Employees Provident Fund Organisation Vs. Sh. Darshan Singh Anand - “As clarified in the extracts above, all the dues raised by the EPFO under various sections, including interests and penalties are to be paid by the new establishment under Section 17B of the Employees Provident Funds and Miscellaneous Act, 1952.”

 NCLT Chandigarh (03.01.2023) in Employees Provident Fund Organisation Vs.  Sh. Darshan Singh Anand [IA Nos.1431/2022 in CP (IB) No.315/Chd/Hry/2019]  held that;

• “It is very much clear vide Section 30(2)(e) that the Resolution Plan does not contravene any of the provisions of the law for the time being in force. The Resolution Professional/Adjudicating Authority is to look at the compliance of the provisions of law.

• Since no provisions of the above said Act are in conflict with any of the provisions of  the I & B Code, the applicability of even Section 238 of the I & B Code does not arise. PF dues are not the assets of the CD as amply made clear by the provisions of Section 36(4)(a)(iii) of the I & B Code, 2016.

• “As clarified in the extracts above, all the dues raised by the EPFO under various sections, including interests and penalties are to be paid by the new establishment under Section 17B of the Employees Provident Funds and Miscellaneous Act, 1952.”

• The Resolution Plan of the Successful Resolution Applicant has been approved by the CoC and is pending approval of this Adjudicating Authority. In the circumstances, the liabilities to pay the impugned demand of the applicant falls squarely on the Successful Resolution Applicant.

• The payment of the dues of the applicant, therefore, be paid as per the provision of the EPF and MP Act, 1952 by the Successful Resolution Applicant. The Successful Resolution Applicant is, thus, directed to make necessary payments under the provisions of EPF and MP Act, 1952 after the approval of the Resolution Plan by this Adjudicating Authority.

Blogger’s Comments; IBC recognises secured debt & unsecured debt, which are further categorized as financial debt, operational debt and other debts. What is baffling is that, with the various case laws the PF dues have acquired the status of SUPER DEBT which have to be settled in full, in priority to all other debts defined in IBC. 

In the present case, we have moved a step further. Here the liability of EPFO dues has been fastened on the new Establishment under section 17B of EPF & MA, 1952.

NCLAT (19.12.2019) in Tourism Finance Corporation of India Ltd. & Ors vs Rainbow Papers Ltd. & Ors. [Company Appeal (AT) (Insolvency) No. 354, 364, 404 & 1001  of 2019] held that;

• # 45. Therefore, we direct the ‘Successful Resolution Applicant’- 2nd Respondent (‘Kushal Limited’) to release full provident fund and interest thereof in terms of the provisions of the ‘Employees Provident Funds and Miscellaneous Provision Act, 1952’ immediately, as it does not include as an asset of the ‘Corporate Debtor’. The impugned order dated 27th February, 2019 approving the ‘Resolution Plan’ stands modified to the extent above. The appeal preferred by ‘Regional Provident Fund Commissioner’ is allowed with aforesaid observations and directions. 

Excerpts of the order;

The present application has been filed by EPFO through Regional Provident Fund Commissioner, Jodhpur seeking direction against the corporate debtor to implement the order dated 13.01.2022 and order dated 19.01.2022 passed under Section 7A of EPF and MP Act, 1952 and the order dated 30.11.2021 and 13.09.2021 passed under Section 14B and Section 7Q of EPF and MP Act, 1952 and letter dated 11.02.2022 of Damages leviable under Section 14B and interest chargeable under Section 7 (2) of the EPF Act, 1952 in view of Section 36 (4) (a) (iii) of Insolvency and Bankruptcy Code, 2016.

# 2. It is submitted that the appellant initiated the enquiry against the corporate debtor for not complying with the EPF Act by not depositing the dues for the period 09/2015 to 03/2018. After valuation the EPF dues from the employer under Section 7A of the Act, whereby amounting to Rs. 1,29,49,496/-, were assessed to be paid by the corporate debtor under different heads. Further, the applicant initiated proceedings under the Act against the corporate debtor for deficiency in making payment during the period 04/2018 to 07/2018, an amount of Rs. 31,33,265/- has been assessed to be paid by the corporate debtor vide order date 29.01.2022. Further, vide order dated 30.11.2021, dues during the period from 04/2019 to 09/2021 have been assessed amounting to Rs. 77,25,551/- on account of damages under Section 14B to be deposited by the corporate debtor. Also, an amount of Rs. 3,09,786/- on account of interest under Section 7Q is to be paid by the corporate debtor.

