2017 (10) TMI 855 - Tri - Companies Law

Interpretation of I&B Code Sections in Personal Guarantor Case: Upholding Moratorium and Guarantor Rights

The judgment addressed the interpretation of Sections 14 and 31 of the I&B Code, 2016 in the context of a Corporate Insolvency Resolution Process. It ... Corporate Insolvency Resolution Process - guarantor contends that, in case his personal property is sold to realise the portion of the debt outstanding against M/s. Veesons Energy Systems Private Limited, the same shall create charge on the assets of the Corporate Debtor which shall amount ‘encumbering’ the properties of the Corporate Debtor - Held that:- Certainty in the event the guarantor fulfils his obligation for payment of outstanding debt of the Corporate Debtor, he has every right on the assets of the Corporate Debtor to the extent he has paid the outstanding debt to the creditors. It is clear that if the Financial Creditor during the Corporate Insolvency Resolution Process and declaration of the moratorium is permitted to proceed against the personal guarantor of the Corporate Debtor for recovery of the outstanding debt to the extent of the personal guarantee given, then, the security interest, if any, of the Financial Creditor shall get transferred to the guarantor which will be in violation of Section 14(1)(b) of the I&B Code, 2016. In the light of the above, Interlocutory Application of the personal guarantor is allowed. The 2nd Respondent, State Bank of India is restrained from proceeding against the personal guarantor till the period of moratorium is over. Issues:Interpretation of Sections 14 and 31 of the I&B Code, 2016 regarding moratorium and resolution plan approval.Application of Section 140 of the Indian Contract Act, 1872 in the context of guarantor's rights.Violation of Section 14(1)(b) of the I&B Code, 2016 due to actions against personal guarantor during Corporate Insolvency Resolution Process.Interpretation of Sections 14 and 31 of the I&B Code, 2016:The judgment dealt with an Interlocutory Application concerning the interpretation of Sections 14 and 31 of the I&B Code, 2016 in the context of a Corporate Insolvency Resolution Process. Section 14 imposes a moratorium on various actions by a corporate debtor, including transferring or encumbering its assets. Section 31 outlines the approval process for a resolution plan. The applicant, a guarantor, argued that if his personal property is sold to recover debts of the corporate debtor, it would create a charge on the debtor's assets, violating the moratorium. The judgment analyzed these provisions to prevent such actions during the resolution process.Application of Section 140 of the Indian Contract Act, 1872:The judgment referenced Section 140 of the Indian Contract Act, 1872, which addresses the rights of a surety upon payment of the guaranteed debt. It establishes that upon fulfilling payment obligations, the surety gains the same rights as the creditor against the principal debtor. This provision was crucial in determining the guarantor's entitlement to the assets of the corporate debtor to the extent of the debt paid. The judgment highlighted the surety's immediate right to the creditor's claims upon fulfilling payment obligations.Violation of Section 14(1)(b) of the I&B Code, 2016:The judgment emphasized the importance of upholding Section 14(1)(b) of the I&B Code, 2016, which prohibits actions like transferring or encumbering assets of a corporate debtor during the moratorium. It noted that allowing actions against the personal guarantor during the resolution process could transfer security interests to the guarantor, contravening the moratorium's purpose. Consequently, the judgment restrained the financial creditor from proceeding against the personal guarantor until the moratorium period concluded, ensuring compliance with the provisions of the I&B Code.This detailed analysis of the judgment showcases the meticulous consideration of legal provisions and their application in the context of insolvency proceedings, safeguarding the rights and integrity of the resolution process.