TaxTMI 
TaxTMI 
TaxTMI 
2019 (2) TMI 2000
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....ars and the Company was given financial facility limit upto Rs. 36.28 Crores, out of which, the said Company availed only Rs. 36 Crores as loan. As against the said loan, the valuable properties/assets of the said Company were given as "primary security" by creating equitable mortgage with the respondent, totally valued at Rs. 87.5 Crores. The said Company remained insolvent and the dues were mounting. Hence, the respondent-Bank initiated measures against the said Company under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for short, 'the SARFAESI Act'). Accordingly, a demand notice was issued on 07.07.2017 under Section 13(2) of the SARFAESI Act, calling upon the said Company and its Directors and Guarantors (including the Writ Petitioners herein), demanding repayment of Rs. 30,50,63,587.43 as on 07.07.2017, within 60 days from the date of the notice, otherwise, the Bank will exercise their rights under Section 13(4) of the SARFAESI Act. Hence, on 05.09.2017, the said Company (borrower) submitted a detailed representation to the respondent-Bank as envisaged under Section 13(3A) of the SARFAESI Ac....
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....tion for recovery of dues from the borrower-Company, continues, because of the pendency of the proceedings before the NCLT. In such a situation, the respondent-Bank brought the properties of the guarantors for sale by notice, dated 29.08.2018, under the provisions of the SARFAESI Act. Thus, E-Auction Notice is challenged in the present Writ Petitions. 6. Learned counsel for the petitioners submitted that the NCLT, by its order dated 25.01.2018, initiated the CIRP and subsequently ordered the liquidation on 06.08.2018. The NCLT, vide said order dated 06.08.2018, ordered for liquidation of the corporate debtor, namely M/s.GB Engineering Enterprises Private Limited and one Ms.C.S.Satyadevi Alamuri had been appointed as Liquidator, with a direction that the Company Liquidator shall exercise her powers and duties enumerated under Sections 35 to 50 and 52 to 54 of the IBC read with Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016. Besides that, Section 52(1)(a) of the IBC says that a secured creditor in the liquidation proceedings may relinquish its security interest to the liquidation estate and receive proceeds from the sale of assets by the liquidator ....
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.... of Sections 52 and 53 of the IBC, would reveal that the secured creditor relinquishing his security interest, has a higher footing and priority in the distribution of sale proceeds, and if there is a shortfall after realisation of security interest, the proximity of being paid by the liquidator, is remote. It is incumbent to point out that when once the secured creditor chooses to realise its security interest as per Section 52(1)(b) of the IBC, the NCLT is vested with powers to facilitate and permit a secured creditor in accordance with law for the time being in force, as per Section 52(6) of the IBC. As such, the secured creditor ought to obtain permission before the NCLT before realising its security interest under the provisions of the SARFAESI Act. Contrary to realisation of security interest, if the secured creditor chooses to relinquish its security interest, the secured creditor shall await the sale of assets by the liquidator and the consequent distribution of assets as per Section 53(1)(b)(ii) of the IBC. 9. In the above background, learned counsel for the petitioners submitted that the measures adhered to by the respondent-Bank invoking the provisions of SARFAESI Act, ....
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.... after the guarantor's property, is prejudicial and impairing the guarantor's eventual remedy, as the principal debtor itself is about to be liquidated. Therefore, learned counsel for the petitioner submitted that the guarantor ought to be discharged for the liability. In this context, learned counsel for the petitioners relied on a decision of the Uttaranchal High Court reported in 2004 (II) BC 241 = 2004 (1) UC 451 = 2004 (1) UD 359 (Unique Engineering Works Vs. Union of India), in which, the Division Bench made recommendations to the Reserve Bank of India (RBI) regarding banks choosing to enforce security interest. The relevant portion of the said decision reads as follows: "30. The impugned NPA Act, 2002 does contain stringent measures. In the circumstances, as a matter of recommendation to the Reserve Bank of India which is empowered to issue directions, we hereby make following suggestions, which suggestions will not provide any cause of action for litigation. The suggestions are as follows : ... .... ... (e) As far as sale of residential houses are concerned Banks should try to recover the loan amount from principal borrower. They should try to encash securitie....
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.... insolvency proceedings. The bar of jurisdiction is also specifically provided for in the IBC under Section 231, as per which, no Civil Court shall have jurisdiction in respect of any matter in which the Adjudicating Authority or the Board is empowered by, or under the IBC to pass any order and no injunction shall be granted by any Court or other authority in respect of any action taken or to be taken in pursuance of any order passed by such Adjudicating Authority under the IBC. Further, the provisions of the IBC will over-ride other laws in terms of Section 238 of the IBC. Learned counsel for the petitioners relied on a decision of the Supreme Court in the case of PR.Commissioner of Income Tax Vs. Monnet Ispat and Energy Limited in Petition(s) for Special Leave to Appeal (C).No.6483 of 2018, wherein, by order dated 10.08.2018, the Apex Court observed that it is obvious that the IBC will over-ride anything inconsistent contained in any other enactment including the Income Tax Act. Thus, as such, when the secured creditor relinquished the security interest and agreed to receive the proceeds from the sale of assets by liquidator, the measures provided under Section 13(4) of the SARFA....
