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TMI Blog2022 (10) TMI 66X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the order dated 03.02.2022 passed by the National Company Law Tribunal (Adjudicating Authority), Cuttack Bench in INTERLOCUTORY APPLICATION(IB).No.113/CB/2021 in TP No.255/CTB/2019 in CP (IB) No.593/KB/2017, whereby the INTERLOCUTORY APPLICATION filed by the petitioner for various reliefs was dismissed by the Adjudicating Authority. 2. The factual matrix is as follows: The appellant filed the INTERLOCUTORY APPLICATION before the Adjudicating Authority with a request to direct respondent No.1 to abstain from proceeding with the public auction of properties belonging to the appellant on 11.11.2021 under Section 60 (5) of IBC read with Rule 11 of the NCLT Rules, 2016 in view of the liquidation order dated 06.12.2018 passed by the NCLT admitting Coastal Projects Limited (Corporate Debtor) into liquidation (Liquidation Order). The Corporate Debtor availed loan facility to a tune of Rs.774.12 Crore from respondent No.1 bank, to which the appellant stood as a guarantor for the Corporate Debtor and the appellant's property was taken as collateral security by respondent No.1. Upon default by the Corporate Debtor in repayment of the debt, respondent No.1 declared the debt as a Non-P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respondent No.1 on the strength of the order passed under Section 14 of SARFAESI Act, issued notice dated 29.09.2021 under Rule 8(6) of the Security Interest (Enforcement) Rules, 2002 to conduct public auction of the Property on 11.11.2021. The said notice was followed by a sale notice dated 06.10.2021 published in the 'Deccan Herald' and 'Prajavani' newspapers on 07.10.2021 at Bengaluru and also on the websites of respondent No. 1 and the Indian Banks Auctions Mortgaged Properties Information ("IBAPI") portal. In the meantime, the appeal of the appellant before the DRT was dismissed on 04.10.2021, confirming the order passed under Section 14 of SARFAESI Act. The appellant filed Interlocutory Application before NCLT, Cuttack challenging the action of the Respondent No. 1 and sought the following reliefs: a) The Respondent No.1 has erroneously sought to proceed against the Appellant, a personal guarantor to the Corporate Debtor's debt, prior to the expiry of the moratorium imposed in terms of the Liquidation Order under Section 33 of the IBC, as any recovery of the Corporate Debtor's debt from the Appellant would result in a consequential violation of the moratorium impos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid Notification does not prohibit the financial creditor from proceeding against the personal guarantor of a corporate debtor by instituting recovery proceedings permissible under any other existing and applicable law c) The proceedings initiated by the Respondent No.1 against the Appellant under the SARFAESI Act need not be quashed as such proceedings are not proceedings under the IBC and there is no bar against the Respondent No.1 in continuing the SARFAESI proceedings against the Appellant. 3. The appellant challenged the said findings raising several contentions on various grounds. However, the specific questions of law arise for consideration in the appeal are also formulated by the appellant in Paragraph No.8.2 of the grounds of appal. 4. The main grounds urged before this Tribunal, in the grounds of appeal and in the written submissions are that, the insolvency of the Corporate Debtor that resulted in its inability to meet loan repayment obligation towards its financial creditor, ie, the Respondent No.1. It was only when the Respondent No.1 was unable to recover its financial debt from the Corporate Debtor, respondent No.1 pursued all legal remedies available to it fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly dismissed the petition and the Tribunal strongly relied on the law laid down by the Apex Court in "Gujarat Urja Vikas Nigam Limited Vs. Amit Gupta (2021) 7 SCC 209 " (hereinafter referred to as "Gujarat Urja Judgment") and concluded that the Interlocutory Application filed by the appellant under Section 60 (5) was neither maintainable nor sustainable. 8. The Apex Court at paragraph No.69 of the said Gujarat Urja Judgment, relied on its earlier judgment in "Arcelor Mittal (India) (P) Ltd. Vs. Satish Kumar Gupta (2019) 2 SCC 1", wherein the following observations were made: "The non-obstanate clause in Section 60 (5) is designed for a different purpose to ensure that NCLT alone has jurisdiction when it comes to applications and proceedings by or against a Corporate Debtor covered by the Code, making it clear that no other forum has Jurisdiction to entertain or dispose of such applications or proceedings." 