TMI Blog2019 (2) TMI 2000X X X X Extracts X X X X X X X X Extracts X X X X ..... rs and duties enumerated under Sections 35 to 50 and 52 to 54 of the IBC read with Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016. Since the liability of the guarantor and principal debtor is co-extensive, it is absolutely not necessary for the Bank to first proceed against the principal debtor and then against the guarantor, and when that being the position, the submission of the learned counsel for the petitioners that the secured creditor has to wait for the completion of the entire sale transaction by the liquidator on the properties of the corporate debtor surrendered by the secured creditor for realising the dues, cannot be accepted - Section 14 refers only to debts due by corporate debtors, who are limited liability companies, and it is clear that in the vast majority of cases, personal guarantees are given by Directors who are in management of the companies. The object of the Code is not to allow such guarantors to escape from an independent and co-extensive liability to pay off the entire outstanding debt, which is why Section 14 is not applied to them. However, insofar as firms and individuals are concerned, guarantees are given in res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e can file insolvency proceedings against the personal debtor. The contention of the petitioners that the secured creditor of the corporate debtor has to wait to initiate proceedings under the SARFAESI Act against the personal guarantors till the liquidation process is over, is unsustainable and not supported by any of the provisions of the IBC - Petition dismissed. - W.P.(MD).Nos.19871 to 19874 of 2018 and W.M.P.(MD).Nos.17659 to 17662 and 19050 to 19053 of 2018 - - - Dated:- 28-2-2019 - THE HONOURABLE MR.JUSTICE R.SUBBIAH AND THE HONOURABLE MR.JUSTICE B.PUGALENDHI For the Petitioner : Mr. B. Dhanaraj For the Respondent: Mr. M. Vallinayagam, Senior Counsel for Mr. V. Meenakshi Sundaram COMMON ORDER R.SUBBIAH, J All these Writ Petitions have been filed to call for the records of the respondent relating to impugned E-Auction Sale Notice, dated 29.08.2018 and quash the same. 2. Since the issue involved in all these Writ Petitions, is one and the same, they are disposed of by this common order. 3. The petitioners are the guarantors to the loan facility provided by the respondent-Bank to M/s.GB Engineering Enterprises Private Limited, Trichy. They are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2018 on condition to make pre-deposit of ₹ 3,50,000/- within four weeks before the DRAT, and if the Company fails to make the pre-deposit within the said period, it was also made clear that the appeal itself shall stand dismissed automatically without any reference to the Court and the I.A. filed before the DRAT was disposed of accordingly. 5. While so, the borrower-Company filed Company Petition under Section 10 of the Insolvency and Bankruptcy Code, 2016 (for short, 'the IBC') before the National Company Law Tribunal (for short, 'the NCLT'), Chennai, for initiation of Corporate Insolvency Resolution Process (CIRP) in C.P.No.64(IB)/CB/2018. Thereafter, Interim Resolution Professional was appointed by order dated 25.01.2018, who took custody and control of all assets/liabilities of the said Company, including the business records and other actions provided under Section 25 of the IBC. The Moratorium Period was declared as per Section 13 of the IBC. As per Section 14(1)(c) of the IBC, the secured creditor is prohibited from proceeding under the provisions of the SARFAESI Act to recover the amount against the Corporate Debtor, namely the borrower-Company. Aft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the liquidation estate and receive proceeds from the sale of assets from the liquidator or realise its security in the manner specified in that Section. In the contrary, the secured creditor can realise the security interest after informing the liquidator of such security interest and identify the asset, subject to such security interest to be realised. The liquidator shall verify such security interest and permit the secured creditor to realise only such security interest. 