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....n Contract and Specific Relief Act, Tenth Edition, at page 728, as under: "Co-extensive: Surety's liability is co-extensive with that of the principal debtor. A surety's liability to pay the debt is not removed by reason of the creditor's omission to sue the principal debtor. The creditor is not bound to exhaust his remedy against the principal before suing the surety, and a suit may be maintained against the surety though the principal has not been sued." 16. Learned Senior Counsel appearing for the respondent-Bank also invited the attention of this Court to Halsbury's Laws of England, Fourth Edition, Vol.20, paragraph 159 at page 87, wherein, it is observed that "it is not necessary for the creditor, before proceeding against the surety, to request the principal debtor to pay or to sue him, although solvent, unless this is expressly stipulated for". Thus, learned Senior Counsel appearing for the respondent-Bank submitted that the secured creditor first surrendered only the properties of the borrower to the liquidator, which do not form part of the auction sale and so far as the properties of the personal guarantors are concerned, absolutely there is no impedi....
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.... corporate debtor. Therefore, the interest of the personal guarantor is covered under the Resolution Plan, which may not be the case during liquidation, especially when the secured creditor chooses to relinquish its security interest, instead of realisation of such interest under the provisions of the SARFAESI Act. Having relinquished its security interest, the secured creditor shall await the sale proceeds in order to quantify its dues before proceeding against the personal guarantors. The learned counsel for the petitioners submitted that the judgment relied on by the learned Senior Counsel appearing for the respondent-Bank in Ramakrishnan's case (cited supra) is only dealing with moratorium period and CIRP process, and not with regard to the stage of liquidation. So far as the present case is concerned, after the expiry of the moratorium period, the liquidation was ordered by the NCLT, and therefore, the said Ramakrishnan's case cannot be made applicable to the facts of the present case. Thus, learned counsel for the petitioners prayed to allow the Writ Petitions. 18. Heard the submissions made on both sides. As we have dealt with the factual matrix of the case in detai....
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....or the petitioners that besides that, Section 52(1)(a) of the IBC also says that a secured creditor in the liquidation proceedings, may relinquish its security interest to the liquidation estate and receive the proceeds from the sale of assets by liquidator in the manner specified in Section 53 of the IBC. In the present case, invoking the aforesaid provision, when the respondent-Bank has chosen to relinquish their security interest to the liquidator and preferred to receive its dues from the sale proceeds of the assets from the liquidator, they cannot proceed against the personal properties of the guarantors under the SARFAESI Act. In this regard, the learned counsel for the petitioners made detailed submissions by inviting the attention of this Court to Section 141 of the Indian Contract Act, as per which, a surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship is entered into, whether the surety knows of the existence of such security or not, and if the creditor loses or without the consent of the surety, parts with such security, the surety is discharged to the extent of the value of t....
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....s a collateral security usually taken by a banker. The security will become useless if his rights against the surety can be so easily cut down. ..." 23. The learned Senior Counsel appearing for the respondent-Bank also referred to a decision of the Supreme Court reported in AIR 1992 SC 1740 (State Bank of India Vs. M/s.Indexport Registered) and submitted that the liability of the surety/guarantor is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract and a decree-holder can execute the decree against the guarantor without proceeding against the principal borrower. Learned Senior Counsel appearing for the respondent-Bank also relied on a decision of the Supreme Court reported in 2009 (7) MLJ 129 (SC) = 2009 (9) SCC 478 (Industrial Investment Bank of India Ltd. Vs. Biswanath Jhunjhunwala), whereinalso, it was held by the Apex Court that the liability of the guarantor and principal debtors is co-extensive and not in alternative. 24. Therefore, we are of the opinion that, since the liability of the guarantor and principal debtor is co-extensive, it is absolutely not necessary for the Bank to first proceed against the principal debtor and th....