9. In view of the principles laid down in the above judgment, Section 60 (2) of the IBC was amended with effect from 06.06.2018. From the reading of amended provision, it is evident that Section 60(2) which came into effect from 06.06.2018, includes liquidation and bankruptc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ator and also admitted about the proceedings initiated under Section 14 of the SARFAESI Act before Court of XXXVII Additional Chief Metropolitan Magistrate, Bangalore, obtaining order for taking possession, issue of notice etc. 14. The main objection raised by respondent No.1 is that the appellant indulged in "forum shopping" as the appellant lost its remedy both before the XXXVII ACMM, Bangalore and DRT in the appeal filed under Section 17 of the SARFAESI Act. It is further submitted that Section 60 (5) does not permit the Adjudicating Authority to decide such issues which are not between the Corporate Debtor and the Creditor, thereby the petition is not maintainable under Section 60(5) of IBC. 15. Respondent No.1 supported the order passed by the Adjudicating Authority based on the principle laid down in "State Bank of India Vs. V.Ramakrishnan" (referred supra) while accepting the purpose of amending Section 60 (2) enabling the creditor to proceed against the personal guarantor of corporate debtor. 16. It is further contended that when the similar issue came up before the High Court of Delhi in "Kiran Gupta Vs. State Bank of India [W.P.(C) No.7230/2020), wherein the Court held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olve the surety/guarantor of his or her liability, which arises out of an independent contract." 19. While coming to the aforesaid conclusion, the Hon'ble Supreme Court of India has referred and relied on the aforesaid judgment of "State Bank of India Vs. V.Ramakrishnan" (referred supra) but also on other judgments. Notably, the Hon'ble Apex Court had also considered the provisions of Section 128 the Indian Contract Act 1872 as well as the rights of the guarantor under Section 140 of the Indian Contract Act 1872 and thereafter held that "the release or discharge of a principal borrower from the debt owed by it to its creditor, by an involuntary process, i.e. by operation of law, or due to liquidation or insolvency proceeding, does not absolve the surety/guarantor of his or her liability, which arises out of an independent contract. In view of the same, it is contended that the submission of the appellant that in view of the liquidation of the corporate debtor, upon auction of the property under the SARFAESI Act, he remains remediless (inspite of the rights envisaged under Section 140 of the Indian Contract Act 1872), is also wrong, illegal, untenable and deserves to be re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respondent No.1 sought dismissal of the appeal as not maintainable, upholding the order passed by the Adjudicating Authority. 25. Respondent No.2 - Liquidator filed reply admitting his appointment as liquidator, dismissal of applications etc. by the DRT and by the Adjudicating Authority in various proceedings. 26. Respondent No.2 contended that respondent No.1 has initiated proceedings against the appellant under Chapter III of the SARFAESI Act in his capacity as a personal guarantor for the debts owed by the Corporate Debtor to respondent No.1. In terms of the deed of guarantee dated 26.06.2014, (i) the appellant has mortgaged his personal property to secure the debt owed by the Corporate Debtor to respondent No.1; and (ii) the appellant has an independent, co - extensive and primary obligation to pay respondent No.1 to the extent of the value of the mortgaged asset i.e. Rs.164.06 crores. 27. Respondent No.1 initiated insolvency resolution proceedings against the Corporate Debtor under Section 7 of the IBC, which culminated into passing of liquidation order by Adjudicating Authority on 06.12.2018. In terms of the liquidation order as well as provisions of the IBC, respondent No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 14 and 36 prohibits proceeding with any suit or proceedings against the corporate debtor, but without considering the same, the property of the appellant was sold in the public auction as per the provisions of SARFAESI Act, which is illegal and arbitrary. 32. She also submitted written briefs reiterating the contentions urged in the grounds of appeal and mainly contended that the judgment of the Hon'ble Apex Court in "State Bank of India Vs. V.Ramakrishnan" (referred supra) has no application since the amendment was given effect from 06.06.2018, whereas the proceedings against the appellant were initiated on 17.08.2018. The amended Section 60 (2) now included the liquidation or bankruptcy of a personal guarantor. On 15.11.2019, vide notification No.S.O.4126(E) dated 15.11.2019, insolvency proceedings against personal guarantor were now to be instituted under the IBC and not under the Presidency-Towns Insolvency Act, 1909 (for short "PTA Act") and the Provincial Insolvency Act, 1920 (for short "PIA Act"). Therefore, dismissal of application filed by the appellant by applying the principle laid down in "State Bank of India Vs. V.Ramakrishnan" (referred supra) is an illegality. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovision, which permits the Adjudicating Authority to determine such issues, thereby learned Adjudicating Authority failed to appreciate these contentions in proper perspective. 37. Learned senior counsel Sri Ramji Srinivasan, appearing for respondent No.1, vehemently contended that all the questions raised in the present appeal were answered by the Apex Court in "Lalit Kumar Jain Vs. Union of India", "State Bank of India Vs. V.Ramakrishnan" (referred supra). Even otherwise, the High Court of Delhi in "Kiran Gupta Vs. State Bank of India [W.P.