K.V. Jayaprakash vs State Bank Of India

[Arising out of an order dated 3rd February, 2022 passed in Interlocutory Application(IB). No.113/CB/2021 in TP No.255/CTB/2019 in CP (IB) No.593/KB/2017 by the Adjudicating Authority (National Company Law Tribunal, Cuttack Bench]

IN THE MATTER OF:

K.V. Jayaprakash S/o K. Vishwanadh Sethty Residing at No. 166, K.R./.S. Road, V.V. Puram, Basavanagudi, Bangalore - 560 004 .. Appellant

Versus

1. State Bank of India, Stressed Assets Management Branch-II, Hyderabad, D. No. 3-4-1013/A. New Bus station, 1st Floor, Commuter Amenity Centre, TSRTC, Kachiguda, Hyderabad- 500 027 .. Respondent No. 1

2. Ravi Sankar Devarakonda Liquidator of Coastal Projects Ltd., At D-602, Prestige St. Johnwood Apartment, No. 80, Tavarakere Main Road, Chikka Adugodi, Bangalore- 560 029. .. Respondent No. 2

Present:

For Appellant: Dr. Menaka Guruswamy, Sr. Adv. With Mr. D.V. Raghuvamsy, Mr. Yash S Vijay, Mr. Utkarsh Pratap, Advocates

For Respondent: Mr. Ramji Srinivasan, Sr. Adv. With Mr. Avrojyoti Chatterjee, Mr. Rajiv S. Roy, Ms. Rajshree Choudhary, Ms. Megha Dugar, Ms. Jayasree Saha, Advocates for R-1. Ms. Samiksha Godiyal, Mr. Govind Manoharan, Ms. Sugandha Yadav, Advocates for R-2. 2 Company Appeal(AT)(Insolvency) No. 362 of 2022

JUDGMENT

[30th September, 2022]

(Per Hon'ble Mr. Justice M. Satyanarayana Murthy)

This appeal under Section 61 (1) of the Insolvency and

Bankruptcy Code, 2016 (for short "IBC") is filed by K.V.Jayaprakash,

who is a personal guarantor of corporate debtor, aggrieved by the

order dated 03.02.2022 passed by the National Company Law

Tribunal (Adjudicating Authority), Cuttack Bench in

INTERLOCUTORY APPLICATION(IB).No.113/CB/2021 in TP

No.255/CTB/2019 in CP (IB) No.593/KB/2017, whereby the

INTERLOCUTORY APPLICATION filed by the petitioner for various

reliefs was dismissed by the Adjudicating Authority.

2. The factual matrix is as follows:

The appellant filed the INTERLOCUTORY APPLICATION before

the Adjudicating Authority with a request to direct respondent No.1 to

abstain from proceeding with the public auction of properties

belonging to the appellant on 11.11.2021 under Section 60 (5) of IBC

read with Rule 11 of the NCLT Rules, 2016 in view of the liquidation

order dated 06.12.2018 passed by the NCLT admitting Coastal

Projects Limited (Corporate Debtor) into liquidation (Liquidation

Order).

The Corporate Debtor availed loan facility to a tune of Rs.774.12

Crore from respondent No.1 bank, to which the appellant stood as a 3 Company Appeal(AT)(Insolvency) No. 362 of 2022

guarantor for the Corporate Debtor and the appellant's property was

taken as collateral security by respondent No.1. Upon default by the

Corporate Debtor in repayment of the debt, respondent No.1 declared

the debt as a Non-Performing Asset (for short "NPA") on 25.01.2017,

thereafter, filed application in terms of Section 7 of the IBC for

initiation of Corporate Insolvency Resolution Process (for short "CIRP")

against the Corporate Debtor. The NCLT, Kolkata Bench by its order

dated 05.01.2018 admitted respondent No.1's petition initiating the

CIRP against the Corporate Debtor and appointed respondent No.2 as

resolution professional.

During the CIRP process, respondent No.1 had submitted its

claim, most of which was admitted by the resolution professional. The

list of creditors and their corresponding claims admitted by the

resolution professional (RP) was uploaded on the website of the

Corporate Debtor on 26.09.2018. Due to unsuccessful CIRP, the

Corporate Debtor was admitted into liquidation vide Liquidation Order

on 06.12.2018 by the Adjudicating Authority and respondent No.2

was appointed as Liquidator.

Respondent No.1 submitted its claim to the Liquidator in

response to the public announcement under Section 33 (1) (b) (ii) of

the IBC for liquidation of the Corporate Debtor. Major of the amount

claimed by respondent No.1 was also admitted and formed part of the

claims consolidated by the Liquidator under Section 38 of the IBC and

submitted a report to the Adjudicating Authority under Regulation 13 4 Company Appeal(AT)(Insolvency) No. 362 of 2022

of the Insolvency and Bankruptcy Board of India (Liquidation Process)

Regulations, 2016 (for short "Liquidation Process Regulations, 2016")

Respondent No. 1 filed an application under Section 14 of

SARFAESI Act before the Court of XXXVII Additional Chief

Metropolitan Magistrate, Bangalore (for short "XXXVII ACMM") against

the Corporate Debtor and its guarantors, including the appellant

herein, for taking possession of the Property, without honouring or

even disclosing the fact that the Corporate Debtor was under

liquidation, fraudulently suppressing and concealing the fact that the

moratorium was in force under Section 33(5) of the IBC. Accordingly,

the XXXVII ACMM, Bangalore allowed the said application under

Section 14 of SARFAESI Act to take possession of the Property vide

order dated 03.08.2021. Thereafter, the appellant filed an appeal

against respondent No.1 under Section 17 of SARFAESI Act,

challenging the order passed under Section 14 of SARFAESI Act,

before the Debts Recovery Tribunal, Bangalore (for short " DRT") in

S.A. No. 258/2021. During pendency of the said appeal, respondent

No.1 on the strength of the order passed under Section 14 of

SARFAESI Act, issued notice dated 29.09.2021 under Rule 8(6) of the

Security Interest (Enforcement) Rules, 2002 to conduct public auction

of the Property on 11.11.2021. The said notice was followed by a sale

notice dated 06.10.2021 published in the 'Deccan Herald' and

'Prajavani' newspapers on 07.10.2021 at Bengaluru and also on the

websites of respondent No. 1 and the Indian Banks Auctions 5 Company Appeal(AT)(Insolvency) No. 362 of 2022

Mortgaged Properties Information ("IBAPI") portal. In the meantime,

the appeal of the appellant before the DRT was dismissed on

04.10.2021, confirming the order passed under Section 14 of

SARFAESI Act.

The appellant filed Interlocutory Application before NCLT,

Cuttack challenging the action of the Respondent No. 1 and sought

the following reliefs:

a) The Respondent No.1 has erroneously sought to proceed against the Appellant, a personal guarantor to the Corporate Debtor's debt, prior to the expiry of the moratorium imposed in terms of the Liquidation Order under Section 33 of the IBC, as any recovery of the Corporate Debtor's debt from the Appellant would result in a consequential violation of the moratorium imposed vide the Liquidation Order dt. 06.12.2018

b) The actions of the Respondent No.1 are in contravention of the provisions of the IBC as the Respondent No.1 has failed to follow the procedure prescribed therein for recovery of debt by a financial creditor during the liquidation of the Corporate Debtor.

c) In terms of section 60(2) of the IBC (as amended with effect from 06.06.2018), where a liquidation proceeding of the Corporate Debtor is pending before the Tribunal, an application relating to liquidation or bankruptcy of a personal guarantor of such Corporate Debtor shall be filed before such Tribunal. Therefore, the Respondent No.1 erroneously invoked the provisions of the SARFAESI Act by approaching a forum other than the Tribunal.

6 Company Appeal(AT)(Insolvency) No. 362 of 2022

d) In view of section 60(5)(c) of the IBC, the Tribunal shall have jurisdiction to entertain or dispose of any question of law or fact arising out of or in relation to the liquidation proceeding of the Corporate Debtor.

e) Section 238 has an overriding effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force. The inconsistency between the IBC and the SAFAESI Act is that when under Section 101, the IBC provides moratorium, the provision of SARFAESI Act allows the sale of Property. Therefore, when there is an inconsistency the provisions of IBC shall prevail

f) There is difference between a surety (u/s 128 of the Contract Act) and a guarantor. The surety's liability is co extensive with that of the principal borrower whereas, the guarantor's liability is secondary to that of the principal borrower.