8. Learned counsel for the petitioners further submitted that Section 52(4) of the IBC provides for the secured creditor to opt to enforce and realise the secured assets in accordance with such law as applicable to the security interest being realised by the secured creditor and apply the proceeds to recover the debt due to it. The law applicable here is SARFAESI Act, 2002. In case the sale proceeds are not adequate to recover the debts, the unpaid debts of such secured creditor shall be paid by the liquidator as per Section 53(1)(e)(i) of the IBC. Further, Section 52(5) of the IBC provides for the secured creditor to approach the adjudicating authority, if the secured creditor faces resistance from the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court reported in AIR 1968 SC 1432 (Amrit Lal Goverdhan Lalan Vs. State Bank of Travencore), wherein, the Supreme Court relied on a judgment of the Court of Chancery in the case of Craythorne Vs. Swinburne ( (1807) 14 Yes. 160), wherein it was observed that the surety will be entitled to every remedy which the creditor has against the principal debtor to enforce every security and all means of payments to stand in the place of the creditor, not only through the medium of contract, but even by means of securities entered into without the knowledge of the surety having a right to have those securities transferred to him, though there was no stipulation for that and to avail himself of all those securities against the debtor. This right of a surety stands not upon the contract, but upon the principles of natural justice . 10. Learned counsel for the petitioners further submitted that the action of the Bank not to realise the primary security interest while it is sufficient, but relinquishing it and simultaneously coming against the properties of the guarantor, is against equity, justice and good conscience. By such conduct, a guarantor cannot step into the shoes of the sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operties of the borrower, which is in violation of Article 14 of the Constitution of India and also in gross violation of the provisions of the IBC. The secured creditor having relinquished the security, ought to have awaited the entire sale transaction by the liquidator and thereafter, in the event of shortfall, was entitled to approach the NCLT to seek recourse against the personal guarantors. In this regard, learned counsel for the petitioners invited the attention of this Court to Section 63 of the IBC, as per which, no Civil Court or authority shall have jurisdiction to entertain any suit or proceedings in respect of any matter on which NCLT or NCLAT has jurisdiction under the IBC. Likewise, as per Section 64(2) of the IBC, no injunction shall be granted by any Court, Tribunal or Authority in respect of any action taken or to be taken in pursuance of any power conferred on the NCLT or NCLAT under the IBC. 12. Therefore, learned counsel for the petitioners submitted that presently, the NCLT is seized of the Insolvency and Bankruptcy proceedings related with the corporate debtor and its persons connected thereto, which includes the petitioners' capacity as personal guaran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 14. With regard to the submission made by the learned counsel for the petitioners that since the proceedings under the IBC are pending against the borrower-Company, which is the corporate debtor, no proceedings can be initiated against the guarantors, and by virtue of Section 2(e) of the IBC, the provisions of the IBC will also apply to the guarantors of the corporate debtor, it is replied by the learned Senior Counsel appearing for the respondent-Bank that the liability of the guarantor and principal debtor is co-extensive and not in alternative, and therefore, it is not necessary for the secured creditor/Bank to proceed first against the borrower and then against the guarantor. In support of this submission, learned Senior Counsel appearing for the respondent-Bank relied on the decisions of the Honourable Supreme Court reported in AIR 1992 SC 1740 (State Bank of India Vs. Indexport Registered and others) , AIR 1969 SC 297 (Bank of Bihar Ltd. Vs. Dr.Damodar Prasad and another) and 2009 (7) MLJ 129 (SC) = 2009 (9) SCC 478 (Industrial Investment Bank of India Ltd. Vs. Biswanath Jhunjhunwala). 15. That apart, learned Senior Counsel appearing for the respondent-Bank brought to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned Senior Counsel appearing for the respondent-Bank prayed for dismissal of the Writ Petitions. 17. By way of reply, learned counsel for the petitioners submitted that Section 14 of the IBC deals with the moratorium period and the amended provisions of Section 14(3)(b) of the IBC could be applied only during the moratorium period and not after ordering liquidation. The intent of the Legislature to impose moratorium during the Corporate Insolvency Resolution Process (CIRP) is to facilitate the reorganisation and rehabilitation of the corporate debtor by way of submission of the Resolution Plan by a prospective resolution applicant as per Section 30 of the IBC. Further, during the period of CIRP, if the secured creditor recovers its dues from the personal guarantor, the personal guarantor will step into the shoes of the creditor by way of operation of law. It is incumbent