of IBC?
(4) Whether the provisions of IBC overrides the provisions of Indian Contract Act, more particularly, Section 140 of Contract Act? If not, whether the appellant is entitled to include himself as secured creditor in the list of creditors prepared under Section 36 of IBC by respondent No.2 herein so as to recover the amount he paid to the corporate debtor due to non-payment of debt due to respondent No.1 by the corporate debtor?
Point No.1:
# 47. Section 60(5)(c) of I.B.C permits all the Tribunals to decide any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor or corporate person. The language employed in Clause (c) of Section 60(5) made it abundantly clear that the jurisdiction is conferred on the Tribunals or adjudicating authority only to decide the question of fact or law arising out or in relation to the insolvency resolution or liquidation proceedings. But, the proceedings under SARFAESI Act are independent against the personal guarantor of corporate debtor and they are purely recovery proceedings. Therefore, it is difficult to conclude that the dispute raised by the appellant would fall within the ambit of Section 60(5)(c) of I.B.C. The adjudicating authority rightly held that the application under Section 60(5) is not maintainable and even after re-appreciating the law laid down by the Courts and upon consideration of argument, we find no ground to interfere with the finding recorded by the adjudicating authority about maintainability of the application under Section 60(5) of I.B.C.
# 48. In view of our foregoing discussion, we find no ground, warranting interference with the finding recorded by the adjudicating authority as to the maintainability of the application under Section 60(5) of I.B.C. Accordingly, the finding recorded by the adjudicating authority is hereby confirmed, holding this point in favour of the respondents and against the appellant.
Point No.2:
# 51. Thus, it is clear from both the provisions under Section 14 and Section 33(5) that the proceedings against ‘corporate debtor’ alone are to be interdicted. There is subtle distinction between Section 14 and Section 33(5). According to Section 14(a), the Adjudicating Authority shall declare moratorium prohibiting the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority. At the same time, Clause (3) incorporated by amendment of Act.26 of 2018 with effect from 06.06.2018, says that, Sub-sections (1) and (2) of Section 14 have no application to such transactions, as may be notified by the Central Government in consultation with any financial sector regulator or any other authority and a surety in a contract of guarantee to the corporate debtor.
# 52. It is clear from Sub-section (3) of Section 14 that the Moratorium imposed under Section 14 will have no application to enforce the liability against a surety in a contract of guarantee to a corporate debtor. The exemption contained under Sub-section (3) is squarely applicable to the present facts of the case. However, Section 33(5) of I.B.C restricts filing of suit or other legal proceeding by or against the “corporate debtor”. But, the rider attached to it permits the liquidator to institute a suit or other legal proceeding on behalf of the corporate debtor, with the prior approval of the Adjudicating Authority. Thus, it restricts only filing of suits or other proceedings, but did not impose any restriction on the pending proceedings against corporate debtor. In any view of the matter, the language employed in both the sections is clear that, the interdict is only against institution of suits or proceedings and prosecuting those suits or proceedings in any Court or Tribunal or other Forums instituted against the corporate debtor, but not against third part,y since sub-Section 3 of Section 14 excludes the surety in a contract of Guarantee specifically. But here, the appellant is the personal guarantor to corporate debtor, as defined under Section 5(22) of I.B.C, who is an independent person mortgaged his property as a security for due performance of the obligation by the corporate debtor. Therefore, the Moratorium imposed either under Section 14 or the interdict contained under Section 33(5) has no application and it is not a bar to proceed against the appellant for recovery of the debt in a different Forum i.e., before the Debts Recovery Tribunal under SARFAESI Act.
# 53. A similar issue came up for consideration before the Division Bench of Delhi High Court in “Kiran Gupta Vs. State Bank of India”8), wherein, the Court after adverting to various judgments, including Sections 14 & 31 of I.B.C and Sections 128 & 140 of the Indian Contract Act, based on the law laid down in “State Bank of India Vs. V.Ramakrishnan” (referred supra) concluded as follows:
“The view expressed by the Supreme Court amply demonstrates that neither Section 14 nor Section 31 of the IB Code place any fetters on Banks/Financial Institutions from initiation and continuation of the proceedings against the guarantor for recovering their dues. That being the position, the plea taken by the counsel for the petitioner that all proceedings against the petitioner, who is only a guarantor, ought to be stayed under the SARFESI Act during the continuation of the Insolvency Resolution process qua the Principal Borrower, is rejected as meritless. The petitioner cannot escape her liability qua the respondent/Bank in such a manner. The liability of the principal borrower and the Guarantor remain co-extensive and the respondent/Bank is well entitled to initiate proceedings against the petitioner under the SARFESI Act during the continuation of the Insolvency Resolution Process against the Principal Borrower.”
