Recently, the NCLAT Delhi, in a recent judgment of Amit Jain v. Siemens Financial Services Pvt. Ltd, has held that the Section 10A of the Insolvency and Bankruptcy Code, 2016 is applicable only to the corporate debtor, but not to the personal guarantor of the corporate debtor.
Legislative Background of Section 10A of IBC
The Insolvency and Bankruptcy Code was introduced with the aim to maximize the asset value of the Corporate Debtor and the Supreme Court in the case of Swiss Ribbon Pvt Ltd v. UOI has held that the IBC envisages the resolution of the Corporate Debtor by maximizing the value of the assets of the corporate debtor.
The Covid-19 induced lockdown had stalled almost all the economic activities during that period. As a consequence, many companies and firms were shut down and there was no money to repay the debt to the creditors. In order to save the corporate debtors from facing liquidation proceedings and to ensure smooth recovery of business sector post lockdown, the Central Government introduced the Section 10A of the IBC.
As per the section 10A, there would be no initiation of any Corporate Insolvency Resolution Process under the Code against the Corporate Debtor for any default that occurred from 25th March, 2020 to 24th March, 2021.
Facts and Decision of the Case.
In the present case, the Corporate Debtor had taken loan from the respondent and the appellant stood as a personal guarantor to the Corporate Debtor. The Corporate debtor failed to pay EMI in 2020 and the respondent approached the NCLT Delhi for initiation of Insolvency Resolution process against the Personal Guarantor under section 95 of the IBC. The Adjudicating Authority ordered interim moratorium against the Personal Guarantor under section 96 of the IBC. Aggrieved by the order passed by the NCLT, the appellant approached the NCLAT.
The NCLAT, rejected the appeal filed by the appellant on the ground that the section 10A is applicable only to the Corporate Debtor not to the Personal Guarantor. The tribunal declared that the provision enshrined in section 10A is clear and unambiguous and the provision is inserted only under the Chapter II of the Code by the 2020 Amendment Act, and there is no reference to the applicability of the said provision under the Part III of the Code that deals with the Insolvency Resolution process of the Personal Guarantor. Relying on the judgment of the Lalu Prasad Yadav v. State of Bihar, the tribunal held that since the provision is clear and unambiguous, the rule of strict or literal interpretation will be applicable and the provision cannot be interpreted in a manner so as to extend its protection to the Personal Guarantor.
Analysis of the decision
The Section 10A of IBC was introduced with the aim to save the corporate sector from facing insolvency proceedings for the default that had occurred during the period of lockdown. The main idea behind granting the protection is to provide friendly environment to the sector to recover from the loss that happened due to the lockdown. However, the non-applicability of the provision to the personal guarantor is working as an impediment in the smooth functioning of the corporate debtor. Firstly, in most the cases, the Personal Guarantors to the Corporate Debtor are the persons that either holding important posts in the Corporate Debtor such as promoter or director or they are directly or indirectly related to the person who is holding equity or important post in the Corporate Debtor. The initiation of IPR against such guarantor is bound to affect the functionality of the company as the persons involved in the management of the company will be affected by the IPR and they will focus on saving themselves rather than on improving the profitability of the company.
Lastly, the initiation of the IPR against the Guarantor who is related or not related to the company will only increase the burden on the Corporate Debtor. As recognized in the case of Orbit Towers Pvt Ltd v. Sampura Suppliers Pvt Ltd, the NCLT Kolkata has held that whenever, the Personal Guarantor has paid the debt of the Corporate Debtor to the principal creditor, the Personal Guarantor can recover the amount he/she has paid to the Creditor and also has the power to file application for initiation of CIRP against the Corporate Guarantor under section 7 of the IBC.
Therefore, the section 10A of IBC offers protection only to the corporate debtor i.e. company, a legal person but provides no protection to the natural persons who are related directly or indirectly in the functioning of the Corporate Debtor.
Conclusion and Way Forward
The decision given by the NCLAT is correct if one goes by the principle of the strict interpretation of law and that the court has no power to interfere in the wisdom of the legislature. However, the basic aim for which the section was incorporated in 2020 is that there is no proceeding under the code against the Corporate Debtor, so that the management of the company can focus solely on reviving its company. Since, the section does not bar insolvency proceedings against the personal guarantor, the guarantors are getting involved in the proceedings, and this is affecting their focus towards their company as most of them are involved in the day-to-day management of the company and thereby preventing the revival of the corporate debtor.
It is the need of the time, that the Parliament should introduce a similar section under the Part III of the Code that provides protection to the personal guarantor who were unable to pay the guaranteed sum from 25th March 2020 to 24th March 2021. Moreover, a provision must be introduced under both the Part II and Part III of the code that for the period during which section 10A is operative, the creditor would be entitled to get extra 4 percent per annum interest in addition to the interest agreed at the time of the contract if the loan amount not paid back on demand by both the personal guarantor and corporate debtor.
This extra payment of interest will provide an incentive to the creditors to not to seek their loan back and is equitable in nature as it provides them fair compensation for the blockage of their capital during the crucial time of lockdown.
Amit Jain v. Siemens Financial Services Pvt. Ltd. – https://www.livelaw.in/pdf_upload/1661445969-432382.pdf