(C) No.7230/2020) made it clear that the proceedings under the SARFAESI Act and the IBC are independent, even during subsistence of moratorium none of the provisions of IBC prevent the creditor to proceed against the personal guarantor, since, moratorium protects action against the corporate debtor not against the 3rd party. Therefore, the bar under moratorium has nothing to do with the issue. Therefore, the appellant is disentitled to claim any relief on any of the grounds. 38. Yet, another contention raised by the learned counsel for respondent No.1 is that Section 60 (5) permits the Adjudicating Authority to decide the disputes falling wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on was passed by the adjudicating authority for realization of the debt due to various creditors by the corporate debtor. At the same time, the creditor initiated proceedings under Section 14 of the SARFAESI Act, 2002, against the appellant and another, before the XXXVII Additional Chief Judicial Magistrate, Bangalore, who in-turn, allowed the application. Accordingly, the creditor took possession of the mortgaged property, but the challenge thereto under Section 17 before the Debt Recovery Tribunal was unsuccessful. Later, the property was brought to sale during pendency of the appeal and bid was knocked down in favour of M/s. Bagmane Developers Private Limited, who was declared as highest bidder in the auction and the confirmation was made subject to the outcome or the result of the present appeal vide letter dated 29.01.2022 bearing No.SAMB/VI/HYD/MNK/2022-23/72 issued by the creditor/first applicant, who initiated proceedings both under Section 7 of I.B.C against the corporate debtor, so also under SARFAESI Act, 2002, against the appellant and others. The adjudicating authority concluded that the petition under Section 65(c) of I.B.C read with Rule 11 of NCLT Rules is not maint ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case, since it is the sole contract for the sale of electricity which was entered into by the Corporate Debtor. In doing so, we reiterate that the NCLT would have been empowered to set aside the termination of the PPA in this case because the termination took place solely on the ground of insolvency. The jurisdiction of the NCLT under Section 60(5)(c) of the IBC cannot be invoked in matters where a termination may take place on grounds unrelated to the insolvency of the corporate debtor....." Though Arcelor Mittal (India)(P) Ltd. was referred, the principle was not completely accepted in "Gujarat Urja Vikas Nigam's case. Hence, the law laid down in "Gujarat Urja Vikas Nigam Limited Vs. Amit Gupta" is binding precedent 45. A perusal of the principle laid down in the above judgment, the Hon'ble Apex Court cautioned NCLT and NCALT to ensure that they do not usurp the legitimate jurisdiction of other courts, tribunals and fora when the dispute is one which does not arise solely from or relate to the insolvency of the Corporate Debtor. Applying the same principle to the present facts of the case, now we shall examine the present issue. 46. The appellant is a personal guarantor of co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nability of the application under Section 60(5) of I.B.C. 48. In view of our foregoing discussion, we find no ground, warranting interference with the finding recorded by the adjudicating authority as to the maintainability of the application under Section 60(5) of I.B.C. Accordingly, the finding recorded by the adjudicating authority is hereby confirmed, holding this point in favour of the respondents and against the appellant. POINT No. 2 : 49. The major contention of the learned Senior Counsel for the appellant before this Tribunal is that, when moratorium was imposed during insolvency resolution process or during liquidation process, the proceedings or suits pending before the other Court or Tribunal or Forum shall not be continued. 50. Undoubtedly, there is a bar under Section 14 from proceeding against the corporate debtor in any suits or proceedings pending before the Court, Tribunal or any other Forum. Similarly, Sub-section (5) of Section 33 of I.B.C interdicted pending suits or proceedings before the Courts or Tribunals or other Forums during liquidation process. For better appreciation of law, it is apposite to extract Section 14 and Section 33(5) of I.B.C and they ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... There is subtle distinction between Section 14 and Section 33(5). According to Section 14(a), the Adjudicating Authority shall declare moratorium prohibiting the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority. At the same time, Clause (3) incorporated by amendment of Act.26 of 2018 with effect from 06.06.2018, says that, Sub-sections (1) and ((2) of Section 14 have no application to such transactions, as may be notified by the Central Government in consultation with any financial sector regulator or any other authority and a surety in a contract of guarantee to the corporate debtor. 52. It is clear from Sub-section (3) of Section 14 that the Moratorium imposed under Section 14 will have no application to enforce the liability against a surety in a contract of guarantee to a corporate debtor. The exemption contained under Sub-section (3) is squarely applicable to the present facts of the case. However, Section 33(5) of I.B.C restricts filing of suit or other legal proceeding by or against the "corporate debtor". ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsive and the respondent/Bank is well entitled to initiate proceedings against the petitioner under the SARFESI Act during the continuation of the Insolvency Resolution Process against the Principal Borrower." 