to point out that the said Resolution Plan submitted during the period of CIRP, shall be binding on the guarantors of the corporate debtor, as per Section 31(1) of the IBC. Further, Regulation 38(1A) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of Corporate Insolvency Resolution Process (CIRP). The NCLT, by order dated 25.01.2018, initiated the CIRP and subsequently, after the period of moratorium of 180 days, ordered liquidation on 06.08.2018. Pursuant to the order of liquidation, one Ms.C.S.Satyadevi Alamuri had been appointed as Liquidator, with a direction that the Company Liquidator shall exercise her powers and duties enumerated under Sections 35 to 50 and 52 to 54 of the IBC read with Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016. 21. The secured creditor relinquished the properties of the borrower- Company in favour of the Liquidator for the purpose of realisation in terms of Section 52(1)(a) of the IBC. As per Section 2 of the IBC, the provisions of the IBC are applicable to companies, partnership, proprietorship and also personal guarantors to corporate debtors. It means that those categories of persons are entitled to invoke the provisions of the IBC. It is the submission of the learned counsel for the petitioners that since Section 2(e) of the IBC says that the provisions of the IBC shall apply to the personal guarantors to corporate debtors, when the liquidation of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot at all lost or parted with any security. In this regard, learned Senior Counsel appearing for the respondent-Bank invited the attention of this Court to Section 128 of the Indian Contract Act and submitted that the liability of the guarantor and the principal debtor is co-extensive and not in alternative. It is not safe to proceed against the borrower first and then against the guarantor. In this context, learned Senior Counsel appearing for the respondent-Bank relied on a decision of the Supreme Court reported in AIR 1969 SC 297 (The Bank of Bihar Ltd. Vs. Dr.Damodar Prasad and another). In this decision, the Supreme Court referred to a judgment of the Bombay High Court in the case of Lachhman Joharimal Vs. Bapu Khandu, ( (1869) 6 Bom HCR 241), wherein the Division Bench of the Bombay High Court observed as follows: The Court is of opinion that a creditor is not bound to exhaust his remedy against the principal debtor before suing the surety and that when a decree is obtained against a surety, it may be enforced in the same manner as a decree for any other debt. The Supreme Court, in the above decision, while referring the above said judgment of the Bombay High Court, o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tribunal, arbitration panel or other authority; (b) transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein; (c) any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002); (d) the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor. (2) The supply of essential goods or services to the corporate debtor as may be specified shall not be terminated or suspended or interrupted during moratorium period. (3) The provisions of sub-section (1) shall not apply to-- (a) such transaction as may be notified by the Central Government in consultation with any financial regulator; (b) a surety in a contract of guarantee to a corporate debtor. (4) The order of moratorium shall have effect from the date of such order till the completion of the corporate insolvency resolution process: PROVIDED that where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provides for the repeal of said enactments, has not been notified till date, and further, that the provisions relating to insolvency resolution and bankruptcy for individuals and partnerships as contained in Part III of the Code are yet to be notified. Hence, it was advised that stakeholders who intend to pursue their insolvency cases may approach the appropriate authority/court under the existing enactments, instead of approaching the Debt Recovery Tribunals. 20. It is for this reason that sub-section (2) of Section 60 speaks of an application relating to the bankruptcy of a personal guarantor of a corporate debtor and states that any such bankruptcy proceedings shall be filed only before the National Company Law Tribunal. The argument of the learned counsel on behalf of the Respondents that bankruptcy would include SARFAESI proceedings must be turned down as bankruptcy has reference only to the two Insolvency Acts referred to above. Thus, SARFAESI proceedings against the guarantor can continue under the SARFAESI Act. Similarly, subsection (3) speaks of a bankruptcy proceeding of a personal guarantor of the corporate debtor pending in any Court or Tribunal, which shal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owned