Can Personal Property of Guarantor be transferred during CIRP?
Keywords:- Property, Guarantor, Principal Debtor, Insolvency, CIRP, Resolution
Author: Vrinda Agrawal
Introduction to Insolvency and Bankruptcy Code
In India, the procedure of Insolvency and Bankruptcy has been governed by the Insolvency and Bankruptcy Code since 2016. It is a landmark development in the area of law. Where a unified law for Insolvency and Bankruptcy was introduced to resolve the problems of Insolvency. This Code brought all the insolvency laws under one umbrella. So that it can overcome all the troubles and shortcomings regarding Insolvency and Bankruptcy in the country.
The main purpose of the code is to maximize the value of assets of the insolvent corporate people. To assure entrepreneurship, obtain credit as well as balance the interest of all the stakeholders. To balance the interests of stakeholders, there must be a fair and justifiable obligation on the part of both the stakeholders and the entity. Code provides provisions for resolution and reorganization of individuals, corporate persons and partnership firms on time.
Today the authority of Bankruptcy and Insolvency has shifted from the debtors to the creditors. Where a third person is appointed as Interim Resolution Professional by the National Company Law Tribunal (NCLT). To resolve the Insolvency of the corporate debtor.
The code strikes a balance between resolution and liquidation. Where it prefers to provide resolution so that creditors at least get an equal value as in the case of liquidation.
Proceedings against Personal Guarantors
On 15th November 2019 Ministry of Corporate Affairs issued a notification. Rendering insolvency and bankruptcy proceedings against the personal guarantors to be governed by the Code. The notification was like a delight to the creditors. As the notification laid greater accountability of the personal guarantors, maximizing the value of the creditors. This helped the creditors to recover their debt from both the personal guarantor as well as the corporate debtor.
In this article, let’s firstly discuss the ‘Contract of Guarantee’ which was introduced under Section 126 of the Indian Contract Act, 1872.
Contract of Guarantee
A guarantee is an obligation on a surety to perform its promise or discharge his liability to honour the promise of the principal debtor in case of default of any future debt given by the creditor. A Contract of Guarantee is a Tripartite Contact that involves three parties i.e. surety, principal debtor and creditor. The basic ideology behind the concept of a guarantee is to ensure payment of the debt; if the first party is not able to pay. As soon as the principal debtor makes a default. The liability of the guarantor arises, making them liable to the creditors.
Section 128 of the Indian Contract Act, creates a coextensive liability between the surety and the debtor. So if a proceeding is initiated against the principal debtor guarantors conduct will be governed by it. Since there is coextensive liability between the guarantor and the principal debtor, it would empower the creditor to initiate the proceedings against the principal debtor as well as the guarantor.
The court in Shriya v. State Bank of India reaffirmed the right of the creditor to proceed against the guarantor of the corporate debtor.
Corporate Insolvency Resolution Process
Secondly, one must know what CIRP is, so CIRP is the Corporate Insolvency Resolution Process which is a recovery mechanism for creditors of corporate debtors to resolve corporate insolvency in accordance with the provisions of the code. A CIRP can be initiated by a financial creditor by applying to NCLT.
According to Section 14 of IBC whenever a CIRP is initiated against a corporate debtor, the company has to go through a moratorium period of 180 days where “any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property” is prohibited. So whenever a guarantor pays the corporate debt, he himself would acquire a right against the principal debtor.
Interim Resolution Professional
When CIRP is initiated, an Interim Resolution Professional is required to collect all the information relating to assets, financial position and operations of the corporate debtor [Section 18(1)]. The IRP makes a list of assets and liabilities of the corporate debtor. Regulation 36 of the CIRP Regulations provides details of the Information Memorandum which is issued by Resolution Professional. The Information Memorandum included details of assets and liabilities of corporate debtors and also gives details of guarantees which have been given for the debts of corporate debtors. Thus giving details of guarantees taken by third parties, although this reference does not make the property of the guarantor a property of the corporate debtor.
Judicial Rulings
In the case of Nitin Chandrakant Naik v. Sanidhya Industries LLP [2021 SCC OnLine NCLAT 302], the tribunal observed that Section 31 of the Act favours the fact that a personal guarantor is required to pay for debts that are due without any moratorium applying to save them. It does not absolve the personal guarantor from any kind of liability. A resolution plan once approved by the Committee of Creditors becomes binding on the corporate debtor as well as the guarantor.
The Resolution Plan of the Corporate Debtor does not itself provide provision to consume the property of the Personal Guarantor without any kind of recourse to actual proceedings. Also, the guarantor can not escape any provisions, once the Resolution Plan has been approved which may include the provision of payment to be made by the guarantor. Since there is prohibition of taking recourse to the guarantor and realizing the debt, implicitly indicates that proceedings against the guarantor under IBC are restricted in nature, hence against the legislation of Contract. Also if personal guarantors assets are disposed of, the same would be against the objective of IBC, 2016. Therefore, finality of insolvency proceedings would not discharge guarantors liability under the contract of guarantee.
If in the matter of State Bank of India v. V. Ramakrishnan, the moratorium under section 14 of IBC during CIRP does not apply to personal guarantors of the corporate debtor. The personal properties of the Corporate Debtor can not be realised by way of sale, transfer, etc. In the resolution plan of the corporate debtor there may be provision relating to the right of financial creditor to proceed against personal guarantor. But enforcement of such kind of rights can only be according to the provisions of law.
Conclusion
The jurisdiction over proceedings against Personal Guarantors lies with both:-
National Company Law Tribunal and Debt Recovery Tribunal but this depends on the facts and circumstances of the matter.
In cases where proceedings against a corporate debtor are either pending or are filled during pendency of proceedings against a personal guarantor, the forum having jurisdiction shall be NCLT. Whereas the forum having jurisdiction in other cases of individuals and firms including personal guarantor shall be DRT. DRT focuses on the recovery of debts while NCLT does not focus on recovery of debts. Recovery of Debt is a by-product of the insolvency process.
The National Company Law Appellate Tribunal held that the personal property of the guarantor cannot be transferred during the CIRP of Corporate Debtor. Even if the properties were mortgaged with the financial creditors.
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