Tag: CIRP

Can Personal Property of Guarantor be transferred during CIRP?

March 30, 2022
/ Leave a Comment on Can Personal Property of Guarantor be transferred during CIRP?

6 min
2 years
1,185 word

Tagged CIRP, Guarantor, Insolvency, Keywords:- Property, Principal Debtor

Can Personal Property of Guarantor be transferred during CIRP?

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.

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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Article

December 12, 2020
/ Leave a Comment on Position of Guarantors under the IBC

4 min
3 years
772 words

Tagged CIRP, IBC, IBC 2016

Position of Guarantors under the IBC

AUTHOR : ISHIKA CHATTOPADHYAY In the judgment of Dr. Vishnu Kumar Agarwal v. M/s Piramal Enterprises Limited [Company Appeal (AT) (Insolvency) No. 346 and 347 of 2018, NCLAT (order dated January 8, 2019)], the NCLAT had […]

AUTHOR : ISHIKA CHATTOPADHYAY

In the judgment of Dr. Vishnu Kumar Agarwal v. M/s Piramal Enterprises Limited [Company Appeal (AT) (Insolvency) No. 346 and 347 of 2018, NCLAT (order dated January 8, 2019)], the NCLAT had to decide on two contentious issues, viz. whether two separate Corporate Insolvency Resolution Processes (CIRP) initiated against two corporate guarantors will be maintainable in case the claim or default is same; and whether a CIRP can be initiated against a corporate guarantor in case the principal debtor is not a corporate person. The NCLAT held that in case of the same set of claims or default, a financial creditor cannot initiate a CIRP against one corporate debtor, which may either be the principal borrower or the corporate guarantor, if an application for initiating CIRP has already been admitted against another corporate debtor. The dilemma with the abovementioned Piramal judgment is that it takes a route contrary to settled position of law regarding the treatment of guarantors under insolvency proceedings.

Position of guarantors under Indian Contract Act, 1872

Under Section 128 of the Indian Contract Act, 1872 it is provided that in a contract of guarantee, the surety has a liability that is “co-extensive” with the liability of the principal debtor, which essentially means that a creditor can initiate simultaneous proceedings against the principal debtor and the surety, in recovery of his dues, and it is not mandatory that the creditor has to exhaust his remedy against the principal debtor before initiating proceedings against the surety.

Position of guarantors under the Insolvency and Bankruptcy Code, 2016

Section 14 of the IBC provides for the imposition of a moratorium which prohibits institution or continuation of any suit or proceeding against the corporate debtor as well as any action to recover or enforce any security interest created by the corporate debtor on its property. There has been confusion with respect to applicability of moratorium under Section 14 of the Code since its very inception, and several cases have ensued before the NCLTs as well as NCLAT. The Insolvency Law Committee was constituted by the Ministry of Corporate Affairs to find solutions to this confusion. The Committee suggested that all assets of the guarantors to the corporate debtor should be kept outside the ambit of moratorium imposed under the IBC. Accordingly, the Insolvency and Bankruptcy Code (Second Amendment Act), 2018 came into being, whereby clause (b) was inserted to sub-section (3) of Section 14 of the Code, which provided that the moratorium will not be applicable to the guarantor of a corporate debtor. There are therefore no provisions in the Code which restricts a creditor to institute a CIRP against the principal debtor and the guarantor at the same time.

It must be mentioned in this context that the very purpose of the enactment of the IBC was to induce availability of more credit in the market by facilitating the recovery of dues by creditors. The Amendment Act of 2018 goes in the same direction as it upholds the basic principles of a contract of guarantee even during a period of moratorium.

Dilemma regarding the Piramal Judgment

The very nature of a contract of guarantee is to secure the lender by enabling him to proceed against both the principal debtor and the surety, without a requirement to exhaust the remedy against one of them before he can proceed against the other. The Piramal judgment goes against this very principle by saying that a financial creditor cannot initiate a CIRP against one corporate debtor when an application for initiating CIRP has already been admitted against another corporate debtor. It may be argued here that IBC being a special law, its effects will override those of the Contract Act, but the IBC itself does not have any bar on the institution of a second CIRP as ruled in the judgment. In fact, the IBC, under Section 14 excludes the assets of the surety in a contract of guarantee from the moratorium, thus enabling the institution of CIRPs against it. Also, under Sections 60(2) and (3) of the IBC, it has been provided that the same bench of the NCLT will be dealing with insolvency proceedings against a principal debtor and its corporate guarantor, thus once again implying that simultaneous proceedings may be instituted against them.

This judgment basically gives an escape route to a guarantor, thereby negating the very purpose of the enactment of the IBC as well as that of the Amendment Act of 2018. An appeal has been filed against the judgment in the Supreme Court and it will be interesting to see how the Apex Court interprets the position of guarantors and whether any subsequent amendments are brought about in the Code.

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