In the case of Sanjeev Shriya v. State Bank of India and Ors. Writ C No. 30285 of 2017 connected with Deepak Singhania and Another v. State Bank of India, Writ C No. 30033 of 2017, the Hon'ble Allahabad High Court has decided the question of the liability of personal guarantors of a company where moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (Code) is in force.

Factual background:

The petitioners were ex-directors of M/s LML Limited (Company) and they had executed a deed of guarantee dated 28.03.2005 in favor of State Bank of India (SBI). The Company was declared as sick industrial company by the Board of Industrial and Financial Reconstruction on 08.05.2007. Thereafter, SBI filed an application under Section 19(3) of the Recovery of Debts and Bankruptcy Act, 1993 (RDB Act) before Hon'ble DRT for recovery of debt against the Company as principal borrower and the petitioners as the guarantors. An interim order dated 30.03.2017 was passed by Hon'ble DRT requiring the Company and the guarantors to disclose particulars/ assets specified by SBI. Meanwhile, the Company approached the Hon'ble Adjudicating Authority (NCLT, Allahabad) by preferring a company petition under Section 10 of the Code seeking initiation of corporate insolvency resolution procedure. The Hon'ble Adjudicating Authority, vide its order dated 30.05.2017 admitted the application and declared moratorium under Section 14. In furtherance to the order of the Hon'ble Adjudicating Authority, the petitioners sought a stay of the DRT proceedings on the grounds that the matter is pending before Hon'ble Adjudicating Authority and that moratorium has been issued. On 06.07.2017, Hon'ble DRT passed an order stating that the Hon'ble Adjudicating Authority's order dated 30.05.2017 is qua proceedings only against the Company and there is no order to restrain proceedings against individual guarantors/ mortgagors. The petitioners have challenged the order dated 06.07.2017 passed by the Hon'ble DRT.

Issue

Whether SBI can be allowed to pursue proceedings, under Section 19 of the RDB Act, for recovery of loan amount taken by the Company before Hon'ble DRT against the guarantors when the Hon'ble Adjudicating Authority has already issued moratorium under Section 14 of the Code?

Petitioner's submissions:

It was submitted by the petitioners that the proceedings before Hon'ble DRT is without jurisdiction, as the insolvency proceeding has commenced under the Code and moratorium has been issued under Section 14 and the parties have already appeared before the interim resolution professional. It was argued that Hon'ble DRT cannot adjudicate upon any claims of alleged debt and without crystallization/ determination of debt, Hon'ble DRT cannot proceed against the guarantors. The action initiated by Hon'ble DRT is contradictory to the aim and object of the Code, which has been enacted to consolidate and amend the laws relating to re-organization and insolvency resolution. Further, Hon'ble DRT has erred in law while interpreting the order of the Hon'ble Adjudicating Authority - to state that there is neither any specific order by the Hon'ble Adjudicating Authority nor there is any restriction to proceed against individual guarantors.

Respondent's submissions:

The Respondent has raised a preliminary objection stating that the writ petition is liable to be dismissed because of availability of efficacious alternative remedy, that is, the validity of DRT order can be challenged before the Hon'ble Debt Recovery Appellate Tribunal. It was argued that under the Code, there is no restriction on proceedings against the guarantor independently and that the rights of the bank are flowing from the deed of guarantee executed by the petitioners. Further, the recovery proceedings were initiated by the bank - before the Hon'ble DRT - prior to the Hon'ble Adjudicating Authority's order dated 30.05.2017 and the said order does not affect the DRT proceeding against petitioners as guarantors.

Decision

It was held by the Hon'ble High Court that the liability of the Company and petitioners is co-extensive but the entire proceeding is still in a fluid stage and for the same cause of action, two split proceedings cannot go simultaneously before Debt Recovery Tribunal as well as National Company Law Tribunal. It was held that the liability has not been crystallized either against the principal debtor or guarantors and hence, the proceeding pending before the Hon'ble Debt Recovery Tribunal cannot continue and the same was stayed till finalization of corporate insolvency resolution process or till the Hon'ble National Company Law Tribunal approves the resolution plan under Section 31 or passes an order for liquidation of corporate debtor under Section 33, as the case may be.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.