The Tribunal dismissed the Interlocutory Application, by

impugned order on the following grounds.

a) The IA was neither maintainable nor sustainable as the Appellant personal guarantor was a stranger to the insolvency and bankruptcy proceedings pending between the Respondent No. 1 and the Corporate Debtor and could not invoke Section 60(5)(c) of the IBC to file the IA.

b) The Notification No.S.O.4126(E) dated 15.11.2019 (for short "Notification") has the effect that only insolvency proceedings initiated against the personal guarantor of a corporate debtor are to be instituted under the IBC as opposed to the provisions of the Presidency-Towns Insolvency Act, 1909 (for short "PTA Act") and the 7 Company Appeal(AT)(Insolvency) No. 362 of 2022

Provincial Insolvency Act, 1920 (for short "PIA Act"). The said Notification does not prohibit the financial creditor from proceeding against the personal guarantor of a corporate debtor by instituting recovery proceedings permissible under any other existing and applicable law

c) The proceedings initiated by the Respondent No.1 against the Appellant under the SARFAESI Act need not be quashed as such proceedings are not proceedings under the IBC and there is no bar against the Respondent No.1 in continuing the SARFAESI proceedings against the Appellant.

3. The appellant challenged the said findings raising several

contentions on various grounds. However, the specific questions of

law arise for consideration in the appeal are also formulated by the

appellant in Paragraph No.8.2 of the grounds of appal.

4. The main grounds urged before this Tribunal, in the grounds of

appeal and in the written submissions are that, the insolvency of the

Corporate Debtor that resulted in its inability to meet loan repayment

obligation towards its financial creditor, ie, the Respondent No.1. It

was only when the Respondent No.1 was unable to recover its

financial debt from the Corporate Debtor, respondent No.1 pursued all

legal remedies available to it for the recovery of such bad debts

accordingly. In addition to initiating appropriate proceedings under

the IBC, respondent No.1 also sought to recover such amount from

the Appellant.

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Company Appeal(AT)(Insolvency) No. 362 of 2022

5. The moratorium declared in the Liquidation Order under

Section 33 of the IBC is identical to the moratorium prescribed under

Section 14 read with 31 of the IBC in case of CIRP of the Corporate

Debtor, imposes an embargo on the institution of any suit or other

legal proceedings against the Corporate Debtor, which includes

prohibition in transferring, encumbering, alienating or disposing of by

the Corporate Debtor any of its assets or any legal right or beneficial

interest therein.

6. As per Section 140 of the Indian Contract Act, 1872, 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. Thus, the

appellant is having right to proceed against the assets of corporate

debtor to recover the amount he paid or discharged as part of his

obligation being a guarantor, but due to moratorium, the appellant

cannot proceed against the corporate debtor. However, the Code is

silent as to the right of the appellant to recover the amount from the

corporate debtor when the entire assets of the corporate debtor were

liquidated in the liquidation process. Therefore, there is interplay

between the provisions of IBC and the Contract Act. In such

circumstances, the appellant cannot be deprived of remedy to recover

the amount he paid as part of his obligation under the agreement of

guarantee under the Indian Contract Act, from the Corporate Debtor. 9

Company Appeal(AT)(Insolvency) No. 362 of 2022

7. The proceedings under the SARFAESI Act are independent and

separate, though is unquestionable, the same is not applicable to the

present case. It is the same creditor i.e. respondent No. 1, at whose

behest the Corporate Debtor went into liquidation earlier. During the

pendency of the same liquidation proceeding, the same creditor has

pursued the instant actions under the SARFAESI Act suppressing the

factum of pendency of the liquidation proceedings. Therefore, both

proceedings are related and not independent of each other, and have

been initiated pursuant to the insolvency of the Corporate Debtor.

Accordingly, the Tribunal erroneously dismissed the petition and the

Tribunal strongly relied on the law laid down by the Apex Court in

"Gujarat Urja Vikas Nigam Limited Vs. Amit Gupta1" (hereinafter

referred to as "Gujarat Urja Judgment") and concluded that the

Interlocutory Application filed by the appellant under Section 60 (5)

was neither maintainable nor sustainable.

8. The Apex Court at paragraph No.69 of the said Gujarat Urja

Judgment, relied on its earlier judgment in "Arcelor Mittal (India) (P)

Ltd. Vs. Satish Kumar Gupta2", wherein the following observations

were made:

"The non-obstanate clause in Section 60 (5) is designed for a different purpose to ensure that NCLT alone has jurisdiction when it comes to applications and proceedings by or against a Corporate Debtor covered by the Code, making it clear that no other forum has Jurisdiction to entertain or dispose of such applications or proceedings."

1 (2021) 7 SCC 209 2 (2019) 2 SCC 1 10 Company Appeal(AT)(Insolvency) No. 362 of 2022

9. In view of the principles laid down in the above judgment,

Section 60 (2) of the IBC was amended with effect from 06.06.2018.

From the reading of amended provision, it is evident that Section 60(2)

which came into effect from 06.06.2018, includes liquidation and

bankruptcy of a corporate debtor or personal guarantor within the fold

of Section 60 of IBC. Therefore, the aforementioned observations in

the Gujarat Urja Judgement have to be read in tandem with the

amended Section 60(2) of IBC, whereby the logical deduction is that

the Tribunal is the only forum which has the jurisdiction to entertain

any application or proceeding relating to a personal guarantor of a

corporate debtor. But, the Tribunal erroneously held that the IA filed

by the Appellant under Section 60(5) was neither maintainable nor

sustainable, dismissed the petition erroneously.

10. It is also contended that the principle laid down by the Hon'ble

Apex Court in "State Bank of India Vs. V.Ramakrishnan3" has no

application as it is prior to the amendment of Section 60 (2). But,

based on the principle laid down in the above judgment, the

Adjudicating Authority dismissed the petition on erroneous

appreciation of law.

11. It is further contended that the Tribunal failed to appreciate

that respondent No.1 has acted in breach of the liquidation order as

well as provisions of IBC since moratorium is deemed to be in force to

proceed against the appellant, who is a guarantor of corporate debtor.

3 (2018) 17 SCC 394 11 Company Appeal(AT)(Insolvency) No. 362 of 2022

Similarly, Adjudicating Authority did not appreciate the interplay

between the provisions of IBC and the Indian Contract Act based on

the principle laid down in "Amulya Lal Choudhury Vs. Tripura

Industrial Development4" Thus, committed a grave error in

dismissing the Interlocutory Application filed by the petitioner under

Section 60 (5) of the IBC read with Rule 11 of the NCLT Rules, 2016.

12. The appellant brought on record few additional facts by filing

INTERLOCUTORY APPLICATIONNo.1427 of 2022, wherein the

appellant submitted that the auction of the property in question was

held on 29.04.2022 and the bid was knocked down in favour of M/s.

Bagmane Developers Private Limited for Rs.135,50,00,000/-. A letter

dated 29.04.2022 bearing No.SAMB-II/HYD/MMK/2022-23/72

issued by the State Bank of India to M/s. Bagmane Developers Private

Limited communicating about the knocking the bid in its favour. In

the said letter also, it is intimated that the auction is subject to

outcome/result of the appeal pending before this Tribunal.

13. Respondent No.1 filed reply admitting about the passing of

liquidation order, appointment of respondent No.2 as liquidator and

also admitted about the proceedings initiated under Section 14 of the

SARFAESI Act before Court of XXXVII Additional Chief Metropolitan

Magistrate, Bangalore, obtaining order for taking possession, issue of

notice etc.

4 AIR 2007 Gau 113 12 Company Appeal(AT)(Insolvency) No. 362 of 2022

14. The main objection raised by respondent No.1 is that the

appellant indulged in "forum shopping" as the appellant lost its

remedy both before the XXXVII ACMM, Bangalore and DRT in the

appeal filed under Section 17 of the SARFAESI Act. It is further

submitted that Section 60 (5) does not permit the Adjudicating

Authority to decide such issues which are not between the Corporate

Debtor and the Creditor, thereby the petition is not maintainable

under Section 60(5) of IBC.

15. Respondent No.1 supported the order passed by the

Adjudicating Authority based on the principle laid down in "State

Bank of India Vs. V.Ramakrishnan" (referred supra) while accepting

the purpose of amending Section 60 (2) enabling the creditor to

proceed against the personal guarantor of corporate debtor.

16. It is further contended that when the similar issue came up

before the High Court of Delhi in "Kiran Gupta Vs. State Bank of

India [W.P.(C) No.7230/2020), wherein the Court held as under:

"The view expressed by the Supreme Court amply demonstrates that neither Section 14 nor Section 31 of the IB Code place any fetters on Banks/Financial Institutions from initiation and continuation of the proceedings against the guarantor for recovering their dues. That being the position, the plea taken by the counsel for the petitioner that all proceedings against the petitioner, who is only a guarantor, ought to be stayed under the SARFESI Act during the continuation of the Insolvency Resolution process qua the Principal Borrower, is rejected as meritless. The petitioner cannot escape her liability qua the respondent/Bank in such a manner. The liability of the principal borrower and the 13 Company Appeal(AT)(Insolvency) No. 362 of 2022

Guarantor remain co-extensive and the respondent/Bank is well entitled to initiate proceedings against the petitioner under the SARFESI Act during the continuation of the Insolvency Resolution Process against the Principal Borrower."