by the corporate debtor, without the surety's consent, would relieve the guarantor from payment. Section 31(1), in fact, makes it clear that the guarantor cannot escape payment as the Resolution Plan, which has been approved, may well include provisions as to payments to be made by such guarantor. This is perhaps the reason that Annexure VI(e) to Form 6 contained in the Rules and Regulation 36(2) referred to above, require information as to personal guarantees that have been given in relation to the debts of the corporate debtor. Far from supporting the stand of the Respondents, it is clear that in point of fact, Section 31 is one more factor in favour of a personal guarantor having to pay for debts due without any moratorium applying to save him. 23. 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. First and foremost, this is a separate moratorium, applicable separately in the case of personal guarantors against whom insolvency resolut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment in the concurrent sphere, before it is brought into force. Parliament can repeal, amend, or vary such State law no sooner it is assented to by the President and that it need not wait till such assented-to State law is brought into force. This view finds support in the judgment of this Court in Tulloch [AIR 1964 SC 1284 : (1964) 4 SCR 461] . 80. Lastly, the definitions of the expressions laws in force in Article 13(3)(b) and Article 372(3) Explanation I and existing law in Article 366(10) show that the laws in force include laws passed or made by a legislature before the commencement of the Constitution and not repealed, notwithstanding that any such law may not be in operation at all. Thus, the definition of the expression laws in force in Article 13(3)(b) and Article 372(3) Explanation I and the definition of the expression existing law in Article 366(10) demolish the argument of the State of Kerala that a law has not been made for the purposes of Article 254, unless it is enforced. The expression existing law finds place in Article 254. In Edward Mills Co. Ltd. Vs. State of Ajmer [AIR 1955 SC 25], this Court has held that there is no difference between an exist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore, there is no law prohibiting the secured creditor to take legal action to recover the amount from the guarantors, without taking action on the borrower. Hence, there is no impediment in the action taken by the secured creditor under the SARFAESI Act as against the personal properties of the guarantors, since the liability of the guarantor is co-extensive. It cannot be said that the principles laid down in the above judgment of the Supreme Court will be applicable only during the moratorium period and not after the order of liquidation. Therefore, we are of the opinion that the respondent-Bank is entitled to initiate the proceedings under the SARFAESI Act as against the personal properties of the guarantors, even when the borrower-Company is under the order of liquidation. In fact, as stated above, the secured creditor has surrendered only the properties of the borrower-Company alone, which is clear from the following extract of the relevant portion of the impugned E-auction sale notice, dated dated 29.08.2018: SALE OF IMMOVABLE ASSETS CHARGED TO THE BANK UNDER THE SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS AND ENFORCEMENT OF SECURITY INTEREST ACT, 2002. The A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it is clear that in the above extracted Notification of E-auction sale notice itself, it is stated that the charged properties in the name of the borrower do not form part of the auction sale. Further, we reiterate that when the personal properties of the guarantors stand outside the scope of liquidation, as stated earlier, there is no impediment to proceed against the personal properties of the guarantor. 29. The liability of a guarantor arises as soon as the principal debtor defaults in paying back the loan. It is to be noted that a contract of guarantee focusses upon the breaking of a promise, whereas the IBC focusses upon the existence of a default. Contrary to the proceedings under the IBC which can only be conducted in NCLT, a breach of guarantee contract can be brought into DRT, that too when 'public money' is involved. The rights available to a creditor to proceed against the personal guarantor of a corporate debtor are many-fold, i.e. he can either go to DRT solely for the purpose of debt recovery, or he can file insolvency proceedings against the personal debtor. Therefore, we find no error in proceeding against the personal properties of the petitioners/guar ..... X X X X Extracts X X X X X X X X Extracts X X X X
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