05 April 2018

Insolvency – ‘Moratorium’ applicable to property of ‘Personal Guarantor’

National Company Law Appellate Tribunal has held that ‘Moratorium’ under Section 14 of the Insolvency and Bankruptcy Code will not only be applicable to the property of the ‘Corporate Debtor’ but also on its ‘Personal Guarantor’.


Brief Facts:

Mr. V. Ramakrishnan (“1st Respondent”), Director of M/s Veesons Energy Systems Pvt. Ltd. (“2nd Respondent/Corporate Debtor”) furnished a personal guarantee of his assets to State Bank of India (“Appellant/Financial Creditor”). Thus, as per definition of “Personal Guarantor” under the Insolvency & Bankruptcy Code (“Code”), Mr. V. Ramakrishnan was the Personal Guarantor for the Corporate Debtor.

The Financial Creditor invoked its rights under the SARFAESI Act, 2002 against the Personal Guarantor for recovery from the 1st Respondent. This notice was challenged by the Corporate Debtor before the High Court of Madras and the same was dismissed. The Financial Creditor issued a Possession Notice and took symbolic possession of the secured assets. The Corporate Debtor invoked Section 10 of the Code and subsequently, an order of Moratorium was passed and an Interim Resolution Professional was appointed.

Despite the moratorium, the Financial Creditor moved under the SARFAESI Act and proceeded against the assets of the Personal Guarantor, issuing a notice of Sale dated 12th July 2017. The Personal Guarantor, aggrieved from this action, approached the NCLT, Chennai (“Adjudicating Authority”) for stay of proceedings under SARFAESI Act, which was granted till the moratorium was over, vide order dated 18th September 2017 (“Impugned Order”). The Financial Creditor filed an appeal before the NCLAT against this order of the Adjudicating Authority.


Points for consideration:

Whether Financial creditor is barred from proceeding against the assets of a Personal Guarantor while a Moratorium applies to the Corporate Debtor.



Interpreting Section 60 of the Code (Adjudicating Authority for corporate persons), the Appellate Tribunal in its decision dated 28-2-2018 stated that,

…in a case where proceeding has been initiated against the Corporate Debtor, if simultaneous proceeding is to be initiated against the Personal Guarantor for bankruptcy proceedings, an application relating to the Insolvency Resolution or Bankruptcy of a Personal Guarantor of such Corporate Debtor is to be filed before the same Adjudicating Authority (National Company Law Tribunal) hearing the ‘Insolvency Resolution Process’ or ‘Liquidation Proceedings’ of a ‘Corporate Debtor’.
Therefore, a ‘Financial Creditor’, including Appellant-State Bank of India, if intends to proceed against the ‘Personal Guarantor’ of the ‘Corporate Debtor’, may file an application relating to ‘Bankruptcy’ of the ‘Personal Guarantor’ before the same Adjudicating Authority (‘Division Bench, Chennai’ herein).

Interpreting Section 14 of the Code (Moratorium), NCLAT observed that it was clear that not only institution of suits or continuation of pending suits or proceedings against the ‘Corporate Debtor’ are prohibited from proceedings, any 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.

Interpreting Section 31(1) of the Code (Approval of resolution plan), it was held that a ‘Resolution Plan’ if approved by the Committee of Creditors and once approved by the Adjudicating Authority is not only binding on the Corporate Debtor, but also on its employees, members, creditors, guarantors and other stakeholders involved in the Resolution Plan, including the Personal Guarantor.

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