17. The legislative intent and the object of the Code has been to

permit the creditor to proceed for both recovery action under the

SARFAESI Act and/or to initiate insolvency resolution process qua the

personal guarantor, and leave the same unfettered as a commercial

discretion of the creditor. Had the same not been the intent and had

the legislative intent been to exclude the rights of the creditor to

initiate recovery actions under SARFAESI Act, upon promulgation of

Part III of the Code, the applicable provisions of the SARFAESI Act

would also have been repealed under Section 243 of the Code.

However, the same not being the legislative intent, the provisions of

the Presidency Towns Insolvency Act, 1909 and the Provincial

Insolvency Act, 1920 only were repealed in terms of Section 243 of the

Code, leaving the SARFAESI Act, intact.

18. When similar issue came up before the Apex Court in "Lalit

Kumar Jain Vs. Union of India5", the Apex Court held in paragraph

No.111 as follows:

"In view of the above discussion, it is held that approval of a resolution plan does not ipso facto discharge a personal guarantor (of a corporate debtor) of her or his liabilities under the contract of guarantee. As held by this court, the release or discharge of a principal borrower from the debt owed by it to its

5 (2021) 9 SCC 321 14 Company Appeal(AT)(Insolvency) No. 362 of 2022

creditor, by an involuntary process, i.e. by operation of law, or due to liquidation or insolvency proceeding, does not absolve the surety/guarantor of his or her liability, which arises out of an independent contract."

19. While coming to the aforesaid conclusion, the Hon'ble Supreme

Court of India has referred and relied on the aforesaid judgment of

"State Bank of India Vs. V.Ramakrishnan" (referred supra) but also

on other judgments. Notably, the Hon'ble Apex Court had also

considered the provisions of Section 128 the Indian Contract Act 1872

as well as the rights of the guarantor under Section 140 of the Indian

Contract Act 1872 and thereafter held that "the release or discharge

of a principal borrower from the debt owed by it to its creditor,

by an involuntary process, i.e. by operation of law, or due to

liquidation or insolvency proceeding, does not absolve the

surety/guarantor of his or her liability, which arises out of an

independent contract. In view of the same, it is contended that the

submission of the appellant that in view of the liquidation of the

corporate debtor, upon auction of the property under the SARFAESI

Act, he remains remediless (inspite of the rights envisaged under

Section 140 of the Indian Contract Act 1872), is also wrong, illegal,

untenable and deserves to be rejected.

20. Respondent No.1 denied the contention of the appellant that

respondent No.1 has acted in breach of the liquidation order dated

06.12.2018. It is contended that the argument of the appellant that

respondent No.1 could not proceed against the appellant/personal 15 Company Appeal(AT)(Insolvency) No. 362 of 2022

guarantor, in terms of Section 33 (5) of the Code is also incorrect and

erroneous in view of sub-section (5) of Section 33 of the Code, which is

as follows:

"(5) Subject to Section 52, when a liquidation order has been passed, no suit or other legal proceedings shall be instituted by or against the corporate debtor,

Provided that a suit or other legal proceeding may be instituted by the liquidator, on behalf of the corporate debtor, with prior approval of the Adjudicating Authority."

21. Respondent No.1 contended that the proceedings under

SARFAESI Act is not barred in view of the overriding provision i.e.

Section 238 of the Code. In the present case, an initiation of

insolvency resolution process against the principal borrower and/or

the guarantor under the provisions of the Code and initiation of

recovery actions under the SARFAESI Act being distinct and separate

statutory legal remedies available to the creditor, the applicability of

the provisions of Section 238 of the Code or the question of any

'inconsistency' ipso facto does not arise. That the Appellant herein

endeavours to mislead this Tribunal by equating 'insolvency resolution

process' with 'recovery action'.

22. It is contended that in terms of the agreed clauses/covenants of

the last executed deed of guarantee dated 26.06.2014 by the

Appellant, in favour of this Respondent bank, as security for the debts

of the corporate debtor, the liability of the appellant was agreed to be

co-extensive with that of the principal debtor/ corporate debtor, to the 16 Company Appeal(AT)(Insolvency) No. 362 of 2022

extent of the value of the mortgaged asset (i.e.Rs. 164.06 Crores) plus

interest, charges etc. The guarantor/ Appellant in acknowledgement of

the nature of his liability had agreed as under:

7. In order to give effect to the Guarantee herein contained the Bank shall be entitled to act as if the Guarantors were principal debtors to the Bank for all payments guaranteed by them as aforesaid to the Bank.

23. In view of the above agreed terms of contract, the Appellant is

now estopped from taking a contrary stand.

24. On the basis of the above grounds, respondent No.1 sought

dismissal of the appeal as not maintainable, upholding the order

passed by the Adjudicating Authority.

25. Respondent No.2 - Liquidator filed reply admitting his

appointment as liquidator, dismissal of applications etc. by the DRT

and by the Adjudicating Authority in various proceedings.

26. Respondent No.2 contended that respondent No.1 has initiated

proceedings against the appellant under Chapter III of the SARFAESI

Act in his capacity as a personal guarantor for the debts owed by the

Corporate Debtor to respondent No.1. In terms of the deed of

guarantee dated 26.06.2014, (i) the appellant has mortgaged his

personal property to secure the debt owed by the Corporate Debtor to

respondent No.1; and (ii) the appellant has an independent, co- 17

Company Appeal(AT)(Insolvency) No. 362 of 2022

extensive and primary obligation to pay respondent No.1 to the extent

of the value of the mortgaged asset i.e. Rs.164.06 crores.

27. Respondent No.1 initiated insolvency resolution proceedings

against the Corporate Debtor under Section 7 of the IBC, which

culminated into passing of liquidation order by Adjudicating Authority

on 06.12.2018. In terms of the liquidation order as well as provisions

of the IBC, respondent No.2 is requested to proceed with the

liquidation process in the manner laid down in Chapter III of the

Code. As set out in this Chapter, more particularly Section 36, the

liquidator is required to form a "liquidation estate" and hold the

liquidation estate as a fiduciary for the benefit of all creditors. The

liquidator has no power or authority to deal with any assets outside

the liquidation estate of the corporate debtor. Section 36 stipulates

that only properties belonging to, or vested in, the corporate debtor

can form part of the liquidation estate. Personal assets of third parties

including shareholders, members and guarantors cannot be included

in the liquidation estate of a corporate debtor and the liquidator

cannot deal with such assets at all. Admittedly, the property

mortgaged to respondent No.1 under the deed of guarantee is the

appellant's personal property. It does not belong to, or vest in, the

Corporate Debtor. As such, it is not part of the liquidation estate of

the Corporate Debtor and respondent No.2 has no authority to deal

with it.

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Company Appeal(AT)(Insolvency) No. 362 of 2022

28. Since the property sold by respondent No.1 under the

SARFAESI Act is the appellant's personal property, respondent No.2

has no power under Section 52 of the IBC or otherwise, to verify

respondent No.1's security interest in this regard and to permit its

realization as contemplated in Section 36 read with Section 52 of the

IBC.

29. Finally, respondent No.2 contended that respondent No.2 being

statutory officer appointed under the Act acted in accordance with law

and not liable for the acts of the Creditors, requested to dismiss the

appeal.

30. During argument, Ms. Menaka Guruswamy, learned senior

counsel, would contend that on account of proceeding against the

Corporate debtor while moratorium is in force, he is deprived of his

right to recover the amount from the principal debtor and that Section

146 of the Indian Contract Act provides a remedy to proceed against

the principal debtor by the guarantor for indemnification. On account

of liquidation of assets of the corporate debtor (principal debtor), the

petitioner is deprived of his right to recover the amount he paid to the

secured creditor (respondent No.1) and became remediless. But the

Tribunal did not consider the conflict between the provisions of the

Indian Contract Act and the IBC.

31. It is further contended that while moratorium is in force,

Section 14 and 36 prohibits proceeding with any suit or proceedings 19 Company Appeal(AT)(Insolvency) No. 362 of 2022

against the corporate debtor, but without considering the same, the

property of the appellant was sold in the public auction as per the

provisions of SARFAESI Act, which is illegal and arbitrary.

32. She also submitted written briefs reiterating the contentions

urged in the grounds of appeal and mainly contended that the

judgment of the Hon'ble Apex Court in "State Bank of India Vs.

V.Ramakrishnan" (referred supra) has no application since the

amendment was given effect from 06.06.2018, whereas the

proceedings against the appellant were initiated on 17.08.2018. The

amended Section 60 (2) now included the liquidation or bankruptcy of

a personal guarantor. On 15.11.2019, vide notification No.S.O.4126(E)

dated 15.11.2019, insolvency proceedings against personal guarantor

were now to be instituted under the IBC and not under the

Presidency-Towns Insolvency Act, 1909 (for short "PTA Act") and the

Provincial Insolvency Act, 1920 (for short "PIA Act"). Therefore,

dismissal of application filed by the appellant by applying the principle

laid down in "State Bank of India Vs. V.Ramakrishnan" (referred

supra) is an illegality.

