2019 (2) TMI 2000 - HC - Indian Laws

Interpretation of statute - overriding effect of IBC over SARFAESI Act - When Section 2(e) of the IBC says that the provisions of the IBC are applicable to the personal guarantors to corporate debtor, whether the secured creditor (respondent-Bank) can proceed with the properties of the guarantors (petitioners) under the SARFAESI Act, when the order of liquidation is passed against the borrower-Company by the NCLT as per the provisions of the IBC? - HELD THAT - In the instant case, the borrower-Company filed a company petition under Section 10 of the IBC before the NCLT, Chennai, vide C.P.No. 64(IB)/CB/2018 for initiation 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. 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 respect of individual debts by persons who have unlimited liability to pay them. And such guarantors may be complete strangers to the debtor--often it could be a personal friend. It is for this reason that the moratorium mentioned in Section 101 would cover such persons, as such moratorium is in relation to the debt and not the debtor. In the instant case, the secured creditor had surrendered only the properties of the corporate debtor and not the personal properties of the guarantors and hence, the properties of the guarantors stand outside the scope of liquidation. Therefore, 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. When the properties of the borrower alone are surrendered to liquidation, there cannot be SARFAESI proceedings against the properties of the guarantors, cannot be countenanced. Thus, at the risk of repetition, we state that the respondent-Bank is entitled to proceed under the SARFAESI Act as against the guarantors' properties, even when the borrower- Company is in liquidation process under the IBC - 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. 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.

Summary

Issues Involved:
1. Validity of the E-Auction Sale Notice dated 29.08.2018.
2. Applicability of the Insolvency and Bankruptcy Code (IBC) to personal guarantors.
3. Rights of the secured creditor under the SARFAESI Act versus the IBC.
4. Co-extensive liability of guarantors and principal debtors.
5. Jurisdiction of courts and tribunals in matters involving the IBC and SARFAESI Act.

Detailed Analysis:

1. Validity of the E-Auction Sale Notice dated 29.08.2018:
The petitioners challenged the E-Auction Sale Notice issued by the respondent-Bank under the SARFAESI Act. The notice was issued to auction the properties of the guarantors to recover dues from M/s. GB Engineering Enterprises Private Limited, which was under liquidation. The petitioners argued that the Bank should have realized the primary security interest before proceeding against the guarantors' properties.

2. Applicability of the Insolvency and Bankruptcy Code (IBC) to personal guarantors:
The petitioners contended that Section 2(e) of the IBC applies to personal guarantors of corporate debtors, and therefore, the Bank should seek remedies against the guarantors through the IBC. They argued that since the corporate debtor was under liquidation, the Bank could not proceed against the guarantors' properties under the SARFAESI Act.

3. Rights of the secured creditor under the SARFAESI Act versus the IBC:
The petitioners argued that the secured creditor had two options under the IBC: relinquish its security interest to the liquidation estate and receive proceeds from the sale of assets by the liquidator, or realize the security interest in the manner specified under Section 52 of the IBC. They contended that the Bank, having chosen to relinquish its security interest, should await the sale proceeds from the liquidator before proceeding against the guarantors.

4. Co-extensive liability of guarantors and principal debtors:
The respondent-Bank argued that the liability of the guarantor and principal debtor is co-extensive and not in the alternative. The Bank cited various Supreme Court decisions to support this argument, stating that it is not necessary for the Bank to exhaust its remedies against the principal debtor before proceeding against the guarantor.

5. Jurisdiction of courts and tribunals in matters involving the IBC and SARFAESI Act:
The petitioners argued that the NCLT, being the adjudicating authority under the IBC, has jurisdiction over matters involving the corporate debtor and its guarantors. They contended that the Bank should approach the NCLT for remedies against the guarantors. The respondent-Bank countered that there is no prohibition under the IBC preventing the Bank from proceeding against the guarantors under the SARFAESI Act.

Judgment:

Validity of the E-Auction Sale Notice:
The court dismissed the writ petitions challenging the E-Auction Sale Notice. The court held that the Bank is entitled to proceed against the guarantors' properties under the SARFAESI Act, even when the corporate debtor is under liquidation.

Applicability of the IBC to personal guarantors:
The court held that the provisions of the IBC apply to personal guarantors of corporate debtors. However, this does not prevent the Bank from proceeding against the guarantors' properties under the SARFAESI Act.

Rights of the secured creditor under the SARFAESI Act versus the IBC:
The court held that the secured creditor has the right to choose between relinquishing its security interest to the liquidation estate and realizing the security interest under the SARFAESI Act. The Bank's decision to proceed against the guarantors' properties under the SARFAESI Act was upheld.

Co-extensive liability of guarantors and principal debtors:
The court agreed with the respondent-Bank's argument that the liability of the guarantor and principal debtor is co-extensive. The Bank is not required to exhaust its remedies against the principal debtor before proceeding against the guarantor.

Jurisdiction of courts and tribunals:
The court held that the NCLT's jurisdiction under the IBC does not preclude the Bank from proceeding against the guarantors' properties under the SARFAESI Act. The court cited the Supreme Court's decision in State Bank of India Vs. V. Ramakrishnan, which clarified that the moratorium under Section 14 of the IBC does not apply to personal guarantors.

Conclusion:
The writ petitions were dismissed, and the court upheld the Bank's right to proceed against the guarantors' properties under the SARFAESI Act. The court emphasized the co-extensive liability of guarantors and principal debtors and clarified that the IBC does not bar proceedings under the SARFAESI Act against guarantors.