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TMI Blog2018 (8) TMI 837X X X X Extracts X X X X X X X X Extracts X X X X ..... unal set aside - Decided in favor of petitioner. - Civil Appeal No. 3595 of 2018, Civil Appeal No. 4553 of 2018 - - - Dated:- 14-8-2018 - Mr. R.F. Nariman And Ms. Indu Malhotra JJ. For the Appellant(s) : Mr. Sanjay Kapur, AOR, Ms. Megha Karnwal, Adv., Ms. Sheena Taqui, Adv., Ms. Mansi Kapur, Adv., Ms. Shubhra Kapur, Adv. And Mr. P. S. Sudheer, AOR For the Respondent(s) : Mr. K.V. Viswanathan, Sr. Adv. (A.C.), Mr. Abhishek Kaushik, Adv., Mr. Dhananjay Bhaskar Ray, Adv., Mr. Ravi Raghunath, Adv., Ms. Vrinda Bhandari, Adv., Mr. G. Balaji, AOR, Mr. Dilpreet Singh, AOR And Mr. Rajesh Bohra, Adv. JUDGMENT R.F. NARIMAN, J. 1. The present appeals revolve around 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. 2. The factual backdrop of the present appeals is that the Respondent No.1 is the Managing Director of the corporate debtor, namely, the Respondent No.2 Company, and also the personal guarantor in respect of credit facilities that had been availed from the Appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e debtor, and that, therefore, the moratorium imposed under Section 14 should apply to the personal guarantor as well. 6. Shri Sanjay Kapur, learned counsel appearing on behalf of the Appellant in C.A. No. 3595 of 2018, and Shri C.U. Singh, learned Senior Advocate appearing on behalf of Appellant in C.A. No. 4553 of 2018, both argued that the corporate debtor and personal guarantor are separate entities and that a corporate debtor undergoing insolvency proceedings under the Code would not mean that a personal guarantor is also undergoing the same process. As the guarantor s liability is distinct and separate from that of the corporate debtor, a suit can be maintained against the surety, though the principal debtor has not been sued. For this purpose, they relied upon Section 128 of the Indian Contract Act, 1872. They also relied heavily upon the reasoning contained in a judgment by a Single Judge of the Bombay High Court in M/s. Sicom Investments and Finance Ltd. v. Rajesh Kumar Drolia and Anr. (2017) SCC Online Bom 9725 (decided on 28.11.2017). They then referred to Part III of the Code, and in particular, to Sections 96 and 101. Although Part III of the Code has not been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that as a proceeding relatable to the corporate debtor is pending adjudication in two forums, it is not permissible to proceed against the personal guarantor. A financial creditor cannot operate in a manner that imperils the value of the property of the personal debtor. He also relied strongly upon the Insolvency and Bankruptcy Code (Amendment) Act, 2018 which came into effect on 23.11.2017, by which, clause (e) of Section 2 was substituted so as to include within the sweep of the Code, personal guarantors to corporate debtors. He then relied upon the Statement of Objects of the Amendment Act, 2018, which was, inter alia , to extend the provisions of the Code to personal guarantors of corporate debtors, to further strengthen the corporate insolvency resolution process. He then relied upon certain statutory forms which are contained in the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 and in particular, to Annexure VI(e) to Form 6. Regulation 36(2) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 also provides, as did Annexure VI(e), that information as to personal guarantee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. Application .- The provisions of this Code shall apply to- xxx xxx xxx (e) partnership firms and individuals; xxx xxx xxx By the Amendment Act, 2018, this Section was substituted as follows: 2. Application .- The provisions of this Code shall apply to- xxx xxx xxx (e) personal guarantors to corporate debtors; xxx xxx xxx Though the original Section 2(e) did not come into force at all, the substituted Section 2(e) has come into force w.e.f. 23.11.2017. 11. Section 3(7), (8) and (11) of the Code read as under: 3. Definitions .- In this Code, unless the context otherwise requires,- (7) corporate person means a company as defined in clause (20) of Section 2 of the Companies Act, 2013 (18 of 2013), a limited liability partnership, as defined in clause ( n ) of sub-section (1) of Section 2 of the Limited Liability Partnership Act, 2008 (6 of 2009), or any other person incorporated with limited liability under any law for the time being in force but shall not include any financial service provider; (8) corporate debtor means a corporate person who owes a debt to any person; xxx xxx xxx (11) debt means a liability or obliga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpletion of the corporate insolvency resolution process: Provided that where at any time during the corporate insolvency resolution process period, if the Adjudicating Authority approves the resolution plan under sub-section (1) of Section 31 or passes an order for liquidation of corporate debtor under Section 33, the moratorium shall cease to have effect from the date of such approval or liquidation order, as the case may be. xxx xxx xxx 31. Approval of resolution plan .