In the realm of corporate finance, the role of personal guarantors holds significant implications, particularly in insolvency scenarios where corporate debtors default on their obligations. Personal guarantors, individuals who pledge their assets to secure loans for corporate entities, often find themselves at the center of legal disputes and financial liabilities.
The introduction of the Insolvency and Bankruptcy Code, 2016 (IBC) brought about a paradigm shift in the treatment of personal guarantors within the insolvency framework. With the enactment of specific provisions targeting personal guarantors, the legal landscape surrounding their liability underwent notable evolution.
This article delves into the complexities of guarantor liability in insolvency proceedings, analyzing key judicial interpretations and landmark cases. Through a concise overview of cases such as
- State Bank of India v. V. Ramakrishnan & Anr.,
- Laxmi Pat Surana v. Union Bank of India & Anr.,
- Lalit Kumar Jain v. Union of India & Ors., and
- Maitreya Doshi v. Anand Rathi Global Finance Ltd. and Anr.,
We aim to unravel the intricate legal nuances surrounding the liability of personal guarantors in the context of insolvency law.
A. State Bank of India Vs. V. Ramakrishnan & Anr
Facts
Veeson Energy Systems Pvt Ltd borrowed from State Bank of India, with its director, V Ramakrishna, offering personal guarantee. Defaulting on repayments, the company’s assets became non-performing. Despite a moratorium imposed by NCLT under Section 14 of the IBC, the bank pursued the personal guarantor’s assets under the SARFAESI Act. NCLAT extended the moratorium to the guarantor, but State Bank of India appealed to the Supreme Court, claiming it only applies to the corporate debtor.
Issues
- Does Section 14 of the Insolvency and Bankruptcy Code, 2016, encompass personal guarantors of a corporate debtor?
Appellant’s arguments
- Section 14(1) of the Code lacks explicit mention of individual guarantors, indicating that the moratorium period does not apply to personal guarantors.
- Sections 96 and 101 of the Code, dedicated to personal guarantors, offer separate provisions for a moratorium, suggesting superior protection than Section 14.
Respondent’s arguments
- Section 14 should be construed broadly to include personal guarantors, especially after the amendment to Section 2(e) of the Code.
- Section 60(1) designates the NCLT as the adjudicating authority for both corporate debtors and individual guarantors, indicating that the moratorium encompasses guarantors as well.
Basis of Decision
- The Court acknowledged the staggered enactment of different Code provisions, with some not yet in effect during the judgment.
- While Section 14 allows for a moratorium on specific actions, it does not explicitly mention personal guarantors, and relevant provisions were not yet operative.
- The Court emphasized that in a guaranteed contract, the surety and principal debtor’s liabilities are identical, allowing the creditor to pursue assets from either party.
- The Court dismissed the notion that a guarantor’s liability triggers only after the corporate debtor’s liability crystallizes.
- The Court referred to the Insolvency Law Committee’s report and the 2018 Amendment Ordinance, clarifying that the Section 14 moratorium does not extend to personal guarantors.
Judgment
- The Supreme Court concluded that the moratorium period under Section 14 of the Insolvency and Bankruptcy Code, 2016, does not apply to personal guarantors of a corporate debtor.
- Stressing the coextensive liability of sureties and principal debtors and considering the absence of operative provisions like Sections 96 and 101, the Court held that personal guarantors are not entitled to the moratorium under the Code.
B. Laxmi Pat Surana v. Union Bank of India & Anr.
Facts
In this case, financial creditor extended credit facilities to Mahaveer Construction, a proprietary firm, through two loan agreements in 2007 and 2008. Surana Metals Limited, the corporate guarantor, provided guarantees for these loans. When Mahaveer Construction defaulted, the bank issued a recall notice in 2010, demanding repayment from both Mahaveer Construction and Surana Metals Limited. Despite resistance, the bank initiated Corporate Insolvency Resolution Proceedings (CIRP) against Surana Metals Limited under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC), in 2019.
Issues
- Can a financial creditor initiate action under Section 7 of the IBC against a corporate guarantor, even if the principal borrower is not a corporate entity?
- Is an application under Section 7 of the IBC, filed more than three years after the loan is declared a Non-Performing Asset (NPA), barred by limitation?
Analysis & Reasoning
- Maintainability of Action under Section 7
- Section 7 of the IBC allows a financial creditor to initiate CIRP against a corporate debtor, including a corporate guarantor, if the principal borrower defaults.
- The guarantor’s obligation is coextensive with that of the principal borrower, and default by either triggers action against both.
- The IBC doesn’t limit action to cases where the principal borrower is a corporate entity, extending to cases where a corporate entity offers a guarantee for a non-corporate borrower.