54. In view of the law laid down by the Division Bench of the Delhi High Court, Moratorium under Section 14 or restriction under Section 33(5) of I.B.C is not a bar to proceed against this appellant herein under SARFAESI Act for recovery of debt based on mortgage created in favour of 1st Respondent executing agreement of guarantee. 55. In "Rakesh Kumar Gupta v. Mahesh Bansal" Company Appeal (AT) (Insolvency) No. 1408 of 2019 decided on 20- 02-2020 (NCLAT)], the NCLAT held that the pending proceedings under SARFAESI Act shall not hinder the proceedings triggered by the financial creditor under the IBC. Therefore, even when proceedings under SARFAESI Act have already been initiated, fresh proceedings under IBC can still be accepted because of the non obstante Clause in Section 238 of IBC. Thus the provision of IBC will prevail over SARFAESI. 56. The effect of Moratorium was considered by the Courts in various judgments, more particularly, in "Maharashtra Tubes Ltd. v. State ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other enactment, including Income Tax Act." 61. In March 2018 "Report of the Insolvency Committee" was published in which committee on para 5.11 of its report stated following: "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." 62. Finally, this matter came before the the Apex Court in the case of "State Bank of India vs V. Ramakrishnan & Anr." (referred supra). The Hon'ble Apex Court differentiated between moratorium mentioned u/s 14 of the code and interim moratorium and moratorium mentioned under sec 96 &101 respectively (under part III) of the IBC 2016 and made following observation" "We are also of the opinion that Sections 96 and 101, when contrasted with Section 14, would show that Section 14 cannot possibly apply to a personal guarantor. When an application is filed under Part III, an interim-moratorium or a moratorium is applicable in respect of any debt due........... The object of the Code is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts which the creditor had against the principal debtor. 68. A guarantor will get invested with all the rights which the creditor had only "upon payment or performance of all that he is liable for". A guarantor is liable for any payment or performance of any obligation only to the extent the principal debtor has defaulted (vide C.K.Aboobacker v K.P.Ayishu AIR 2000 Ker 29 ( NOC ) ). In any view of the matter, in view of Section 140 of the Indian Contract Act, the appellant herein, on payment of debt due under the guranteed debt, is entitled to recover the same as if he is a creditor. Taking advantage of Section 140 of the Indian Contract Act, Smt. Menaka Gyuruswamy, learned Senior Counsel contended that, in case the entire assets of the corporate debtor are liquidated and the amount realised on sale of assets of debtor shall be distributed among the creditors of different kinds, the appellant will be denuded to realise the debt. Therefore, he shall be included in the list of secured creditors, but this was not specifically urged in the petition before the Tribunal. 69. In view of the specific contention raised for the first time before the Tribunal, it is apposite to advert to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied by the Board, including shares held in any subsidiary of the corporate debtor; (b) assets that may or may not be in possession of the corporate debtor including but not limited to encumbered assets; (c) tangible assets, whether movable or immovable; (d) intangible assets including but not limited to intellectual property, securities (including shares held in a subsidiary of the corporate debtor) and financial instruments, insurance policies, contractual rights; (e) assets subject to the determination of ownership by the court or authority; (f) any assets or their value recovered through proceedings for avoidance of transactions in accordance with this Chapter; (g) any asset of the corporate debtor in respect of which a secured creditor has relinquished security interest; (h) any other property belonging to or vested in the corporate debtor at the insolvency commencement date; and (i) all proceeds of liquidation as and when they are realised. 71. But, Sub-section (4) of Section 36 exempted assets to be included in the liquidation estate i.e. assets owned by a third party which are in possession of the corporate debtor, including the assets held in trust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itted under section 38 within such time as specified by the Board. In any view of the matter, the appellant cannot claim as a secured creditor to include his claim in the list of secured creditors in the claims list prepared under Section 38 as no security interest is created in his favour. 