2018 (3) TMI 657 - AT - Insolvency and Bankruptcy

Sureties for Corporate Debtors also Personal Guarantors under Bankruptcy Code: Moratorium Protects All Parties

The court clarified that individuals acting as sureties for corporate debtors are considered 'Personal Guarantors' under the Insolvency and Bankruptcy ... Stay of proceedings under SARFAESI Act 2002, including the auction notice - 'Moratorium’ applicability to the property of the ‘Corporate Debtor’ - Approval of resolution plan - ‘Financial Creditor’, including Appellant-State Bank of India to proceed against the ‘Personal Guarantor’ of the ‘Corporate Debtor’ - Held that:- Only institution of suits or continuation of pending suits or proceedings against the ‘Corporate Debtor’ are prohibited from proceedings, in terms of clause (b) of sub-section (1) of Section 14 of the ‘I&B Code’, transfer, encumbrance, alienation or disposal of any of its assets of the ‘Corporate Debtor’ and/ or any legal right or beneficial interest therein are prohibited. Clauses (c) & (d) of sub-section (1) of Section 14 of the ‘I&B Code’ prohibits recovery or enforcement of any security interest created by the corporate debtor in respect of its property including the property occupied by it or in the possession of the ‘Corporate Debtor’. ‘Resolution Plan’ if approved by the ‘Committee of Creditors’ under sub-section (4) of Section 30 and if the same meets the requirements as referred to in sub-section (2) of Section 30 and once approved by the ‘Adjudicating Authority’ is not only binding on the ‘Corporate Debtor’, but also on its employees, members, creditors, guarantors and other stakeholders involved in the ‘Resolution Plan’, including the ‘Personal Guarantor’. Thus we hold that the ‘Moratorium’ will not only be applicable to the property of the ‘Corporate Debtor’ but also on the ‘Personal Guarantor’. Appeal dismissed. Issues:1. Interpretation of the term 'Personal Guarantor' under the Insolvency and Bankruptcy Code, 2016.2. Applicability of moratorium under the Insolvency and Bankruptcy Code on personal guarantors.3. Jurisdiction of the Adjudicating Authority in cases involving personal guarantors of corporate debtors.Analysis:Issue 1: Interpretation of the term 'Personal Guarantor'The judgment delves into the definition of 'Personal Guarantor' as per sub-section (22) of Section 5 of the Insolvency and Bankruptcy Code, 2016. It establishes that an individual who acts as a surety in a contract of guarantee to a corporate debtor falls within the ambit of a 'Personal Guarantor' under the Code.Issue 2: Applicability of moratorium on personal guarantorsThe judgment explores the impact of the moratorium declared by the Adjudicating Authority under Section 14 of the Insolvency and Bankruptcy Code. It emphasizes that the moratorium not only prohibits actions against the corporate debtor but also extends to the personal guarantor, restraining any transfer, encumbrance, or disposal of assets by the personal guarantor during the moratorium period.Issue 3: Jurisdiction of the Adjudicating AuthorityRegarding the jurisdiction of the Adjudicating Authority in cases involving personal guarantors of corporate debtors, the judgment clarifies that if insolvency proceedings are initiated against a corporate debtor, simultaneous proceedings against the personal guarantor must be filed before the same Adjudicating Authority. This ensures a cohesive approach in resolving insolvency matters related to both the corporate debtor and the personal guarantor.The judgment underscores the interconnectedness of insolvency proceedings involving corporate debtors and personal guarantors, highlighting the need for a unified approach before the Adjudicating Authority. It emphasizes the comprehensive application of the moratorium under the Insolvency and Bankruptcy Code, extending its protective umbrella not only to corporate debtors but also to personal guarantors. The interpretation of key legal definitions and provisions ensures clarity in understanding the rights and obligations of parties involved in insolvency proceedings, contributing to a more structured and consistent legal framework.