- Limitation of Action under Section 7
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- The date of default, not the declaration of NPA, triggers the limitation period under Section 7.
- Acknowledgment of debt by either the principal borrower or the guarantor within the limitation period resets the clock on the limitation period.
- If acknowledgment occurs within the limitation period, the financial creditor can initiate action within three years of the acknowledgment.
- The Supreme Court upheld the bank’s right to initiate CIRP against Surana Metals Limited, the corporate guarantor, under Section 7 of the IBC. Additionally, the Court clarified that the limitation period for such action is reset upon acknowledgment of debt, allowing the bank’s application, filed within the renewed limitation period, to proceed.
C. Lalit Kumar Jain v. Union of India & Ors.
Facts
The central issue in this case revolves around the validity and implications of a notification dated September 15, 2019, issued by the Government of India regarding the enforcement of certain provisions related to personal guarantors under Part III of the Insolvency and Bankruptcy Code, 2016 (IBC). The petitioners, who provided guarantees in their capacities as directors, promoters, chairman, and managing directors of companies, challenged the notification’s legality. The notification empowered banks and financial institutions to initiate insolvency proceedings against personal guarantors of corporate debtors.
Issues
- Is the Government of India’s notification dated 15.09.2019, implementing provisions related to personal guarantors, lawful and within the scope of its authority?
- What is the extent of liability of personal guarantors’ post-approval of a resolution plan under the IBC?
Petitioner’s arguments
- The Central Government exceeded its authority by selectively enforcing provisions of the IBC related to personal guarantors.
- The notification did not differentiate between financial and operational creditors, contrary to the legislative intent.
- Section 243 of the IBC, repealing older insolvency laws, should have been implemented alongside the notification.
- Personal guarantors’ liability should be discharged post-approval of a resolution plan, as per the Essar Steel case.
Respondent’s arguments
- The legislative intent was to treat personal guarantors differently, as reflected in the 2018 amendments to the IBC.
- The 2018 amendment to Section 60(2) permits insolvency proceedings against personal guarantors.
- Stage-wise implementation of the IBC, as per Section 1(3), is valid and in line with the code’s objectives.
- Personal guarantors’ liability remains coextensive with that of the corporate debtor, as per contractual agreements.
Judgment
The Supreme Court upheld the validity of the notification, stating that it was not excessive legislation and fell within the Central Government’s authority under Section 1(3) of the IBC. The Court emphasized that personal guarantors’ liability is not automatically discharged post-approval of a resolution plan, as their obligations are independent of the corporate debtor’s discharge.
Analysis
This judgment clarifies the extent of personal guarantors’ liability and ensures alignment with the objectives of the IBC. While it may pose initial challenges, particularly in ongoing insolvency cases, it strengthens banks’ ability to recover debts and reduces non-performing assets. Moreover, it underscores the importance of a common forum for adjudicating insolvency-related matters, enhancing efficiency and coherence in the resolution process.
D. Maitreya Doshi v. Anand Rathi Global Finance Ltd. and Anr.
Facts
The Appellant, a director of M/S Doshi Holdings Pvt. Ltd. (Doshi Holdings), and the Respondent, Anand Rathi Global Finance Limited (Financial Creditor (FC)), were parties to Loan-cum-Pledge Agreements. The FC disbursed a loan to M/s Premier Limited (Premier), with Doshi Holdings pledging shares as security. Premier defaulted, and the FC initiated insolvency proceedings against both Premier and Doshi Holdings. The NCLT admitted the petitions, leading to an appeal by the Appellant to the NCLAT, which was dismissed.
Issues
The central issue in the case is whether Doshi Holdings should be classified as a personal guarantor, considering its role in pledging shares as security for the loan disbursed to Premier by the Financial Creditor (FC).
Appellant argument
- Doshi Holdings was not a borrower as no loan amount was disbursed to it.
- Pledge of shares by Doshi Holdings did not constitute a financial debt under the IBC.
- The NCLT’s admission of the petition against Doshi Holdings disregarded an earlier order.
Respondent argument
- Doshi Holdings was a borrower and pledgor under the agreements.
- Doshi Holdings acknowledged receipt of funds and promised repayment.
- Initiation of CIRP against both Premier and Doshi Holdings was justified.
Judgment
- Doshi Holdings was considered a borrower and pledgor under the agreements.
- The NCLT’s interpretation was plausible and not interfered with.
- Approval of a resolution for one borrower does not discharge a co-borrower.
- Proceedings under Section 7 of the IBC can be initiated against both corporate debtors.
- Recovery cannot be made twice over from both corporate debtors once the claim is discharged.
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