Delhi HC allows debt recovery proceedings against guarantors despite principal borrower being sick industrial company under 1993 Act

The Delhi HC dismissed writ petitions challenging debt recovery proceedings against guarantors under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993. The petitioners argued that since the principal borrower was declared a sick industrial company, proceedings could not continue against guarantors. The HC held that recovery proceedings under the 1993 Act are not "suits" within the meaning of Section 22(1) of SICA, 1985, which only bars "suits" against sick companies. The court distinguished Supreme Court precedents and ruled that the term "suit" should not be interpreted broadly to include all legal proceedings. The Debts Recovery Tribunal and Appellate Tribunal correctly allowed proceedings against guarantors to continue despite the principal borrower's status as a sick industrial company.

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Issues Involved:
1. Interpretation of Section 22(1) of the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA).
2. Impact of the Supreme Court decision in KSL & Industries Ltd. vs. Arihant Threads Ltd. & Ors.
3. Whether recovery proceedings under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDB Act) can continue against guarantors when the principal borrower is declared a sick industrial company.

Detailed Analysis:

1. Interpretation of Section 22(1) of SICA:
Section 22(1) of SICA provides for the suspension of legal proceedings against a sick industrial company. The provision states:
"No proceedings for the winding up of the industrial company or for execution, distress or the like against any of the properties of the industrial company or for the appointment of a receiver in respect thereof and no suit for the recovery of money or for the enforcement of any security against the industrial company or of any guarantee in respect of any loans or advance granted to the industrial company shall lie or be proceeded with further, except with the consent of the Board or, as the case may be, the Appellate Authority."

The court noted that the term "proceedings" has been interpreted broadly to include actions such as those under Sections 29 and 31 of the State Financial Corporation Act, 1951, as seen in Maharashtra Tubes Ltd. vs. State Industrial and Investment Corpn. of Maharashtra Ltd. The 1994 amendment to Section 22(1) added the phrase "and no suit for the recovery of money or for the enforcement of any security against the industrial company or of any guarantee in respect of any loans or advance granted to the industrial company," expanding the scope to include suits against guarantors.

2. Impact of the Supreme Court Decision in KSL & Industries Ltd. vs. Arihant Threads Ltd. & Ors.:
The Supreme Court in KSL & Industries Ltd. vs. Arihant Threads Ltd. & Ors. addressed whether the RDDB Act proceedings should be stayed under Section 22(1) of SICA. The Court held that SICA's provisions prevail over the RDDB Act, emphasizing the legislative intent to protect the properties of sick industrial companies from recovery proceedings. The decision underscored that allowing recovery proceedings to continue would undermine the rehabilitation efforts under SICA.

The court in the present case clarified that the decision in KSL & Industries Ltd. did not change the legal position regarding the continuation of proceedings against guarantors. The Supreme Court's observations in paragraphs 26 and 27 of KSL & Industries Ltd. focused on the legislative scheme and the purpose of SICA to protect the properties of sick industrial companies.

3. Whether Recovery Proceedings Under the RDDB Act Can Continue Against Guarantors:
The court examined whether recovery proceedings under the RDDB Act could continue against guarantors when the principal borrower is declared a sick industrial company. The court referred to the Supreme Court's decision in Paramjit Singh Patheja vs. ICDS Ltd., which held that the term "guarantee" in Section 22(1) of SICA extends to guarantors. However, the court also noted that the decision in Kailash Nath Agarwal & Ors. vs. Pradeshiya Industrial & Investment Corporation of UP Ltd. & Anr. clarified that the protection under SICA is not absolute and does not extend to guarantors in all circumstances.

The court concluded that the term "suit" in Section 22(1) of SICA should be confined to proceedings in a civil court and does not include recovery proceedings before the Debt Recovery Tribunal (DRT). The court held that proceedings under the RDDB Act could continue against guarantors, as the legislative intent was not to provide blanket protection to guarantors but to facilitate the rehabilitation or winding up of sick industrial companies.

Conclusion:
The court dismissed the writ petitions, holding that the proceedings under the RDDB Act could continue against the guarantors despite the principal borrower being declared a sick industrial company. The court emphasized that the term "suit" in Section 22(1) of SICA does not encompass recovery proceedings before the DRT, and the legislative intent was to protect the properties of sick industrial companies, not to provide absolute protection to guarantors.

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