# 3. It is further submitted by the applicant that EPF dues during the period 05/2017 to 03/2019 amounting to Rs. 1,08,90,367/- under Section 14B and Rs. 52,37,583/- under Section 7Q assessed vide order dated 13.09.2021 under the Act. The applicant has assessed the short remitted dues of Rs. 11,20,937/- vide letter dated 09.02.2022. The applicant submitted the claim of EPF dues with the IRP on 11.02.2022 in the prescribed format along with proof of claim and the latest calculation dated 11.09.2022 of the EPF dues, whereby the total amount of Rs. 9,28,86,993/- been claimed by the applicant. 

# 4. It is averred by the applicant that respondent No. 1 vide email dated 022 has admitted the claim of Rs. 1,60,82,761/- instead of the entire amount of claim raised by the applicant. In view of the above facts, the applicant is praying for a direction to the respondent to deposit the amount of EPF dues determined under Section 7A, 14B and Section 7 (2) of EPF and MP Act, 1952.

# 5. Notice of the present application issued to respondent vide order dated 16.11.2022. Pursuant to the notice, the reply has been filed by the respondent vide diary no. 02412/01 dated 30.12.2022, wherein the respondent has denied the submissions made by the applicant. It is averred by the respondent that the corporate debtor has not been in operation since September 2020, and the workers had been laid off on 29.01.2021, therefore, there are no dues towards applicant EPFO to be payable for the period since the commencement of CIRP i.e., 02.02.2022.

# 6. It is further submitted by the respondent that EPFO lodged a claim in Form B on 11.02.2022, amounting to Rs. 9,28,86,993/- with the Resolution Professional. Therefore, against the total submitted claim amounting to Rs. 9,28,86,913/-, an amount of Rs. 5,01,92,604/- was admitted finally and the portion of damages claimed for Rs. 4,26,94,389/- was not admitted, being the contingent claim and on account of the moratorium on any proceedings against the corporate debtor.

# 7. It is averred by the despondent that Resolution Plan so received provides for the payment of Rs. 5,01,92,604/- in full as per the claim admitted by the Resolution Professional to be paid within 90 days from the date of approval of the Resolution Plan by the Adjudicating Authority. The damages assessed by the applicant are not due and are just for the present application, and the respondent has already admitted the just and equitable dues and EPF as actually due under the statutory dues.

# 8. We have heard the learned counsel for the applicant & respondent and have perused the records carefully.

# 9. Before adjudicating on the matter, the relevant Sections of the EPF and MP Act, 1952 are extracted below for the sake of clarity:-

Section 7A of the EPF & MP Act, 1952

7A. Determination of money due from employers.—(1) The Central Provident Fund Commissioner, any Additional Central Provident Fund Commissioner, any Deputy Provident Fund Commissioner, any Regional Provident Fund Commissioner, or any Assistant Provident Fund Commissioner may, by order,—

(a) in a case where a dispute arises regarding the applicability of this Act to an establishment, decide such dispute; and

(b) determine the amount due from any employer under any provision of this Act, the Scheme or the Pension Scheme or the Insurance Scheme, as the case may be, and for any of the aforesaid purposes may conduct such inquiry as he may deem necessary.”

Section 7Q of the EPF & MP Act, 1952

"7Q. Interest payable by the employer.—The employer shall be liable to pay simple interest at the rate of twelve per cent. Per annum or at a such higher rate as may be specified in the Scheme on any amount due from him under this Act from the date on which the amount has become so due till the date of its actual payment: Provided that higher rate of interest specified in the Scheme shall not exceed the lending rate of interest charged by any scheduled bank.”

Section 8F of EPF & MP Act, 1952

“8F. Other modes of recovery.— (1) Notwithstanding the issue of a certificate to the Recovery Officer under section 8B, the Central Provident Fund Commissioner or any other officer authorised by the Central Board may recover the amount by any one or more of the modes provided in this section.