33. Section 60 of the IBC permits the creditor to proceed against the

personal guarantor, but did not look into the remedies available to the

personal guarantor to proceed against the Corporate debtor and she

formulated the following propositions of law.

"A seeks to canvass the following propositions before this Tribunal:

20 Company Appeal(AT)(Insolvency) No. 362 of 2022

a) A has been bereft of all remedies against CD due to the liquidation of CD by the CoC headed by R1. Such a situation renders S. 140 of the ICA meaningless and must be addressed through the residuary powers under S. 60(5) (c), IBC.

b) The IBC has been used strategically by the creditor (R1) only to ensure the non inclusion of A, a personal guarantor, as a creditor.

c) The scheme of the IBC cannot ignore the place of the PG as a potential guarantor, and the wide powers under S. 60(5)(c) are meant to provide a remedy to parties affected by the moratorium and the overriding nature of the IBC."

34. The judgments in "Lalit Kumar Jain Vs. Union of India",

"State Bank of India Vs. V.Ramakrishnan" (referred supra), did not

deal with such issue.

35. The Hon'ble Supreme Court in "Amrit Lal Goverdhan Lalan

Vs. State Bank of Travancore6" elaborated the scope of Section 140

of Indian Contract Act. The Hon'ble Supreme Court relied upon the

exposition by the Court of Chancery in "Craythorne Vs. Swinburne7",

which suggested as follows:

"The surety will be entitled to every remedy which the creditor has against the principal debtor, to enforce every security and all means of payment, to stand in the place of the creditor, not only through the medium of contract, but even by means of securities entered into (1) without the knowledge of the surety; having a right to have those securities transferred to him, though there was no stipulation for that; and to avail himself of all those securities against the debtor. This right of a surety also stands, not upon contract, but upon a principle of natural justice."

36. Finally, it is contended that personal guarantor entered

contracts of guarantee after assessing risk including the securities

6 AIR 1968 SC 1432 7 (1807) 14 Ves.160 21 Company Appeal(AT)(Insolvency) No. 362 of 2022

held by the creditor, which would, if parted with, reduce the liability of

the personal guarantor. Even if such securities are unknown to the

personal guarantor, it is entitled to discharge to the extent of the loss

of security. Section 60 (5) (c) of the IBC is only the provision, which

permits the Adjudicating Authority to determine such issues, thereby

learned Adjudicating Authority failed to appreciate these contentions

in proper perspective.

37. Learned senior counsel Sri Ramji Srinivasan, appearing for

respondent No.1, vehemently contended that all the questions raised

in the present appeal were answered by the Apex Court in "Lalit

Kumar Jain Vs. Union of India", "State Bank of India Vs.

V.Ramakrishnan" (referred supra). Even otherwise, the High Court of

Delhi in "Kiran Gupta Vs. State Bank of India [W.P.(C)

No.7230/2020) made it clear that the proceedings under the

SARFAESI Act and the IBC are independent, even during subsistence

of moratorium none of the provisions of IBC prevent the creditor to

proceed against the personal guarantor, since, moratorium protects

action against the corporate debtor not against the 3rd party.

Therefore, the bar under moratorium has nothing to do with the issue.

Therefore, the appellant is disentitled to claim any relief on any of the

grounds.

38. Yet, another contention raised by the learned counsel for

respondent No.1 is that Section 60 (5) permits the Adjudicating

Authority to decide the disputes falling within clause (a), (b), and (c) 22 Company Appeal(AT)(Insolvency) No. 362 of 2022

pertaining to corporate insolvency between the parties to the petition,

but not between 3rd party and parties to the petition, requested to

dismiss the appeal.

39. Respondent No.2 also filed written brief supporting the order

passed by the Adjudicating Authority reiterating the contentions urged

in the reply filed in the appeal, while referring to Section 52 of the

IBC, and Regulation 37 of the Liquidation Process Regulations, 2016,

requested to dismiss the appeal against respondent No.2.

40. Considering rival contentions and perusing the material

available on record, the points need be addressed by this Tribunal

are as follows:

(1) Whether Section 60 (5) of IBC permits 3rd party to file an application and redress the grievance in the present appeal?

(2) Whether the Moratorium imposed under the provisions of IBC during liquidation process is a bar to proceed against the personal guarantor under the SARFAESI Act to recover the debt due by the Corporate Debtor?

(3) Whether respondent No.2 is under obligation to include the personal guarantor as a secured creditor in terms of Section 36 (4) of IBC?

(4) Whether the provisions of IBC overrides the provisions of Indian Contract Act, more particularly, Section 140 of Contract Act? If not, whether the appellant is entitled to include himself as secured creditor in the list of 23 Company Appeal(AT)(Insolvency) No. 362 of 2022

creditors prepared under Section 36 of IBC by respondent No.2 herein so as to recover the amount he paid to the corporate debtor due to non-payment of debt due to respondent No.1 by the corporate debtor?

POINT NO.1:

41. The undisputed facts are that the appellant filed petition under

Section 60(5) of I.B.C read with Rule 11 of NCLT Rules, claiming

various reliefs. Admittedly, appellant is a personal guarantor, as

defined under Section 5(22) of I.B.C i.e. an individual, who is the

surety in a contract of guarantee to a corporate debtor. The creditor

advanced loan to the corporate debtor, the appellant herein, executed

agreement of guarantee in favour of the bank for repayment of loan

borrowed by the corporate debtor, as security. Since the corporate

debtor failed to repay the loan amount, initiated proceedings under

Section 7 of I.B.C, later the same was admitted by the adjudicating

authority. However, since the resolution plan was not accepted by the

Committee of Creditors, the order for liquidation was passed by the

adjudicating authority for realization of the debt due to various

creditors by the corporate debtor. At the same time, the creditor

initiated proceedings under Section 14 of the SARFAESI Act, 2002,

against the appellant and another, before the XXXVII Additional Chief

Judicial Magistrate, Bangalore, who in-turn, allowed the application.

Accordingly, the creditor took possession of the mortgaged property,

but the challenge thereto under Section 17 before the Debt Recovery 24 Company Appeal(AT)(Insolvency) No. 362 of 2022

Tribunal was unsuccessful. Later, the property was brought to sale

during pendency of the appeal and bid was knocked down in favour of

M/s. Bagmane Developers Private Limited, who was declared as

highest bidder in the auction and the confirmation was made subject

to the outcome or the result of the present appeal vide letter dated

29.01.2022 bearing No.SAMB/VI/HYD/MNK/2022-23/72 issued by

the creditor/first applicant, who initiated proceedings both under

Section 7 of I.B.C against the corporate debtor, so also under

SARFAESI Act, 2002, against the appellant and others. The

adjudicating authority concluded that the petition under Section 65(c)

of I.B.C read with Rule 11 of NCLT Rules is not maintainable. The

same is now challenged before this Tribunal based on the principle

laid down in "Gujarat Urja Vikas Nigam Limited Vs. Amit Gupta"

(referred supra) and Arcelor Mittal (India) (P) Ltd. Vs. Satish

Kumar Gupta (referred supra)

42. During hearing, Smt. Menaka Guruswamy learned Senior

Counsel would submit that the application under Section 60(5) of

I.B.C is maintainable in view of the law declared by the Hon'ble Apex

Court in Arcelor Mittal(India) (P) Ltd referred in "Gujarat Urja Vikas

Nigam Limited Vs. Amit Gupta" (referred supra).

43. A bare look at the order passed by the adjudicating authority, a

specific point is framed for determination as to maintainability of an

application under Section 60(5) of I.B.C, answerd the same against 25 Company Appeal(AT)(Insolvency) No. 362 of 2022

the appellant herein adverting to the principle laid down in "Gujarat

Urja Vikas Nigam Limited Vs. Amit Gupta" (referred supra). For

better appreciation of the facts, it is necessary to extract Section 60(5)

of I.B.C, and it reads as follows:

"Section 60: Adjudicating Authority for corporate persons.

(5) Notwithstanding anything to the contrary contained in any other law for the time being in force, the National Company Law Tribunal shall have jurisdiction to entertain or dispose of

(a) any application or proceeding by or against the corporate debtor or corporate person;

(b) any claim made by or against the corporate debtor or corporate person, including claims by or against any of its subsidiaries situated in India; and

(c) any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor or corporate person under this Code."

