Corporate guarantee invocation after CIRP commencement violates Section 14 moratorium provisions and claims inadmissible

NCLAT held that corporate guarantee invocation after CIRP commencement is prohibited under Section 14 moratorium provisions. The corporate debtor's CIRP began on 27/01/2020, but respondent invoked guarantee on 18/09/2020, subsequent to CIRP initiation. Relying on SC judgment in Ghanshyam Mishra case, NCLAT ruled that claims based on guarantee invocation after CIRP commencement cannot be admitted as the guarantee was not invoked prior to proceedings. The invocation violated IBC moratorium restrictions, making any resulting claims inadmissible in the resolution process. Appeal allowed.

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ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment include:

• Whether the Respondent could invoke the corporate guarantee after the initiation of the Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor.
• Whether the claim filed by the Respondent based on the invoked guarantee could be admitted in the CIRP.
• The applicability of Section 14 of the Insolvency and Bankruptcy Code (IBC) regarding the moratorium and its effect on the invocation of guarantees.
• Whether the claim submitted by the Respondent was within the permissible time frame and in the correct form as per the IBC regulations.

ISSUE-WISE DETAILED ANALYSIS

Invocation of Corporate Guarantee Post-CIRP Initiation

The relevant legal framework involves Section 14 of the IBC, which imposes a moratorium prohibiting actions to recover or enforce any security interest created by the corporate debtor. The Court interpreted this provision to mean that the invocation of a corporate guarantee after the initiation of CIRP is not permissible. The Court relied on precedents such as "Ghanshyam Mishra and Sons Pvt. Ltd. vs. Edelweiss Asset Reconstruction Company Limited," which upheld that guarantees could not be invoked post-CIRP initiation.

The Court found that the Respondent invoked the guarantee on 18.09.2020, after the CIRP commenced on 10.10.2019, making the invocation impermissible under the moratorium. The Court concluded that the Respondent's claim based on this invocation could not be accepted in the CIRP.

Admissibility of the Claim in CIRP

The Court examined whether the claim filed by the Respondent was admissible under the IBC regulations. Regulation 13 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, requires claims to be verified as existing on the insolvency commencement date. The Court found that no claim existed on the commencement date, as the guarantee was invoked post-CIRP initiation. Consequently, the claim was not admissible.

The Court also addressed the argument regarding the form and timing of the claim submission. The Respondent submitted the claim in Form C on 13.10.2021, but the Court found that the earlier letter dated 23.10.2020 could not be treated as a valid claim since it was based on an impermissible invocation of the guarantee.

Significance of the Moratorium

The Court emphasized the purpose of the moratorium under Section 14 of the IBC, which is to protect the corporate debtor's assets and prevent new liabilities during the CIRP. The Court referred to the Supreme Court's interpretation in "Rajendra K. Bhutta vs. Maharashtra Housing and Area Development Authority," which highlighted the statutory freeze intended by the moratorium to facilitate unhindered resolution processes.

The Court rejected the Respondent's argument that invocation of the guarantee does not constitute an action to enforce a security interest. The Court clarified that any such invocation during the moratorium period is prohibited, aligning with the statutory purpose of the moratorium.

Competing Arguments and Court's Reasoning

The Appellant argued that the Respondent's invocation of the guarantee was in violation of the moratorium, and no claim was submitted before the approval of the Resolution Plan by the Committee of Creditors (CoC). The Respondent contended that the claim could not be adjudicated by the Resolution Professional and that the invocation of the guarantee was not barred by Section 14.

The Court sided with the Appellant, emphasizing that the moratorium prohibits actions to enforce security interests, including the invocation of guarantees. The Court found that the Resolution Professional was correct in not admitting the Respondent's claim based on the post-CIRP invocation.

SIGNIFICANT HOLDINGS

The Court held that:

• The invocation of a corporate guarantee after the initiation of the CIRP is prohibited under the moratorium imposed by Section 14 of the IBC.
• Claims based on such impermissible invocation cannot be admitted in the CIRP.
• The Resolution Professional correctly rejected the Respondent's claim, as it was not a matured claim as of the insolvency commencement date.
• The Adjudicating Authority erred in allowing the Respondent's application for claim admission, as it did not consider the moratorium's prohibition on invoking guarantees.

The Court concluded by setting aside the Adjudicating Authority's order and rejecting the Respondent's application for claim inclusion in the Resolution Plan.

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