(2) If any amount is due from any person to any employer who is in arrears, the Central Provident Fund Commissioner or any other officer authorised by the Central Board in this behalf may require such person to deduct from the said amount the arrears due from such employer under this Act and such person shall comply with any such requisition and shall pay the sum so deducted to the credit of the Central Provident Fund Commissioner or the officer so authorised, as the case may be: Provided that nothing in this sub-section shall apply to any part of the amount exempt from attachment in execution of a decree of a civil court under section 60 of the Code of Civil Procedure, 1908 (5 of 1908).

(3) (i) The Central Provident Fund Commissioner or any other officer authorised by the Central Board in this behalf may, at any time or from time to time, by notice in writing, require any person from whom money is due or may become due to the employer or, as the case may be, the establishment or any person who holds or may subsequently hold money for or on account of the employer or as the case may be, the establishment, to pay to the Central Provident Fund Commissioner either forthwith upon the money becoming due or being held or at or within the time specified in the notice (not being before the money becomes due or is held) so much of the money as is sufficient to pay the amount due from the employer in respect of arrears or the whole of the money when it is equal to or less than that amount.

xxx xxx xxxx xxx xxxx

(4) The Central Provident Fund Commissioner or the officer authorised by the Central Board in this behalf may apply to the court in whose custody there is money belonging to the employer for payment to him of the entire amount of such money, or if it is more than the amount due, an amount sufficient to discharge the amount due.

(5) The Central Provident Fund Commissioner or any officer not below the rank of Assistant Provident Fund Commissioner may, if so authorised by the Central Government by general or special order, recover any arrears of amount due from an employer or, as the case may be, from the establishment by distraint and sale of his or its movable property in the manner laid down in the Third Schedule to the Income-tax Act, 1961 (43 to 1961).]”

Section 14B of the EPF & MP Act, 1952

“14B. Power to recover damages.—Where an employer makes default in the payment of any contribution to the Fund , the Pension] Fund or the Insurance Fund or in the transfer of accumulations required to be transferred by him under sub-section (2) of section 15 or sub-section (5) of section 17 or in the payment of any charges payable under any other provision of this Act or of any Scheme or Insurance Scheme or under any of the conditions specified under section 17, the Central Provident Fund Commissioner or such other officer as may be authorised by the Central Government, by notification in the Official Gazette, in this behalf] may recover from the employer by way of penalty such damages, not exceeding the amount of arrears, as may be specified in the Scheme: 

Provided that before levying and recovering such damages, the employer shall be given a reasonable opportunity of being heard: 

Provided further that the Central Board may reduce or waive the damages levied under this section in relation to an establishment which is a sick industrial company and in respect of which a scheme for rehabilitation has been sanctioned by the Board for Industrial and Financial Reconstruction established under section 4 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986), subject to such terms and conditions as may be specified in the Scheme.”

# 10. The issue at hand is whether the amount of Rs. 9,28,86,993/- including the demands arising out of proceedings under the EPF and MP Act 1952 are recoverable from the corporate debtor. We have carefully gone through the copy of the orders and calculation under Section 14B & 7Q of EPF & MP Act, 1952, attached as Annexure A-11 of the application and the revised claim dated 11.02.2022 submitted to Resolution Professional for an amount of Rs. 9,28,86,993/-. This amount also includes damages under Section 14B and

interest under Section 7Q of the Act. 

# 11. We are conscious of the decision of the Hon’ble NCLAT on the same issues in the case of Sikander Singh Jamuwal vs Vinay Talwar and Others, Company Appeal (AT)(Ins) No.483 of 2019; Case Citation: (2022) iblaw.in 221, NCLAT, the relevant part of which reads as follows: 

• “It is very much clear vide Section 30(2)(e) that the Resolution Plan does not contravene any of the provisions of the law for the time being in force. The Resolution Professional/Adjudicating Authority is to look at the compliance of the provisions of law. In this context, we have to refer to Section 17B of the Employees Provident Funds and Miscellaneous Act, 1952 which is depicted below:

• "17B. Liability in case of transfer of establishment.--Where an employer, in relation to an establishment, transfers that establishment in whole or in part, by sale, gift, lease or licence or in any other manner whatsoever, the employer and the person to whom the establishment is so transferred shall jointly and severally be liable to pay the contribution and other sums due from the employer under any provision of this Act or the Scheme or the Pension Scheme or the Insurance Scheme, as the case may be, in respect of the period up to the date of such transfer: Provided that the liability of the transferee shall be limited to the value of the assets obtained by him by such transfer."