# 54. In view of the law laid down by the Division Bench of the Delhi High Court, Moratorium under Section 14 or restriction under Section 33(5) of I.B.C is not a bar to proceed against this appellant herein under SARFAESI Act for recovery of debt based on mortgage created in favour of 1st Respondent executing agreement of guarantee.
# 62. Finally, this matter came before the the Apex Court in the case of “State Bank of India vs V. Ramakrishnan & Anr.” (referred supra). The Hon’ble Apex Court differentiated between moratorium mentioned u/s 14 of the code and interim moratorium and moratorium mentioned under sec 96 &101 respectively (under part III) of the IBC 2016 and made following observation”
“We are also of the opinion that Sections 96 and 101, when contrasted with Section 14, would show that Section 14 cannot possibly apply to a personal guarantor. When an application is filed under Part III, an interim-moratorium or a moratorium is applicable in respect of any debt due……….. The object of the Code is not to allow such guarantors to escape from an independent and coextensive liability to pay off the entire outstanding debt, which is why Section 14 is not applied to them.”
# 63. In view of the law declared by the Apex Court and other Courts, SARFAESI Act and I.B.C contained non-obstante clauses, in view of the principles laid down in “M/s Innoventive Industries Ltd. vs ICICI Bank & Another” & “P.R. Commissioner of Income Tax vs Monnet Ispat & Energy Limited”, (referred supra), the provisions of I.B.C will prevail over any other statute. Consequently, we find that imposition of Moratorium either in corporate insolvency process or liquidation process interdicts only the proceedings against corporate debtor, but not against third party like the appellant herein who is a personal guarantor of a corporate debtor. Therefore, the finding recorded by the adjudicating authority cannot be interfered by this Tribunal, while exercising jurisdiction under Section 61 of I.B.C. Accordingly, the point is answered against the appellant and in favour of the respondents.
Point Nos.3 & 4:
# 64. As both the points are inter-connected, we find that it is appropriate to decide both the points by common discussion.
# 65. The main endeavour of the appellant is that, when insolvency or liquidation proceedings are initiated against the corporate debtor and if the property of personal guarantor is sold for recovery of debt under the SARFAESI Act, he is entitled to recover the amount from the corporate debtor under Section 140 of the Indian Contract Act and the liability of the surety is coextensive with that of the Principal Debtor, thereby, he is entitled to be included as a Secured Creditor in the list of creditors under Section 36 of I.B.C. This contention was not specifically raised before the adjudicating authority, but before this Tribunal. Such contention is urged for the first time.
# 66. Section 128 of the Indian Contract Act says that, the liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract.
# 67. Section 140 of the Indian Contract Act deals with rights of surety on payment or performance. Where a guaranteed debt has become due, or default of the principal debtor to perform a guaranteed duty has taken place, the surety, upon payment or performance of all that he is liable for, is invested with all the rights which the creditor had against the principal debtor.
# 68. A guarantor will get invested with all the rights which the creditor had only “upon payment or performance of all that he is liable for”. A guarantor is liable for any payment or performance of any obligation only to the extent the principal debtor has defaulted (vide C.K.Aboobacker v K.P.Ayishu13). In any view of the matter, in view of Section 140 of the Indian Contract Act, the appellant herein, on payment of debt due under the guranteed debt, is entitled to recover the same as if he is a creditor. Taking advantage of Section 140 of the Indian Contract Act, Smt. Menaka Gyuruswamy, learned Senior Counsel contended that, in case the entire assets of the corporate debtor are liquidated and the amount realised on sale of assets of debtor shall be distributed among the creditors of different kinds, the appellant will be denuded to realise the debt. Therefore, he shall be included in the list of secured creditors, but this was not specifically urged in the petition before the Tribunal.
# 69. In view of the specific contention raised for the first time before the Tribunal, it is apposite to advert to the definition of corporate guarantor and secured creditor and security interest, as defined under the I.B.C.
“Section 5 (5A) “corporate guarantor” means a corporate person who is the surety in a contract of guarantee to a corporate debtor;
Section 3(30) ‘secured creditor, means a Creditor in favour of whom security interest is credited.
Section 3 (31) “security interest” means right, title or interest or a claim to property, created in favour of, or provided for a secured creditor by a transaction which secures payment or performance of an obligation and includes mortgage, charge, hypothecation, assignment and encumbrance or any other agreement or arrangement securing payment or performance of any obligation of any person: Provided that security interest shall not include a performance guarantee”
# 70. On conjoint reading of the words ‘corporate guarantor’, ‘security interest’ and secured creditor to claim that he is a secured guarantor as defined under Section 3(30), he must satisfy that he has got security interest as defined under Section 3 (31) of I.B.C. The word ‘secured creditor’ is also defined under Section 3(30) of I.B.C, which means a creditor in favour of whom security interest is created. Here, no security interest, as defined under Section 3(31) was created by the corporate debtor, in any of the specified modes, thereby he cannot claim to be a secured creditor to include him as secured creditor in the creditors list to pay his share of amount.
