2018 (8) TMI 837 - SC - Insolvency and Bankruptcy

Whether Section 14 of the Insolvency and Bankruptcy Code, 2016, which provides for a moratorium for the limited period mentioned in the Code, on admission of an insolvency petition, would apply to a personal guarantor of a corporate debtor - NCLT observed that, the moratorium imposed under Section 14 should apply to the personal guarantor as well - Held that - The object of the Code is not to allow such guarantors to escape from an independent and coextensive 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. Judgement of the tribunal set aside - Decided in favor of petitioner.

Issues Involved:
1. Applicability of Section 14 of the Insolvency and Bankruptcy Code, 2016 to personal guarantors of a corporate debtor.
2. The interpretation of various sections of the Insolvency and Bankruptcy Code, 2016, including Sections 14, 31, 60, 96, and 101.
3. The impact of the Insolvency and Bankruptcy Code (Amendment) Act, 2018 on the applicability of the moratorium to personal guarantors.
4. Historical context and legislative intent behind the Insolvency and Bankruptcy Code, 2016.

Issue-wise Detailed Analysis:

1. Applicability of Section 14 of the Insolvency and Bankruptcy Code, 2016 to Personal Guarantors:
The core issue in the appeals was whether the moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (the Code), which is imposed upon the admission of an insolvency petition, extends to personal guarantors of a corporate debtor. The Tribunal and the Appellate Tribunal had previously held that Section 14 applies to personal guarantors, thereby staying proceedings against them. However, the Supreme Court found that Section 14, when read plainly, refers exclusively to the corporate debtor and does not mention personal guarantors. Consequently, the moratorium under Section 14 does not apply to personal guarantors.

2. Interpretation of Various Sections of the Code:
The Supreme Court examined several sections of the Code to determine the legislative intent and the scope of the moratorium:
- Section 2(e) was amended to include personal guarantors to corporate debtors. However, this section's application is limited to the context provided in Section 60(2) and (3).
- Section 60(2) and (3): These sections indicate that insolvency proceedings against personal guarantors should be handled by the National Company Law Tribunal (NCLT) if there are pending proceedings against the corporate debtor. However, the Supreme Court clarified that these provisions do not imply that the moratorium under Section 14 extends to personal guarantors.
- Section 31: This section binds the guarantor to a resolution plan approved by the Committee of Creditors, ensuring that the guarantor cannot escape liability. The Court noted that this section supports the view that personal guarantors are independently liable without the protection of the moratorium.
- Sections 96 and 101: These sections, which have not yet been brought into force, provide for a separate moratorium applicable to personal guarantors. The Supreme Court contrasted these sections with Section 14 to highlight that the latter is not intended to cover personal guarantors.

3. Impact of the Insolvency and Bankruptcy Code (Amendment) Act, 2018:
The Amendment Act of 2018 clarified that the moratorium under Section 14 does not apply to a surety in a contract of guarantee to a corporate debtor. The Supreme Court held that this amendment is clarificatory and thus retrospective in nature. The amendment aimed to address conflicting judicial interpretations and ensure that creditors' rights against guarantors are preserved during the corporate insolvency resolution process.

4. Historical Context and Legislative Intent:
The Supreme Court considered the historical background of debt recovery laws, including the Sick Industrial Companies (Special Provisions) Act, 1985, which provided a moratorium for guarantors. The Court noted that the omission of a similar provision in the Code was deliberate, reflecting a shift in legislative intent to prioritize creditors' rights and facilitate debt recovery. The Court emphasized that the Code aims to prevent guarantors from evading their independent liability to pay off debts, which is consistent with the broader objectives of the insolvency framework.

Conclusion:
The Supreme Court concluded that the moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016, does not apply to personal guarantors of a corporate debtor. The appeals were allowed, and the impugned judgment of the Tribunal was set aside. The Court's interpretation aligns with the legislative intent to ensure that personal guarantors remain liable for their obligations, thereby strengthening the corporate insolvency resolution process.

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