V. Ramakrishnan Vs. M/s. Veesons Energy Systems Pvt. Ltd. & Ors - Guarantor's Property during Moratorium - Right of Subrogation.

NCLT Chennai (18.09.2017) in Mr. V. Ramakrishnan Vs. M/s. Veesons Energy Systems Pvt. Ltd.  & Ors. [IA 05/2017 in CP/510/IB)/CB/2017] held that;

• Section 140 of the Indian Contract Act, 1872

• "Rights of surety on payment or performance. Where a guaranteed debt has become due, or default of the principal debtor to perform a guaranteed duty has taken place, the surety, upon payment or performance of all that he is liable for, is invested with all the rights which the creditor had against the principal debtor.

• 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.

Excerpts of the Order;

# 1. Under adjudication is an Interlocutory Application No: 5/2017 in CP/510/IB)/CB/2017 that as been filed by Guarantor (Promoter) viz., Mr. V. Ramakrishnan against M/s Veesons Energy Systems  Private Limited and State Bank of India. The Applicant (hereinafter called the Guarantor) is the Managing Director and Promoter of M/s. Veesons Energy Systems Private Limited who has given personal guarantee against the loan secured by M/s. Veesons Energy Systems Private Limited from State Bank of India. His contentions is that since is under the process of Corporate Insolvency Resolution Process as per the Order passed by this Bench on 04.08.2017 and the moratorium is declared, the first meeting of the Committee of Creditors (COC) has also been held and Mr. Raghavendaran has been recommended for appointment of Resolution Professional(RP). After public announcement, the State Bank of India has also filed the claim before IRP/RP and involved itself in the Corporate Insolvency Resolution Process. Now, after being part of the Corporate Insolvency Resolution Process, as a Financial Creditor, the State Bank of India issued an auction notice dated 12.07.2017 under the provisions of SARFAESI Act, 2002, in order to sell the property of the personal guarantor of M/s. Veesons Energy Systems Private Limited. 

# 2. The 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. 

# 3. For the sake of better appreciation, the relevant portion of Sections 14 and 31 of the I&B Code, 2016 is reproduced as follows: 

• "14. (1) Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely: 

• (a) .................... 

• (b) transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein; 

• (c) .......... » 

• "31. (1) If the Adjudicating Authority is satisfied that the resolution plan as approved by the committee of creditors under sub-section (4) of section 30 meets the requirements as referred to in sub-section (2) of section 30, it shall by order approve the resolution plan which shall be binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan. ............ 

As can be seen from the provisions of Section 14 (1) (b), the moratorium prohibits transferring, encumbering, alienating or disposing of by the corporate Debtor any of its assets or any legal right or beneficial interest therein and Section 31 (1) provides that if the adjudicating authority is satisfied that the Resolution Plan as approved by CoC under sub-Section (4) of Section 30, meets requirements as referred to in sub Section (2) of Section 30, it shall, by order approve the Resolution Plan which shall be binding on the Corporate Debtor and its employees, members, creditors, guarantors and other stake holders involved in the Resolution Plan. Because, if the property of the personal guarantor is sold by the Financial Creditor, the personal guarantor will have all the rights of that of the creditors against the Corporate Debtor, and in that way, a charge automatically gets created on the property of the Corporate Debtor which is against the purpose and object of the moratorium declared. Thus will violate the provisions of Section 14(1) (b) of the I&B Code, 2016. 

# 4. In this connection, it will be appropriate to make a reference to the provisions of Section 140 of the Indian Contract Act, 1872, which reads as follows: 

• "Rights of surety on payment or performance. Where a guaranteed debt has become due, or default of the principal debtor to perform a guaranteed duty has taken place, the surety, upon payment or performance of all that he is liable for, is invested with all the rights which the creditor had against the principal debtor. -Where a guaranteed debt has become due, or default of the principal debtor to perform a guaranteed duty has taken place, the surety, upon payment or performance of all that he is liable for, is invested with all the rights which the creditor had against the principal debtor."(emphasis supplied) 

# 5. The provisions of the above section came to be interpreted by the Division Bench of Hon'ble High Court of Madras in Parvateneni Bhushayya Vs. Potluri Suryanarayana, AIR 1944 Mad 195 at page 2014, which has held as under: 

• "Section 140, in our opinion, leaves no room for doubt on the point, because it expressly says that the surety upon payment of all that he is liable for is invested-that is, immediately invested-with all the rights which the creditor had against the principal debtor. The condition laid down by the section for this right to arise, is the payment by the surety of all that he is liable for, and not the payment of all that may be due to the creditor who holds the securities. Where the guaranteed debt is a fraction only of the debt, the surety's right comes into existence immediately on payment of that fraction, for that fraction is, so far as he is concerned, the whole.” 

In the light of the above, certainly 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. 

# 6. 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. 

# 7. 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. 

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Blogger’s Comments; Section 14 of the Code as amended w.e.f. 06.06.2018 & 28.12.2019 reads as follows;

# Section 14. Moratorium. -

(1) Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely: -

• (a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgement, decree or order in any court of law, tribunal, arbitration panel or other authority;

• (b) transferring, encumbering, alienating or disposing off by the corporate debtor any of its assets or any legal right or beneficial interest therein;

• (c) any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002);

• (d) the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.

Explanation.-For the purposes of this sub-section, it is hereby clarified that notwithstanding anything contained in any other law for the time being in force, a licence, permit, registration, quota, concession, clearance or a similar grant or right given by the Central Government, State Government, local authority, sectoral regulator or any other authority constituted under any other law for the time being in force, shall not be suspended or terminated on the grounds of insolvency, subject to the condition that there is no default in payment of current dues arising for the use or continuation of the license or a similar grant or right during moratorium period;

(2) The supply of essential goods or services to the corporate debtor as may be specified shall not be terminated or suspended or interrupted during moratorium period.

(2A) Where the interim resolution professional or resolution professional, as the case may be, considers the supply of goods or services critical to protect and preserve the value of the corporate debtor and manage the operations of such corporate debtor as a going concern, then the supply of such goods or services shall not be terminated, suspended or interrupted during the period of moratorium, except where such corporate debtor has not paid dues arising from such supply during the moratorium period or in such circumstances as may be specified.

(3) The provisions of sub-section (1) shall not apply to —

• (a) such transactions, agreements or other arrangement as may be notified by the Central Government in consultation with any financial sector regulator or any other authority;

• (b) a surety in a contract of guarantee to a corporate debtor.

(4) The order of moratorium shall have effect from the date of such order till the completion of the corporate insolvency resolution process:

Provided that where at any time during the corporate insolvency resolution process period, if the Adjudicating Authority approves the resolution plan under sub-section (1) of section 31 or passes an order for liquidation of corporate debtor under section 33, the moratorium shall cease to have effect from the date of such approval or liquidation order, as the case may be.

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