- (1) If the Adjudicating Authority is satisfied that the resolution plan as approved by the committee of creditors under sub-section (4) of section 30 meets the requirements as referred to in sub-section (2) of Section 30, it shall by order approve the resolution plan which shall be binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan. (2) Where the Adjudicating Authority is satisfied that the resolution plan does not confirm to the requirements referred to in sub-section (1), it may, by an order, reject the resolution plan. (3) After the order of approval under sub-section (1), - (a) the moratorium order passe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of limitation specified for any suit or application by or against a corporate debtor for which an order of moratorium has been made under this Part, the period during which such moratorium is in place shall be excluded. xxx xxx xxx 96. Interim-moratorium.- (1) When an application is filed under Section 94 or Section 95- (a) an interim-moratorium shall commence on the date of the application in relation to all the debts and shall cease to have effect on the date of admission of such application; and (b) during the interim-moratorium period- (i) any legal action or proceeding pending in respect of any debt shall be deemed to have been stayed; and (ii) the creditors of the debtor shall not initiate any legal action or proceedings in respect of any debt. (2) Where the application has been made in relation to a firm, the interim-moratorium under sub-section (1) shall operate against all the partners of the firm as on the date of the application. (3) The provisions of sub-section (1) shall not apply to such transactions as may be notified by the Central Government in consultation with any financial sector regulator. xxx xxx xxx 101. Moratorium .- (1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and shall have effect as if the aforementioned Acts have not been repealed; (iii) anything done or any action taken or purported to have been done or taken, including any rule, notification, inspection, order or notice made or issued or any appointment or declaration made or any operation undertaken or any direction given or any proceeding taken or any penalty, punishment, forfeiture or fine imposed under the repealed enactments shall be deemed valid; (iv) any principle or rule of law, or established jurisdiction, form or course of pleading, practice or procedure or existing usage, custom, privilege, restriction or exemption shall not be affected, notwithstanding that the same respectively may have been in any manner affirmed or recognised or derived by, in, or from, the repealed enactments; (v) any prosecution instituted under the repealed enactments and pending immediately before the commencement of this Code before any court or tribunal shall, subject to the provisions of this Code, continue to be heard and disposed of by the concerned court or tribunal; (vi) any person appointed to any office under or by virtue of any repealed enactment shall continue to hold such o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id Section. A plain reading of the said Section, therefore, leads to the conclusion that the moratorium referred to in Section 14 can have no manner of application to personal guarantors of a corporate debtor. 18. However, Sections 2(e) and Section 60 are strongly relied upon by learned counsel for the Respondents as, according to them, the Code will apply to personal guarantors of corporate debtors, and by Section 60, proceedings against such personal guarantors will show that such moratorium extends to the guarantor as well. 19. We are afraid that such arguments have to be turned down on a careful reading of the Sections relied upon. Section 60 of the Code, in sub-section (1) thereof, refers to insolvency resolution and liquidation for both corporate debtors and personal guarantors, the Adjudicating Authority for which shall be the National Company Law Tribunal, having territorial jurisdiction over the place where the registered office of the corporate person is located. This sub-section is only important in that it locates the Tribunal which has territorial jurisdiction in insolvency resolution processes against corporate debtors. So far as personal guarantors are concerne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er such proceedings had been commenced against the corporate debtor, be filed only in the National Company Law Tribunal. However, the Tribunal is to decide such proceedings only in accordance with the Presidency-Towns Insolvency Act, 1909 or the Provincial Insolvency Act, 1920, as the case may be. It is clear that sub-section (4), which states that the Tribunal shall be vested with all the powers of the Debt Recovery Tribunal, as contemplated under Part III of this Code, for the purposes of sub-section (2), would not take effect, as the Debt Recovery Tribunal has not yet been empowered to hear bankruptcy proceedings against individuals under Section 179 of the Code, as the said Section has not yet been brought into force. Also, we have seen that Section 249, dealing with the consequential amendment of the Recovery of Debts Act to empower Debt Recovery Tribunals to try such proceedings, has also not been brought into force. It is thus clear that Section 2(e), which was brought into force on 23.11.2017 would, when it refers to the application of the Code to a personal guarantor of a corporate debtor, apply only for the limited purpose contained in Section 60(2) and (3), as stated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tstanding 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. We may hasten to add that it is open to us to mark the difference in language between Sections 14 and 96 and 101, even though Sections 96 and 101 have not yet been brought into force. This is for the reason, as has been held in State of Kerala and Ors. v. Mar Appraem Kuri Co. Ltd. and Anr. , (2012) 7 SCC 106, that a law made by the Legislature is a law on the statute book even though it may not have been brought into force. The said judgment states: 79. The proviso to Article 254(2) provides that a law made by the State Legislature with the President's assent shall not prevent Parliament from making at any time any law with respect to the same matter including a law adding to, amending, var ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entire field as envisaged in Article 254(1) of the Constitution. 24. Thus, for the purpose of interpretation, it is certainly open for us to contrast Section 14 with Sections 96 and 101, as Sections 96 and 101 are laws made by the Legislature, even though they have not yet been brought into force. 25. As argued by Shri Viswanathan, the historical background of the Code now needs to be looked at. Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985 reads as follows: 22. Suspension of legal proceedings, contracts, etc .-(1) Where in respect of an industrial company, an inquiry under Section 16 is pending or any scheme referred to under Section 17 is under preparation or consideration or a sanctioned scheme is under implementation or where an appeal under Section 25 relating to an industrial company is pending, then, notwithstanding anything contained in the Companies Act, 1956 (1 of 1956), or any other law or the memorandum and articles of association of the industrial company or any other instrument having effect under the said Act or other law, no proceedings for the winding up of the industrial company or for execution, distress or the like agai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 56 (1 of 1956), or any other law, the memorandum and articles of association of the company or any instrument having effect under the said Act or other law or any agreement or any decree or order of a court, tribunal, officer or other authority or of any submission, settlement or standing order and accordingly,- (a) any remedy for the enforcement of any right, privilege, obligation and liability suspended or modified by such declaration, and all proceedings relating thereto pending before any court, tribunal, officer or other authority shall remain stayed or be continued subject to such declaration; and (b) on the declaration ceasing to have effect- (i) any right, privilege, obligation or liability so remaining suspended or modified, shall become revived and enforceable as if the declaration had never been made; and (ii) any proceeding so remaining stayed shall be proceeded with subject to the provisions of any law which may then be in force, from the stage which had been reached when the proceedings became stayed. (5) In computing the period of limitation for the enforcement of any right, privilege, obligation or liability, the period during which it or the remedy f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpanies Act, 1956 which, with a few changes, mirrored the provisions of Sections 15 to 21 of the Sick Industrial Companies (Special Provisions) Act, 1985. Interestingly, the Companies Amendment Act, 2002 omitted a provision similar to Section 22(1) of the Sick Industrial Companies (Special Provisions) Act, 1985. Consequently, creditors were given liberty to file suits or initiate other proceedings for recovery of dues despite pendency of proceedings for the revival or rehabilitation of sick companies before the National Company Law Tribunal. xxx xxx xxx 43. Close on the heels of the amendment made to the Companies Act came the Sick Industrial Companies (Special Provisions) Repeal Act, 2003. This particular Act was meant to repeal the Sick Industrial Companies (Special Provisions) Act, 1985 consequent to some of its provisions being telescoped into the Companies Act. Thus, the Companies Amendment Act, 2002 and the SICA Repeal Act formed part of one legislative scheme, and neither has yet been brought into force. In fact, even the Companies Act, 2013, which repeals the Companies Act, 1956, contains Chapter 19 consisting of Sections 253 to 269 dealing with revival and rehab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efficacy. This Court would be loathe to give such an interpretation as would thwart the recovery process under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 which Act alone seems to have worked to some extent at least. 