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....er section 33, the moratorium shall cease to have effect from the date of such approval or liquidation order, as the case may be." 25. In the above background, learned Senior Counsel for the respondent-Bank relied on a decision of the Supreme Court reported in AIR 2018 SC 3876 = 2018 SCC Online SC 963 (State Bank of India Vs. V.Ramakrishnan), wherein the Supreme Court made it clear that the proceedings of the NCLT will not stand in the way of invoking SARFAESI Act proceedings as against security given as guarantor to a debt. It is useful to extract the relevant portion of the said judgment of the Supreme Court in the case of V. Ramakrishnan: "18. However, Sections 2(e) and Section 60 are strongly relied upon by learned counsel for the Respondents as, according to them, the Code will apply to personal guarantors of corporate debtors, and by Section 60, proceedings against such personal guarantors will show that such moratorium extends to the guarantor as well. 19. We are afraid that such arguments have to be turned down on a careful reading of the Sections relied upon. Section 60 of the Code, in sub-section (1) thereof, refers to insolvency resolution and liquidation for both c....
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....tional Company Law Tribunal constituted under the Companies Act, 2013. 21. The scheme of Section 60(2) and (3) is thus clear - the moment there is a proceeding against the corporate debtor pending under the 2016 Code, any bankruptcy proceeding against the individual personal guarantor will, if already initiated before the proceeding against the corporate debtor, be transferred to the National Company Law Tribunal or, if initiated after such proceedings had been commenced against the corporate debtor, be filed only in the National Company Law Tribunal. However, the Tribunal is to decide such proceedings only in accordance with the Presidency- Towns Insolvency Act, 1909 or the Provincial Insolvency Act, 1920, as the case may be. It is clear that sub-section (4), which states that the Tribunal shall be vested with all the powers of the Debt Recovery Tribunal, as contemplated under Part III of this Code, for the purposes of sub-section (2), would not take effect, as the Debt Recovery Tribunal has not yet been empowered to hear bankruptcy proceedings against individuals under Section 179 of the Code, as the said Section has not yet been brought into force. Also, we have seen that Sect....
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....ed. The difference in language between Sections 14 and 101 is for a reason. Section 14 refers only to debts due by corporate debtors, who are limited liability companies, and it is clear that in the vast majority of cases, personal guarantees are given by Directors who are in management of the companies. The object of the Code is not to allow such guarantors to escape from an independent and co-extensive liability to pay off the entire outstanding debt, which is why Section 14 is not applied to them. However, insofar as firms and individuals are concerned, guarantees are given in respect of individual debts by persons who have unlimited liability to pay them. And such guarantors may be complete strangers to the debtor--often it could be a personal friend. It is for this reason that the moratorium mentioned in Section 101 would cover such persons, as such moratorium is in relation to the debt and not the debtor. We may hasten to add that it is open to us to mark the difference in language between Sections 14 and 96 and 101, even though Sections 96 and 101 have not yet been brought into force. This is for the reason, as has been held in State of Kerala and others Vs. Mar Appraem Kur....
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....nd got published in the Official Gazette] as the Central 1982 Act intended to cover the entire field with regard to the conduct of the chits and further that the State Finance Act 7 of 2002, introducing Section 4(1)(a) into the State 1975 Act, was void as the State Legislature was denuded of its authority to enact the said Finance Act 7 of 2002, except under Article 254(2), after the (Central) Chit Funds Act, 1982 occupied the entire field as envisaged in Article 254(1) of the Constitution." 26. According to the learned Senior Counsel appearing for the respondent- Bank, the dictum laid down in the above judgment of the Supreme Court will squarely apply to the facts of the case, and hence, Section 14 of the IBC cannot apply to the personal guarantors. Therefore, there is no bar in proceeding against the personal properties of the guarantors, even when the order of liquidation is in force as against the principal borrower. But it is the reply of the learned counsel for the petitioners that the amendment made in Section 14(3)(b) of the IBC will apply only during the moratorium period and not after ordering liquidation. The said judgment of the Supreme Court in Ramakrishnan's case....
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.... of the SARFAESI Act on 22.09.2017 and 10.11.2017 respectively. Public at large is informed that e-auction under SARFAESI Act, 2002 of the schedule mentioned charged properties in the names of the below mentioned GUARANTORS, for realisation of Bank's dues, will be held on "AS IS WHWERE IS BASIS and AS IS WHAT IS BASIS". Name of Borrower: M/s. G. B. Engineering Enterprises Pvt. Ltd. (under liquidation with effect from the date of order of liquidation, i.e. 06.08.2018 issued by the Hon'ble NCLT, Chennai in MA/285/IB/2018 in CP/64/ (IB)/2017 filed u/s.10 of Insolvency and Bankruptcy Code, 2016), represented by its Liquidator Ms. CS Satyadevi Alamuri, having its registered office at D-99, Developed Plots Estate, Thuvakudi, Tiruchirapalli-620015 (hereinafter called as "Borrower"). The charged properties in the name of the borrower herein, do not form part of this auction sale, as the undersigned authorised officer has relinquished the said properties to the liquidator as per the provisions of Section 52(1)(a) of Insolvency and Bankruptcy Code, 2016." 27. Further, as observed earlier, there is no law prohibiting the creditor to take legal action to recover the amount from the ....