44. The first respondent herein is a financial creditor who disputed

the maintainability of application under Section 60(5) of I.B.C, since it

is residuary in nature. In view of the specific plea raised by the

appellant and first respondent, it is necessary to advert to the law laid

down by the Hon'ble Apex Court in "Gujarat Urja Vikas Nigam

Limited Vs. Amit Gupta" (referred supra), wherein the Court held as

follows:

"............we hold that the NCLT was empowered to restrain the appellant from terminating the PPA. However, our decision is premised upon a recognition of the centrality of the PPA in the present case to the success of the CIRP, in the factual matrix of 26 Company Appeal(AT)(Insolvency) No. 362 of 2022

this case, since it is the sole contract for the sale of electricity which was entered into by the Corporate Debtor. In doing so, we reiterate that the NCLT would have been empowered to set aside the termination of the PPA in this case because the termination took place solely on the ground of insolvency. The jurisdiction of the NCLT under Section 60(5)(c) of the IBC cannot be invoked in matters where a termination may take place on grounds unrelated to the insolvency of the corporate debtor....."

Though Arcelor Mittal (India)(P) Ltd. was referred, the principle was

not completely accepted in "Gujarat Urja Vikas Nigam's case. Hence,

the law laid down in "Gujarat Urja Vikas Nigam Limited Vs. Amit

Gupta" is binding precedent

45. A perusal of the principle laid down in the above judgment, the

Hon'ble Apex Court cautioned NCLT and NCALT to ensure that they

do not usurp the legitimate jurisdiction of other courts, tribunals and

fora when the dispute is one which does not arise solely from or relate

to the insolvency of the Corporate Debtor. Applying the same principle

to the present facts of the case, now we shall examine the present

issue.

46. The appellant is a personal guarantor of corporate debtor for

repayment of loan borrowed from first respondent herein. Creditor

initiated proceedings under SARFAESI Act, sold the property in public

auction for Rs.125.80 crores as the bid was knocked down in favour of

M/s. Bagmane Developers Private Limited. The proceedings under

SARFAESI Act against the personal guarantor of the corporate debtor

are to realise the debt due to the creditor i.e. bank, whereas, the

proceedings under I.B.C is to see that the company must continue as 27 Company Appeal(AT)(Insolvency) No. 362 of 2022

a going concern or to liquidate the assets and pay the debts due in

proportion as per the provisions of I.B.C. The proceedings under

SARFAESI Act are independent and purely for recovery of the loan

amount. The personal guarantor though related to debt, but not

related to the insolvency of the corporate debtor when no insolvency

process is initiated. Therefore, the petition filed by the petitioner

claiming various reliefs is unrelated to the insolvency of corporate

debtor. When once the dispute was not solely relating to insolvency

proceedings of the corporate guarantor and purely under SARFAESI

Act, in view of the principle laid down in "Gujarat Urja Vikas Nigam

Limited Vs. Amit Gupta" (referred supra), the Tribunal has no

jurisdiction to entertain such an application.

47. Section 60(5)(c) of I.B.C permits all the Tribunals to decide any

question of priorities or any question of law or facts, arising out of or

in relation to the insolvency resolution or liquidation proceedings of

the corporate debtor or corporate person. The language employed in

Clause (c) of Section 60(5) made it abundantly clear that the

jurisdiction is conferred on the Tribunals or adjudicating authority

only to decide the question of fact or law arising out or in relation to

the insolvency resolution or liquidation proceedings. But, the

proceedings under SARFAESI Act are independent against the

personal guarantor of corporate debtor and they are purely recovery

proceedings. Therefore, it is difficult to conclude that the dispute

raised by the appellant would fall within the ambit of Section 60(5)(c) 28 Company Appeal(AT)(Insolvency) No. 362 of 2022

of I.B.C. The adjudicating authority rightly held that the application

under Section 60(5) is not maintainable and even after re-appreciating

the law laid down by the Courts and upon consideration of argument,

we find no ground to interfere with the finding recorded by the

adjudicating authority about maintainability of the application under

Section 60(5) of I.B.C.

48. In view of our foregoing discussion, we find no ground,

warranting interference with the finding recorded by the adjudicating

authority as to the maintainability of the application under Section

60(5) of I.B.C. Accordingly, the finding recorded by the adjudicating

authority is hereby confirmed, holding this point in favour of the

respondents and against the appellant.

P O I N T No.2:

49. The major contention of the learned Senior Counsel for the

appellant before this Tribunal is that, when moratorium was imposed

during insolvency resolution process or during liquidation process, the

proceedings or suits pending before the other Court or Tribunal or

Forum shall not be continued.

50. Undoubtedly, there is a bar under Section 14 from proceeding

against the corporate debtor in any suits or proceedings pending

before the Court, Tribunal or any other Forum. Similarly, Sub-section

(5) of Section 33 of I.B.C interdicted pending suits or proceedings

before the Courts or Tribunals or other Forums during liquidation 29 Company Appeal(AT)(Insolvency) No. 362 of 2022

process. For better appreciation of law, it is apposite to extract Section

14 and Section 33(5) of I.B.C and they are as under:

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

(b) transferring, encumbering, alienating or disposing of 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;

(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.

(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.

(3) The provisions of sub-section (1) shall not apply to such transactions as may be notified by the Central Government in consultation with any financial sector regulator.

(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.

30 Company Appeal(AT)(Insolvency) No. 362 of 2022

Section 33(5)

Subject to section 52, when a liquidation order has been passed, no suit or other legal proceeding shall be instituted by or against the corporate debtor:

Provided that a suit or other legal proceeding may be instituted by the liquidator, on behalf of the corporate debtor, with the prior approval of the Adjudicating Authority.'

51. Thus, it is clear from both the provisions under Section 14 and

Section 33(5) that the proceedings against 'corporate debtor' alone are

to be interdicted. There is subtle distinction between Section 14 and

Section 33(5). According to Section 14(a), the Adjudicating Authority

shall declare moratorium prohibiting the institution of suits or

continuation of pending suits or proceedings against the corporate

debtor including execution of any judgment, decree or order in any

court of law, tribunal, arbitration panel or other authority. At the

same time, Clause (3) incorporated by amendment of Act.26 of 2018

with effect from 06.06.2018, says that, Sub-sections (1) and ((2) of

Section 14 have no application to such transactions, as may be

notified by the Central Government in consultation with any financial

sector regulator or any other authority and a surety in a contract of

guarantee to the corporate debtor.

52. It is clear from Sub-section (3) of Section 14 that the

Moratorium imposed under Section 14 will have no application to

enforce the liability against a surety in a contract of guarantee to a

corporate debtor. The exemption contained under Sub-section (3) is 31 Company Appeal(AT)(Insolvency) No. 362 of 2022

squarely applicable to the present facts of the case. However, Section

33(5) of I.B.C restricts filing of suit or other legal proceeding by or

against the "corporate debtor". But, the rider attached to it permits

the liquidator to institute a suit or other legal proceeding on behalf of

the corporate debtor, with the prior approval of the Adjudicating

Authority. Thus, it restricts only filing of suits or other proceedings,

but did not impose any restriction on the pending proceedings against

corporate debtor. In any view of the matter, the language employed in

both the sections is clear that, the interdict is only against institution

of suits or proceedings and prosecuting those suits or proceedings in

any Court or Tribunal or other Forums instituted against the

corporate debtor, but not against third part,y since sub-Section 3 of

Section 14 excludes the surety in a contract of Guarantee specifically.

But here, the appellant is the personal guarantor to corporate debtor,

as defined under Section 5(22) of I.B.C, who is an independent person

mortgaged his property as a security for due performance of the

obligation by the corporate debtor. Therefore, the Moratorium imposed

either under Section 14 or the interdict contained under Section 33(5)

has no application and it is not a bar to proceed against the appellant

for recovery of the debt in a different Forum i.e., before the Debts

Recovery Tribunal under SARFAESI Act.

32

Company Appeal(AT)(Insolvency) No. 362 of 2022

53. A similar issue came up for consideration before the Division

Bench of Delhi High Court in "Kiran Gupta Vs. State Bank of India"8,

wherein, the Court after adverting to various judgments, including

Sections 14 & 31 of I.B.C and Sections 128 & 140 of the Indian

Contract Act, based on the law laid down in "State Bank of India

Vs. V.Ramakrishnan" (referred supra) concluded as follows:

"The view expressed by the Supreme Court amply demonstrates that neither Section 14 nor Section 31 of the IB Code place any fetters on Banks/Financial Institutions from initiation and continuation of the proceedings against the guarantor for recovering their dues. That being the position, the plea taken by the counsel for the petitioner that all proceedings against the petitioner, who is only a guarantor, ought to be stayed under the SARFESI Act during the continuation of the Insolvency Resolution process qua the Principal Borrower, is rejected as meritless. The petitioner cannot escape her liability qua the respondent/Bank in such a manner. The liability of the principal borrower and the Guarantor remain co-extensive and the respondent/Bank is well entitled to initiate proceedings against the petitioner under the SARFESI Act during the continuation of the Insolvency Resolution Process against the Principal Borrower."

54. In view of the law laid down by the Division Bench of the Delhi

High Court, Moratorium under Section 14 or restriction under Section

33(5) of I.B.C is not a bar to proceed against this appellant herein

under SARFAESI Act for recovery of debt based on mortgage created

in favour of 1st Respondent executing agreement of guarantee.