44. It will, thus, be seen that notwithstanding the non obstante clauses in Sections 22(1) and (4), read with Section 32, Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985 will have to give way to the measures taken under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, more particularly referred to in Section 13 of the said Act, and that this being the case, the sale notices issued both in 2003 and 2013 could continue without in any manner being thwarted by Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985. (emphasis supplied) It is thus clear that for this reason also, it is obvious that Parliament, when it enacted Section 14, had this history in mind and specifically did not provide for any moratorium along the lines of Section 22 of the Sick Industrial Companies (Special Provisions) Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... corporate debtor, then the debt owed by the corporate debtor is not final till the resolution plan is approved, and thus the liability of the surety would also be unclear. The Court took the view that until debt of the corporate debtor is crystallised, the guarantor s liability may not be triggered. The Committee deliberated and noted that this would meant that surety s liabilities are put on hold if a CIRP is going on against the corporate debtor, and such an interpretation may lead to the contracts of guarantee being infructuous, and not serving the purpose for which they have been entered into. 5.8 In State Bank of India v . V. Ramakrishnan and Veeson Energy Systems , NCLAT, New Delhi, Company Appeal (AT) (Insolvency) No. 213/2017 [Date of decision 28 February, 2018], the NCLAT took a broad interpretation of Section 14 and held that it would bar proceedings or actions against sureties. While doing so, it did not refer to any of the above judgments but instead held that proceedings against guarantors would affect the CIRP and may thus be barred by moratorium. The Committee felt that such a broad interpretation of the moratorium may curtail significant rights of the credi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orates are given by its promoters in the form of personal guarantees, if there is a stay on actions against their assets during a CIRP, such promoters (who are also corporate applicants) may file frivolous applications to merely take advantage of the stay and guard their assets. In the judgments analysed in this relation, many have been filed by the corporate applicant under Section 10 of the Code and this may corroborate the above apprehension of abuse of the moratorium provision. The Committee concluded that Section 14 does not intend to bar actions against assets of guarantors to the debts of the corporate debtor and recommended that an explanation to clarify this may be inserted in Section 14 of the Code. The scope of the moratorium may be restricted to the assets of the corporate debtor only. 29. The Report of the said Committee makes it clear that the object of the amendment was to clarify and set at rest what the Committee thought was an overbroad interpretation of Section 14. That such clarificatory amendment is retrospective in nature, would be clear from the following judgments: (i) CIT v. Shelly Products , (2003) 5 SCC 461: 38. It was submitted that afte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances, a particular amendment can be treated as clarificatory or declaratory in nature. Such statutory provisions are labelled as declaratory statutes . The circumstances under which provisions can be termed as declaratory statutes are explained by Justice G.P. Singh [ Principles of Statutory Interpretation , (13th Edn., Lexis Nexis Butterworths Wadhwa, Nagpur, 2012)] in the following manner: Declaratory statutes The presumption against retrospective operation is not applicable to declaratory statutes. As stated in CRAIES [W.F. Craies, Craies on Statute Law (7th Edn., Sweet and Maxwell Ltd., 1971)] and approved by the Supreme Court [in Central Bank of India v. Workmen , AIR 1960 SC 12, para 29]: For modern purposes a declaratory Act may be defined as an Act to remove doubts existing as to the common law, or the meaning or effect of any statute. Such Acts are usually held to be retrospective. The usual reason for passing a declaratory Act is to set aside what Parliament deems to have been a judicial error, whether in the statement of the common law or in the interpretation of statutes. Usually, if not invariably, such an Act contains a Preamble, and also t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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