2020 (11) TMI 54 - HC - Insolvency and Bankruptcy

Whether a bank/financial institution can institute or continue with proceedings against a guarantor under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, when proceedings under the Insolvency and Bankruptcy Code 2016 have been initiated against the principal borrower and the same are pending adjudication? HELD THAT - Since the liability of a guarantor is co-extensive with that of the principal debtor and not in the alternative, it cannot be said that proceedings in the NCLT against the principal debtor can be a bar to institution or continuation of proceedings against the guarantor under the SARFAESI Act. The question as to whether the respondent/Bank can proceed against a guarantor even after initiation of proceedings under the IB Code also stands settled. Neither Section 14 nor Section 31 of the IB Code place any fetters on Banks/Financial Institutions from initiation and continuation of the proceedings against the guarantor for recovering their dues. That being the position, the plea taken by the counsel for the petitioner that all proceedings against the petitioner, who is only a guarantor, ought to be stayed under the SARFESI Act during the continuation of the Insolvency Resolution process qua the Principal Borrower, is rejected as meritless. Petition dismissed.

Issues Involved:
1. Whether a bank/financial institution can institute or continue proceedings against a guarantor under the SARFAESI Act when proceedings under the Insolvency and Bankruptcy Code (IB Code) have been initiated against the principal borrower and are pending adjudication.

Issue-wise Detailed Analysis:

1. Institution or Continuation of Proceedings Against Guarantor under SARFAESI Act During Insolvency Proceedings Against Principal Borrower:

The core issue in this writ petition is whether a bank can proceed against a guarantor under the SARFAESI Act while insolvency proceedings are ongoing against the principal borrower under the IB Code. The petitioner, who is the guarantor and wife of the promoter of the principal borrower, contended that such simultaneous proceedings are not permissible.

The petitioner argued that once insolvency proceedings are initiated against the principal borrower, a moratorium under Section 14 of the IB Code prohibits the continuation of any proceedings against the corporate debtor. The petitioner further submitted that under Section 31 of the IB Code, the approval of a resolution plan binds the guarantor, and thus, the guarantor's liabilities should be considered discharged if the resolution plan is accepted.

The respondent bank countered that the liability of a guarantor is co-extensive with that of the principal debtor, as per Section 128 of the Contract Act. The bank cited the Supreme Court judgment in *State Bank of India v. V. Ramakrishan and Another*, which clarified that Sections 14 and 31 of the IB Code do not bar the initiation and continuation of SARFAESI proceedings against the guarantor.

2. Legal Provisions and Judicial Precedents:

The court examined Sections 14 and 31 of the IB Code and Section 128 of the Contract Act. Section 14 of the IB Code imposes a moratorium on proceedings against the corporate debtor but does not mention personal guarantors. Section 31 states that a resolution plan, once approved, is binding on the corporate debtor and guarantors, ensuring that the guarantor cannot escape liability due to changes in the debt structure.

The court referenced the Supreme Court's interpretation in *State Bank of India v. V. Ramakrishan and Another*, which explicitly stated that the moratorium under Section 14 does not apply to personal guarantors and that Section 31 ensures the guarantor's liability remains intact despite the resolution plan.

3. Co-extensive Liability of Guarantor:

The court reiterated the principle that the liability of a guarantor is co-extensive with that of the principal debtor, as established in *Industrial Investment Bank of India Limited v. Biswanath Jhunjhunwala* and other precedents. This means that the creditor is not required to exhaust remedies against the principal debtor before proceeding against the guarantor.

Conclusion:

The court concluded that the initiation and continuation of proceedings against the guarantor under the SARFAESI Act are not barred by the ongoing insolvency proceedings against the principal borrower under the IB Code. The liability of the guarantor remains co-extensive with that of the principal debtor, and the bank is entitled to proceed against the guarantor. Consequently, the writ petition was dismissed along with the pending application.

← Previous Next →