8 W.P.(C) No.7230/2020) 33 Company Appeal(AT)(Insolvency) No. 362 of 2022

55. In "Rakesh Kumar Gupta v. Mahesh Bansal"9 decided on 20-

02-2020 (NCLAT)], the NCLAT held that the pending proceedings

under SARFAESI Act shall not hinder the proceedings triggered by the

financial creditor under the IBC. Therefore, even when proceedings

under SARFAESI Act have already been initiated, fresh proceedings

under IBC can still be accepted because of the non obstante Clause in

Section 238 of IBC. Thus the provision of IBC will prevail over

SARFAESI.

56. The effect of Moratorium was considered by the Courts in

various judgments, more particularly, in "Maharashtra Tubes Ltd.

v. State Industrial and Investment Corporation of India"10, the

Court held as follows:

The State Finance Corporation Act 1951, is a special statute vis-a-vis the Sick Industrial Companies (Special Provisions) Act 1985. Both are special statutes dealing with different situations notwithstanding a slight overlap here and there, for example, both of them provide for grant of financial assistance though in different situations. The Sick Industrial Companies (Special Provisions) Act,1985 being a subsequent enactment, the non-obstante clause therein would ordinarily prevail over the non-obstante clause found in Section 46 B of the State Finance Corporation Act 1951 unless it is found that the 1985 Act is a general statute and the 1951 Act is a special one. In that event the maxim generalia specialibus non- derogant would apply

9 Company Appeal (AT) (Insolvency) No. 1408 of 2019

10 [1993 ] 2 SCC 144 34 Company Appeal(AT)(Insolvency) No. 362 of 2022

59. In "Schweitzer Systemtek India Private Limited vs Pheonix

ARC Pvt. Ltd. & Ors"11, the corporate debtor in this case had with

the aim to scuttle the proceedings of SARFAESI Act 2002 moved

application u/s 10 of the IBC. The tribunal took stock of Section 14

(1)(c) which states that a moratorium is to be declared to "prohibit any

action to recover or enforce any security interest created by the

Corporate Debtor in respect of its property". That because the language

employed in Section 14 of IBC, the moratorium declared under

Section 13 read with Section 14 would only restrict proceedings

against properties of corporate debtor and proceedings against

personal guarantor were not restricted by Section 13 read with

Section 14. The Application was therefore admitted, subject to this

exception.

60. In M/s Innoventive Industries Ltd. vs ICICI Bank & Another12, the

Hon'ble Apex Court had an occasion to decide the clauses relating to

overriding effect contained in both IBC and Maharashtra State and finally

concluded that in view of Section 238 of IBC, the provision of IBC will prevail

over the provision of the enactments that the legislature promised to have

taken cognizance of provision of other enactments which were passed in IBC.

In "P.R. Commissioner of Income Tax vs Monnet Ispat & Energy

Limited", n this case Supreme Court in quite clear terms observed that

11 Company Appeal (AT) (Insolvency) No. 129 of 2017

12 (2018) 1 SCC 407 35 Company Appeal(AT)(Insolvency) No. 362 of 2022

"given Section 238 of the IBC, 2016, it is obvious that the Code will override

anything inconsistent contained in any other enactment, including Income

Tax Act."

61. In March 2018 "Report of the Insolvency Committee" was published in

which committee on para 5.11 of its report stated following:

"The Committee concluded that section 14 does not intend to bar actions against assets of guarantors to the debts of the corporate debtor and recommended that an explanation to clarify this may be inserted in section 14 of the Code. The scope of the moratorium may be restricted to the assets of the corporate debtor only."

62. Finally, this matter came before the the Apex Court in the case

of "State Bank of India vs V. Ramakrishnan & Anr." (referred

supra). The Hon'ble Apex Court differentiated between moratorium

mentioned u/s 14 of the code and interim moratorium and

moratorium mentioned under sec 96 &101 respectively (under part

III) of the IBC 2016 and made following observation"

"We are also of the opinion that Sections 96 and 101, when contrasted with Section 14, would show that Section 14 cannot possibly apply to a personal guarantor. When an application is filed under Part III, an interim-moratorium or a moratorium is applicable in respect of any debt due........... The object of the Code is not to allow such guarantors to escape from an independent and coextensive liability to pay off the entire outstanding debt, which is why Section 14 is not applied to them."

63. In view of the law declared by the Apex Court and other Courts,

SARFAESI Act and I.B.C contained non-obstante clauses, in view of

the principles laid down in "M/s Innoventive Industries Ltd. vs 36 Company Appeal(AT)(Insolvency) No. 362 of 2022

ICICI Bank & Another" & "P.R. Commissioner of Income Tax vs

Monnet Ispat & Energy Limited", (referred supra), the provisions of

I.B.C will prevail over any other statute. Consequently, we find that

imposition of Moratorium either in corporate insolvency process or

liquidation process interdicts only the proceedings against corporate

debtor, but not against third party like the appellant herein who is a

personal guarantor of a corporate debtor. Therefore, the finding

recorded by the adjudicating authority cannot be interfered by this

Tribunal, while exercising jurisdiction under Section 61 of I.B.C.

Accordingly, the point is answered against the appellant and in favour

of the respondents.

POINT Nos.3 & 4:

64. As both the points are inter-connected, we find that it is

appropriate to decide both the points by common discussion.

65. The main endeavour of the appellant is that, when insolvency or

liquidation proceedings are initiated against the corporate debtor and

if the property of personal guarantor is sold for recovery of debt under

the SARFAESI Act, he is entitled to recover the amount from the

corporate debtor under Section 140 of the Indian Contract Act and the

liability of the surety is coextensive with that of the Principal Debtor,

thereby, he is entitled to be included as a Secured Creditor in the list

of creditors under Section 36 of I.B.C. This contention was not 37 Company Appeal(AT)(Insolvency) No. 362 of 2022

specifically raised before the adjudicating authority, but before this

Tribunal. Such contention is urged for the first time.

66. Section 128 of the Indian Contract Act says that, the liability of

the surety is co-extensive with that of the principal debtor, unless it is

otherwise provided by the contract.

67. Section 140 of the Indian Contract Act deals with 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.

68. A guarantor will get invested with all the rights which the

creditor had only "upon payment or performance of all that he is

liable for". A guarantor is liable for any payment or performance of

any obligation only to the extent the principal debtor has defaulted

(vide C.K.Aboobacker v K.P.Ayishu13). In any view of the matter, in

view of Section 140 of the Indian Contract Act, the appellant herein,

on payment of debt due under the guranteed debt, is entitled to

recover the same as if he is a creditor. Taking advantage of Section

140 of the Indian Contract Act, Smt. Menaka Gyuruswamy, learned

Senior Counsel contended that, in case the entire assets of the

13 AIR 2000 Ker 29(NOC) 38 Company Appeal(AT)(Insolvency) No. 362 of 2022

corporate debtor are liquidated and the amount realised on sale of

assets of debtor shall be distributed among the creditors of different

kinds, the appellant will be denuded to realise the debt. Therefore, he

shall be included in the list of secured creditors, but this was not

specifically urged in the petition before the Tribunal.

69. In view of the specific contention raised for the first time before

the Tribunal, it is apposite to advert to the definition of corporate

guarantor and secured creditor and security interest, as defined under

the I.B.C.

"Section 5 (5A) "corporate guarantor" means a corporate person who is the surety in a contract of guarantee to a corporate debtor;

Section 3(30) 'secured creditor, means a Creditor in favour of whom security interest is credited.

Section 3 (31) "security interest" means right, title or interest or a claim to property, created in favour of, or provided for a secured creditor by a transaction which secures payment or performance of an obligation and includes mortgage, charge, hypothecation, assignment and encumbrance or any other agreement or arrangement securing payment or performance of any obligation of any person: Provided that security interest shall not include a performance guarantee"

70. On conjoint reading of the words 'corporate guarantor', 'security

interest' and secured creditor to claim that he is a secured guarantor

as defined under Section 3(30), he must satisfy that he has got

security interest as defined under Section 3 (31) of I.B.C. The word

'secured creditor' is also defined under Section 3(30) of I.B.C, which 39 Company Appeal(AT)(Insolvency) No. 362 of 2022

means a creditor in favour of whom security interest is created. Here,

no security interest, as defined under Section 3(31) was created by the

corporate debtor, in any of the specified modes, thereby he cannot

claim to be a secured creditor to include him as secured creditor in

the creditors list to pay his share of amount.

71. Section 36 of I.B.C. obligates the second respondent/liquidator

on his appointment as liquidator to prepare list of assets to liquidate

the corporate debtor. For the purpose of liquidation, the liquidator

shall form an estate of the assets mentioned in sub-section (3), which

will be called the liquidation estate in relation to the corporate debtor.