73. The main endeavour of the learned Senior Counsel for the appellant is that, the proceedings were initiated prior to Amendment Act No.26 of 2019 came into force and the judgment of the Apex Court in "State Bank of India Vs. V.Ramakrishnan" (referred supra) has no application. This similar contention was urged before the Apex Court in "Lalit Kumar Jain vs. Union of India" (referred supra), which is a persuasive judgment on all issues raised by the appellant herein. In "Ghanshyam Mishra & Sons Pvt. Ltd. Vs. Edelwiss Asset Reconstruction Company Ltd. & Ors." (2021) 9 SCC 657, in paragraph 95(ii) held 2019 amendment is clarificatory and declaratory in nature and therefore will be effective from the date on which I&B Code has come into effect". Hon'ble Apex Court considered the scope of 2019 amendment to IBC discussed about Ramakrishnan Judgment regarding sureties liability and concluded that it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company (i.e. the company which undergoes the insolvency process). The question which the petitioners urge is that in view of this finality, their liabilities would be extinguished; they rely on Sections 128, 133 and 140 of the Contract Act to urge that creditors cannot therefore, proceed against them separately. 105. In Vijay Kumar Jain v. Standard Chartered Bank67, this court, while dealing with the right of erstwhile directors participating in meetings of Committee of Creditors observed that: "we find that Section 31(1) of the Code would make it clear that such members of the erstwhile Board of Directors, who are often guarantors, are vitally interested in a resolution plan as such resolution plan then binds them. Such plan may scale down the debt of the principal debtor, resulting in scaling down the debt of the guarantor as well, or it may not. The resolution plan may also scale down certain debts and not others, leaving guarantors of the latter kind of debts exposed for the entire amount of the debt. The regulations also make it clear that these persons are vitally interested in resolution plans as they affect them" 106. The rationale for allowing directors to pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the corporate debtor. So far as the present case is concerned, we hasten to add that we are saying nothing which may affect the pending litigation on account of invocation of these guarantees. However, NCLAT judgment being contrary to Section 31(1) of the Code and this Court's judgment in V. Ramakrishnan case [SBI v. V. Ramakrishnan, (2018) 17 SCC 394], is set aside." 108. It is therefore, clear that the sanction of a resolution plan and finality imparted to it by Section 31 does not per se operate as a discharge of the guarantor's liability. As to the nature and extent of the liability, much would depend on the terms of the guarantee itself. However, this court has indicated, time and again, that an involuntary act of the principal debtor leading to loss of security, would not absolve a guarantor of its liability. In Maharashtra State Electricity Board (supra) the liability of the guarantor (in a case where liability of the principal debtor was discharged under the insolvency law or the company law), was considered. It was held that in view of the unequivocal guarantee, such liability of the guarantor continues and the creditor can realize the same from the guarantor in vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out of one estate. It is for that reason sometimes called the rule against double dividend. In the simplest case of suretyship (where the surety has neither given nor been provided with security, and has an unlimited liability) there is a triangle of rights and liabilities between the principal debtor (PD), the surety (S) and the creditor (C). PD has the primary obligation to C and a secondary obligation to indemnify S if and so far as S discharges PD's liability, but if PD is insolvent S may not enforce that right in competition with C. S has an obligation to C to answer for PD's liability, and the secondary right of obtaining an indemnity from PD. C can (after due notice) proceed against either or both of PD and S. If both PD and S are in insolvent liquidation, C can prove against each for 100p in the pound but may not recover more than 100p in the pound in all. In view of the above discussion, it is held that approval of a resolution plan does not ipso facto discharge a personal guarantor (of a corporate debtor) of her or his liabilities under the contract of guarantee. As held by this court, the release or discharge of a principal borrower from the debt owed by it t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 of the same Judgment held that approval of a Resolution Plan does not ipso facto discharge a personal guarantee of a Corporate Debtor of her or his liabilities under the contract of guarantee as it arises out of independent contract. At the same time, based on the principles laid down in "Innoventive Industries Ltd. Vs. ICICI Bank Ltd. and Anr.", "P.R. Commissioner of Income Tax vs Monnet Ispat & Energy Limited", Hon'ble Apex Court is of confirmed view that the provisions of IBC will prevail over provisions of the laws in view of non-obstante clause contained in Section 238 of IBC, the same view is taken by full bench of Apex Court again in "Sundaresh Bhatt, Liquidator Of ABG Shipyard Vs. Central Board of Indirect Taxes and Custom" Civil Appeal No. 7667 of 2021 dated 26.08.2022 while considering the liability to pay Custom duty to release the imported goods held that provision of IBC will prevail over the general or special laws. Thus, it is settled that the provision of IBC will have overriding effect on the provisions of general or special laws, thereby provision of IBC overrides the provision of Indian Contract Act, more particularly, provisions relating to surety's liability ..... X X X X Extracts X X X X X X X X Extracts X X X X
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