# 12. Since no provisions of the above said Act are in conflict with any of the provisions of  the I & B Code, the applicability of even Section 238 of the I & B Code does not arise. PF dues are not the assets of the CD as amply made clear by the provisions of Section 36(4)(a)(iii) of the I & B Code, 2016.

# 13. In this context, the following judgments are also referred to:

i. The judgment of this Tribunal (3 Members Bench - comprising of Hon'ble Chairperson & two Members) in C.A. (AT)(Ins) No. 354 of 2019, decided on 19th August 2019 Tourism Finance Corporation of India Ltd. Vs. Rainbow Papers Ltd. & Ors. given below:

• "44. However, as no provisions of the 'Employees Provident Funds and Miscellaneous Provision Act, 1952' is in conflict with any of the provisions of the 'I & B Code' and, on the other hand, in terms of Section 36(4)(iii), the 'provident fund' and the 'gratuity fund' are not the assets of the 'Corporate Debtor', there being specific provisions, the application of Section 238 of the 'I & B Code' does not arise.

• 45. Therefore, we direct the 'Successful Resolution Applicant'- 2nd Respondent ('Kushal Limited') to release full provident fund and interest thereof in terms of the provisions of the 'Employees Provident Funds and Miscellaneous Provision Act, 1952' immediately, as it does not include as an asset of the 'Corporate Debtor'. The impugned order dated 27th February 2019 approving the 'Resolution Plan' stands modified to the extent above. The appeal preferred by the 'Regional Provident Fund Commissioner' is allowed with aforesaid observations and directions. No costs.” 

It is also noted that the Judgement of the Hon’ble NCLAT in the case of Tourism Finance Corporation of India Ltd. vs. Rainbow Papers Ltd.(supra) has been affirmed by the Hon’ble Supreme Court Civil Appeal No. 1920 of 2020 decided on 20-05-2020(2020) ibclaw.in 145 SC . (emphasis supplied)

# 14. In short, it is a settled issue that when it comes to non-payment of the EPF arrears by the Corporate Debtor, the issue is one of “ compliance of Law”. As clarified in the extracts above, all the dues raised by the EPFO under various sections, including interests and penalties are to be paid by the new establishment under Section 17B of the Employees Provident Funds and Miscellaneous Act, 1952. In the event of any grievance on the part of the corporate debtor with regard to PF arrear demand, there is a provision in th EPF & MP Act, 1952 for appeal against the demand raised by the EPFO Authorities.

# 15. Furthermore, under Section 30(2)(e) of the Resolution Plan, in order to be legitimate, the resolution plan cannot contravene any of the provisions of any law in force. Thus, in the present context, it is incumbent on the RP/SRA to ensure that Section 17B of the EPF and MP Act, 1952 are complied with. As mentioned, Section 17B lays down that in case of a transfer of Establishment, the person to whom the establishment is transferred is liable to pay the contributions and other sums due from the employer under any provision of the EPF and MP Act, 1952.

# 16. In the present application, the liability under the EPF and MP Act, 1952 pertains to the period 09/2015 to 03/2018, 04/2018 to 07/2018, 04/2019 to 09/2021 & 05/2017 to 03/2019 respectively i.e., prior to the CIRP period. It is also noted that the operations of the corporate debtor have been closed since September 2020. The Resolution Plan of the Successful Resolution Applicant has been approved by the CoC and is pending approval of this Adjudicating Authority. In the circumstances, the liabilities to pay the impugned demand of the applicant falls squarely on the Successful Resolution Applicant. 

# 17. In case of any dispute, the Resolution Applicant/Successful Resolution Applicant may avail all the appellate proceedings provided in the EPF and MP Act, 1952 for redressal of their grievances. The payment of the dues of the applicant, therefore, be paid as per the provision of the EPF and MP Act, 1952 by the Successful Resolution Applicant. The Successful Resolution Applicant is, thus, directed to make necessary payments under the provisions of EPF and MP Act, 1952 after the approval of the Resolution Plan by this Adjudicating Authority.

# 18. In the circumstances, IA No.1431/2022 is allowed subject to the above observations and stands disposed of accordingly.

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K.V. Jayaprakash Vs. State Bank of India - 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.

 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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