The liquidator shall hold the liquidation estate as a fiduciary for the

benefit of all the creditors. Subject to sub-section (4), the liquidation

estate shall comprise all liquidation estate assets which shall include

the following:-

"(a) any assets over which the corporate debtor has ownership rights, including all rights and interests therein as evidenced in the balance sheet of the corporate debtor or an information utility or records in the registry or any depository recording securities of the corporate debtor or by any other means as may be specified by the Board, including shares held in any subsidiary of the corporate debtor;

(b) assets that may or may not be in possession of the corporate debtor including but not limited to encumbered assets;

(c) tangible assets, whether movable or immovable;

(d) intangible assets including but not limited to intellectual property, securities (including shares held in a subsidiary of the corporate debtor) and financial instruments, insurance policies, contractual rights;

40 Company Appeal(AT)(Insolvency) No. 362 of 2022

(e) assets subject to the determination of ownership by the court or authority;

(f) any assets or their value recovered through proceedings for avoidance of transactions in accordance with this Chapter;

(g) any asset of the corporate debtor in respect of which a secured creditor has relinquished security interest;

(h) any other property belonging to or vested in the corporate debtor at the insolvency commencement date; and

(i) all proceeds of liquidation as and when they are realised.

71. But, Sub-section (4) of Section 36 exempted assets to be

included in the liquidation estate i.e. assets owned by a third party

which are in possession of the corporate debtor, including the assets

held in trust for any third party. It is as follows:--

(a) assets owned by a third party which are in possession of the corporate debtor, including-

(i) assets held in trust for any third party;

(ii) bailment contracts;

(iii) all sums due to any workman or employee from the provident fund, the pension fund and the gratuity fund;

(iv) other contractual arrangements which do not stipulate transfer of title but only use of the assets; and

(v) such other assets as may be notified by the Central Government in consultation with any financial sector regulator

(b) assets in security collateral held by financial services providers and are subject to netting and set-off in multi-lateral trading or clearing transactions;

(c) personal assets of any shareholder or partner of a corporate debtor as the case may be provided such assets are not held on account of avoidance transactions that may be avoided under this Chapter;

(d) assets of any Indian or foreign subsidiary of the corporate debtor; or

(e) any other assets as may be specified by the Board, including assets which could be subject to set-off on account of mutual dealings between the corporate debtor and any creditor."

41 Company Appeal(AT)(Insolvency) No. 362 of 2022

72. However, as per Section 38, the liquidator shall receive or collect

the claims of creditors within a period of thirty days from the date of

the commencement of the liquidation process. A financial creditor may

submit a claim to the liquidator by providing a record of such claim

with an information utility: Provided that where the information

relating to the claim is not recorded in the information utility, the

financial creditor may submit the claim in the same manner as

provided for the submission of claims for the operational creditor

under sub-section (3). An operational creditor may submit a claim to

the liquidator in such form and in such manner and along with such

supporting documents required to prove the claim as may be specified

by the Board. A creditor who is partly a financial creditor and partly

an operational creditor shall submit claims to the liquidator to the

extent of his financial debt in the manner as provided in sub-section

(2) and to the extent of his operational debt under sub-section (3). A

creditor may withdraw or vary his claim under this section within

fourteen days of its submission. Section 39 of I.B.C obligates the

liquidator to verify the claims submitted under section 38 within such

time as specified by the Board. In any view of the matter, the

appellant cannot claim as a secured creditor to include his claim in

the list of secured creditors in the claims list prepared under Section

38 as no security interest is created in his favour. 42

Company Appeal(AT)(Insolvency) No. 362 of 2022

73. The main endeavour of the learned Senior Counsel for the

appellant is that, the proceedings were initiated prior to Amendment

Act No.26 of 2019 came into force and the judgment of the Apex Court

in "State Bank of India Vs. V.Ramakrishnan" (referred supra)

has no application. This similar contention was urged before the Apex

Court in "Lalit Kumar Jain vs. Union of India" (referred supra),

which is a persuasive judgment on all issues raised by the appellant

herein. In "Ghanshyam Mishra & Sons Pvt. Ltd. Vs. Edelwiss

Asset Reconstruction Company Ltd. & Ors."14, in paragraph 95(ii)

held 2019 amendment is clarificatory and declaratory in nature and

therefore will be effective from the date on which I&B Code has come

into effect". Hon'ble Apex Court considered the scope of 2019

amendment to IBC discussed about Ramakrishnan Judgment

regarding sureties liability and concluded that it will have retroactive

effect. In view of the law laid down in above judgment, the contention

of learned Sr. Advocate is rejected. But the contention of the learned

Senior Counsel for the appellant was that, the issue relating to the

liability of corporate debtor for payment of amount to the personal

guarantor was not addressed. However, this contention is refuted by

the learned Senior Counsel Sri Ramji Srinivasan drawing our

attention to various paragraphs of the judgment in "Lalit Kumar

Jain vs. Union of India" (referred supra), wherein, it is held as

follows:

14

(2021) 9 SCC 657 43 Company Appeal(AT)(Insolvency) No. 362 of 2022

98. This court was clearly cognizant of the fact that the amendment, in so far as it inserted Section 2(e) and altered Section 60(2), was aimed at strengthening the corporate insolvency process.

At the same time, since the Code was not made applicable to individuals (including personal guarantors), the court had no occasion to consider what would be the effect of exercise of power under Section 1(3) of the Code, bringing into force such provisions in relation to personal guarantors.

74. Later, the Apex Court discussed about the effect of notification

issued by the Government of India amending certain provisions. A

reference was also made to Sections 128, 138 and 140 of the Indian

Contract Act, 1872. The contention of the appellant before this Court

was that, once a resolution plan was accepted, the corporate debtor as

discharged of the liability. As a consequence, the guarantor whose

liability is co-extensive with the principal debtor, i.e. the corporate

debtor, too is discharged of all liabilities. It was urged therefore, that

the impugned notification which has the effect of allowing proceedings

before the NCLT by applying provisions of Part III of the Code, deprives

the guarantors of their valuable substantive rights. But, the Court did

not agree with the contention and various paragraphs, concluded as

follows:

104. All creditors and other classes of claimants, including financial and operational creditors, those entitled to statutory dues, workers, etc., who participate in the resolution process, are heard and those in relation to whom the CoC accepts or rejects pleas, are entitled to vent their grievances before the NCLT. After considering their submissions and objections, the resolution plan is accepted and approved. This results in finality as to the claims of creditors, and others, from the company (i.e. the company which undergoes the insolvency process). The question which the petitioners urge is that in view of this finality, their liabilities would be extinguished; they rely on Sections 128, 133 and 140 of the Contract Act to urge that creditors cannot therefore, proceed against them separately.

44 Company Appeal(AT)(Insolvency) No. 362 of 2022

105. In Vijay Kumar Jain v. Standard Chartered Bank67, this court, while dealing with the right of erstwhile directors participating in meetings of Committee of Creditors observed that:

"we find that Section 31(1) of the Code would make it clear that such members of the erstwhile Board of Directors, who are often guarantors, are vitally interested in a resolution plan as such resolution plan then binds them. Such plan may scale down the debt of the principal debtor, resulting in scaling down the debt of the guarantor as well, or it may not. The resolution plan may also scale down certain debts and not others, leaving guarantors of the latter kind of debts exposed for the entire amount of the debt. The regulations also make it clear that these persons are vitally interested in resolution plans as they affect them"

106. The rationale for allowing directors to participate in meetings of the CoC is that the directors' liability as personal guarantors persists against the creditors and an approved resolution plan can only lead to a revision of amount or exposure for the entire amount. Any recourse under Section 133 of the Contract Act to discharge the liability of the surety on account of variance in terms of the contract, without her or his consent, stands negated by this court, in V. Ramakrishnan where it was observed that the language of Section 31 makes it clear that the approved plan is binding on the guarantor, to avoid any attempt to escape liability under the provisions of the Contract Act. It was observed that:

"25. Section 31(1), in fact, makes it clear that the guarantor cannot escape payment as the resolution plan, which has been approved, may well include provisions as to payments to be made by such guarantor...." And further that:

"26.1 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 67 2019 SCC OnLine SC 103 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."

45 Company Appeal(AT)(Insolvency) No. 362 of 2022

107. In Committee of Creditors of Essar Steel (I) Ltd. v. Satish Kumar Gupta68 (the "Essar Steel case") this court refused to interfere with proceedings initiated to enforce personal guarantees by financial creditors; it was observed as follows:

"106. Following this judgment in V. Ramakrishnan case [SBI v. V. Ramakrishnan, (2018) 17 SCC 394], it is difficult to accept Shri Rohatgi's argument that that part of the resolution plan which states that the claims of the guarantor on account of subrogation shall be extinguished, cannot be applied to the guarantees furnished by the erstwhile Directors of the corporate debtor. So far as the present case is concerned, we hasten to add that we are saying nothing which may affect the pending litigation on account of invocation of these guarantees. However, NCLAT judgment being contrary to Section 31(1) of the Code and this Court's judgment in V. Ramakrishnan case [SBI v. V. Ramakrishnan, (2018) 17 SCC 394], is set aside."