# 76. Thus, the view taken by the Hon’ble Apex Court is that the approval of a resolution plan does not ipso facto discharge a personal guarantor of a corporate debtor of her or his liabilities under the contract of guarantee and it will not discharge or release the Principal Debtor from the debt owed by it to its creditor by an involuntary process i.e by operation of law, or due to liquidation or insolvency proceeding, does not absolve the surety/guarantor of his or her liability which arises out of an independent contract.
# 77. From the principle laid down in the above judgment, almost all the contentions raised by the learned Senior Counsel for the appellant were addressed. More so, the contention of the appellant which was left unaddressed is without any merit.
# 78. In any view of the matter, the appellant being a Personal Guarantor discharged part of the loan payable by the Corporate Debtor, he is entitled to recover the amount under Section 140 of the Indian Contract Act, as if he is a creditor, but not a ‘Secured Creditor’ as defined under Section 3(30) of the I.B.C, since no security interest was created in favour of the creditor.
# 79. No doubt, when the assets of the corporate debtor is sold, he may not have any chance of recovery of amount proceeding against the ‘Corporate Debtor’, but, there are different modes of recovery of the debt due by the ‘Corporate Debtor’ under the general law. Therefore, the appellant who stepped into the shoes of creditor in terms of Section 140 of the Indian Contract Act, is entitled to recover the debt irrespective of sale of assets of corporate debtor in liquidation process in any of the recognized modes. Therefore, he cannot be included in the list of secured creditors, as no security interest was created in favour of the guarantor and he would not fall within the definition of ‘Secured Debtor’ as defined under Section 3(31) of I.B.C consequently, cannot be included in the list of secured creditors in the liquidation process, so as to claim share.
# 80. The Hon’ble Apex Court made certain observations in para-99 of Judgment in “Lalit Kumar Jain Vs. Union of India”, referred supra, in paragraph-111 of the same Judgment held that approval of a Resolution Plan does not ipso facto discharge a personal guarantee of a Corporate Debtor of her or his liabilities under the contract of guarantee as it arises out of independent contract. At the same time, based on the principles laid down in “Innoventive Industries Ltd. Vs. ICICI Bank Ltd. and Anr.”, “P.R. Commissioner of Income Tax vs Monnet Ispat & Energy Limited”, Hon’ble Apex Court is of confirmed view that the provisions of IBC will prevail over provisions of the laws in view of non-obstante clause contained in Section 238 of IBC, the same view is taken by full bench of Apex Court again in “Sundaresh Bhatt, Liquidator Of ABG Shipyard Vs. Central Board of Indirect Taxes and Custom”15 dated 26.08.2022 while considering the liability to pay Custom duty to release the imported goods held that provision of IBC will prevail over the general or special laws. Thus, it is settled that the provision of IBC will have overriding effect on the provisions of general or special laws, thereby provision of IBC overrides the provision of Indian Contract Act, more particularly, provisions relating to surety’s liability and right of surety as guarantor in a contract of guarantee.
# 81. In Lalit Kumar Jain’s case, the Hon’ble Apex Court took note of the provision of Indian Contract Act relating to sureties or guarantor’s liability and rights, finally concluded that the provision of IBC will override the other laws.
# 82. In view of law laid down by Apex Court, we have no hesitation to hold that the provisions of IBC will prevail over the provision of Indian Contract Act, thereby surety may take appropriate steps to claim as creditor to recover the amount he discharged to the Creditor under the agreement of guarantee in view of clause ‘h’ and ‘I’ of Section 5(8) of IBC, but not as secured creditor, before the liquidator if the 2nd Respondent did not finalise the list of Creditor, subject to permissibility under Section 38, Chapter III of IBC and limitation. Accordingly, the point is held against the Appellant and in favour of Respondents.
# 83. In view of complexity of questions raised, we summed up our findings as follows:
(1) Petitioner/Appellant is not entitled to claim any relief under Section 60(5) of IBC being 3rd Party to IBC proceedings.
(2) Imposition of moratorium is not a bar to recover the amount proceeding against the guarantor under SARFAESI Act, since the agreement of guarantee is an independent contract.
(3) Petitioner/Appellant is entitled to claim as Creditor of Corporate Debtor in view of Section 140 of Indian Contract Act, but not as Secured Creditor as no security interest is created in his favour, subject to limitation provided in Chapter III of IBC.
(4) The provisions of IBC will override the provisions of Indian Contract Act.
In view of the findings summed up above, the Appeal fails as it is devoid of any merit and liable to be dismissed. In the result, the Appeal is dismissed, but without cost in the circumstances.
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