108. It is therefore, clear that the sanction of a resolution plan and finality imparted to it by Section 31 does not per se operate as a discharge of the guarantor's liability. As to the nature and extent of the liability, much would depend on the terms of the guarantee itself. However, this court has indicated, time and again, that an involuntary act of the principal debtor leading to loss of security, would not absolve a guarantor of its liability. In Maharashtra State Electricity Board (supra) the liability of the guarantor (in a case where liability of the principal debtor was discharged under the insolvency law or the company law), was considered. It was held that in view of the unequivocal guarantee, such liability of the guarantor continues and the creditor can realize the same from the guarantor in view of the language of Section 128 of the Contract Act as there is no discharge under Section 134 of that Act. This court observed as follows:

"7. Under the bank guarantee in question the Bank has undertaken to pay the Electricity Board any sum up to Rs 50,000 and in order to realise it all that the Electricity Board has to do is to make a de- mand. Within forty-eight hours of such demand the Bank has to pay the amount to the Electricity Board which is not under any obliga- tion to prove any default on the part of the Company in liquidation before the amount demanded is paid. The Bank cannot raise the plea that it is liable only to the extent of any loss that may have been sustained by the Electricity Board owing to any default on the part of the supplier of goods i.e. the Company in liquidation. The liability is absolute and unconditional. The fact that the Company in liquidation i.e. the principal debtor has gone into liquidation also would not have any effect on the liability of the Bank i.e. the guarantor. Under Section 128 of the Indian Contract Act, the lia- bility of the surety is coextensive with that of the principal debtor unless it is otherwise provided by the contract. A 46 Company Appeal(AT)(Insolvency) No. 362 of 2022

surety is no doubt discharged under Section 134 of the Indian Contract Act by any contract between the creditor and the principal debtor by which the principal debtor is released or by any act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor. But a discharge which the principal debtor may secure by operation of law in bankruptcy (or in liquidation pro- ceedings in the case of a company) does not absolve the surety of his liability (see Jagannath Ganeshram Agarwala v. Shivnarayan Bhagirath [AIR 1940 Bom 247; see also In re Fitzgeorge Ex parte Robson [(1905) 1 KB 462] )."

75. Finally, In Re Kaupthing Singer and Friedlander Ltd. the UK

Supreme Court reviewed a large number of previous authorities on the

concept of double proof, i.e. recovery from guarantors in the context of

insolvency proceedings. The court held that:

"The function of the rule is not to prevent a double proof of the same debt against two separate estates (that is what insolvency practitioners call "double dip"). The rule prevents a double proof of what is in substance the same debt being made against the same estate, leading to the payment of a double dividend out of one estate. It is for that reason sometimes called the rule against double dividend. In the simplest case of suretyship (where the surety has neither given nor been provided with security, and has an unlimited liability) there is a triangle of rights and liabilities between the principal debtor (PD), the surety (S) and the creditor (C). PD has the primary obligation to C and a secondary obligation to indemnify S if and so far as S discharges PD's liability, but if PD is insolvent S may not enforce that right in competition with C. S has an obligation to C to answer for PD's liability, and the secondary right of obtaining an indemnity from PD. C can (after due notice) proceed against either or both of PD and S. If both PD and S are in insolvent liquidation, C can prove against each for 100p in the pound but may not recover more than 100p in the pound in all.

In view of the above discussion, it is held that approval of a resolution plan does not ipso facto discharge a personal guarantor (of a corporate debtor) of her or his liabilities under the contract of guarantee. As held by this court, the release or discharge of a principal borrower from the debt owed by it to its creditor, by an involuntary process, i.e. by operation of law, or due to liquidation or insolvency proceeding, does not absolve the surety/guarantor of his or her liability, which arises out of an independent contract.

47 Company Appeal(AT)(Insolvency) No. 362 of 2022

76. Thus, the view taken by the Hon'ble Apex Court is that the

approval of a resolution plan does not ipso facto discharge a personal

guarantor of a corporate debtor of her or his liabilities under the

contract of guarantee and it will not discharge or release the Principal

Debtor from the debt owed by it to its creditor by an involuntary

process i.e by operation of law, or due to liquidation or insolvency

proceeding, does not absolve the surety/guarantor of his or her

liability which arises out of an independent contract.

77. From the principle laid down in the above judgment, almost all

the contentions raised by the learned Senior Counsel for the appellant

were addressed. More so, the contention of the appellant which was

left unaddressed is without any merit.

78. In any view of the matter, the appellant being a Personal

Guarantor discharged part of the loan payable by the Corporate

Debtor, he is entitled to recover the amount under Section 140 of the

Indian Contract Act, as if he is a creditor, but not a 'Secured Creditor'

as defined under Section 3(30) of the I.B.C, since no security interest

was created in favour of the creditor.

79. No doubt, when the assets of the corporate debtor is sold, he

may not have any chance of recovery of amount proceeding against

the 'Corporate Debtor', but, there are different modes of recovery of

the debt due by the 'Corporate Debtor' under the general law.

Therefore, the appellant who stepped into the shoes of creditor in 48 Company Appeal(AT)(Insolvency) No. 362 of 2022

terms of Section 140 of the Indian Contract Act, is entitled to recover

the debt irrespective of sale of assets of corporate debtor in liquidation

process in any of the recognized modes. Therefore, he cannot be

included in the list of secured creditors, as no security interest was

created in favour of the guarantor and he would not fall within the

definition of 'Secured Debtor' as defined under Section 3(31) of I.B.C

consequently, cannot be included in the list of secured creditors in the

liquidation process, so as to claim share.

80. The Hon'ble Apex Court made certain observations in para-99 of

Judgment in "Lalit Kumar Jain Vs. Union of India", referred supra,

in paragraph-111 of the same Judgment held that approval of a

Resolution Plan does not ipso facto discharge a personal guarantee of

a Corporate Debtor of her or his liabilities under the contract of

guarantee as it arises out of independent contract. At the same time,

based on the principles laid down in "Innoventive Industries Ltd. Vs.

ICICI Bank Ltd. and Anr.", "P.R. Commissioner of Income Tax vs

Monnet Ispat & Energy Limited", Hon'ble Apex Court is of confirmed

view that the provisions of IBC will prevail over provisions of the laws in view

of non-obstante clause contained in Section 238 of IBC, the same view is

taken by full bench of Apex Court again in "Sundaresh Bhatt,

Liquidator Of ABG Shipyard Vs. Central Board of Indirect Taxes

and Custom"15 dated 26.08.2022 while considering the liability to pay

Custom duty to release the imported goods held that provision of IBC 15 Civil Appeal No. 7667 of 2021 49 Company Appeal(AT)(Insolvency) No. 362 of 2022

will prevail over the general or special laws. Thus, it is settled that the

provision of IBC will have overriding effect on the provisions of general

or special laws, thereby provision of IBC overrides the provision of

Indian Contract Act, more particularly, provisions relating to surety's

liability and right of surety as guarantor in a contract of guarantee.

81. In Lalit Kumar Jain's case, the Hon'ble Apex Court took note of

the provision of Indian Contract Act relating to sureties or guarantor's

liability and rights, finally concluded that the provision of IBC will

override the other laws.

82. In view of law laid down by Apex Court, we have no hesitation to

hold that the provisions of IBC will prevail over the provision of Indian

Contract Act, thereby surety may take appropriate steps to claim as

creditor to recover the amount he discharged to the Creditor under the

agreement of guarantee in view of clause 'h' and 'I' of Section 5(8) of

IBC, but not as secured creditor, before the liquidator if the 2nd

Respondent did not finalise the list of Creditor, subject to

permissibility under Section 38, Chapter III of IBC and limitation.

Accordingly, the point is held against the Appellant and in favour of

Respondents.

83. In view of complexity of questions raised, we summed up our

findings as follows:

(1) Petitioner/Appellant is not entitled to claim any relief under

Section 60(5) of IBC being 3rd Party to IBC proceedings.

50 Company Appeal(AT)(Insolvency) No. 362 of 2022

(2) Imposition of moratorium is not a bar to recover the amount

proceeding against the guarantor under SARFAESI Act, since

the agreement of guarantee is an independent contract.

(3) Petitioner/Appellant is entitled to claim as Creditor of Corporate

Debtor in view of Section 140 of Indian Contract Act, but not as

Secured Creditor as no security interest is created in his favour,

subject to limitation provided in Chapter III of IBC.

(4) The provisions of IBC will override the provisions of Indian

Contract Act.

In view of the findings summed up above, the Appeal fails as it

is devoid of any merit and liable to be dismissed.

In the result, the Appeal is dismissed, but without cost in the

circumstances.

[Justice Ashok Bhushan] Chairperson

[Justice M. Satyanarayana Murthy] Member (Judicial)

[Mr. Barun Mitra] Member (Technical)

NEW DELHI Akc