Discordant Notes in IBC Jurisprudence: The Sanjeev Shriya Case.

[Riddhi Joshi]

The author is a second-year student at Symbiosis Law School, Pune. The author may be reached at riddhi.dhananjay@symlaw.ac.in.

On 6th September, 2017, the Allahabad High Court passed a judgment in the case ofSanjeev Shriya v. SBI, extending the moratorium provided for under section 14 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) to personal guarantors in respect of the debts alleged to have remained unpaid by a corporate debtor.

Facts of the Case

The factual matrix of the case is as follows. M/s. LML Ltd. (“LML”) was declared a ‘sick industrial company’ by the Board for Industrial Financial Reconstruction on May 8, 2007. Under the provisions of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, State Bank of India filed an application before the Debt Recovery Tribunal (“DRT”) for recovery of the debt owed by LML. The Bank instituted the proceedings for recovery of the dues jointly and severally from LML as well as from the personal guarantors. LML filed an application to initiate the corporate insolvency process under Section 10 of the IBC. On May 30, 2017, the National Company Law Tribunal (“NCLT”), Allahabad Bench admitted the application and, as contemplated in section 14 of the IBC, imposed a moratorium on the institution of suits or continuation of pending proceedings against LML. LML and the personal guarantors then moved an application at the DRT seeking stay of proceedings filed by the Bank before the DRT. In view of the NCLT’s order, the DRT stayed the proceedings but only against LML and observed that there was no order to restrain the proceedings against the personal guarantors. The personal guarantors challenged this order of the DRT before the Allahabad High Court.

Judgment

While staying the proceedings at the DRT against even the personal guarantors, the Allahabad High Court relied on sections 60(1) and 60(2) of the IBC, which provide that the Adjudicating Authority in relation to personal guarantors shall be the NCLT. The High Court observed that in cases where the insolvency resolution process has already begun, the application relating to insolvency resolution of a personal guarantor would also lie before the same NCLT. The High Court also observed that when the primary debt is still in a fluid state, two parallel proceedings in different jurisdictions cannot be maintained. Based on this reasoning, the High Court stayed the proceedings at the DRT even against the personal guarantors.

Analysis

Unfortunately, the High Court appears to have erred.

The Sick Industrial Companies (Special Provisions) Act, 1985 (“SICA”) was the precursor to the current regime under the IBC. Section 22 of SICA contemplated a bar on proceedings against a ‘sick industrial company’ in pari materia to the moratarium under section 14 of the IBC.

Section 22(1) of SICA provided-

Where in respect of an industrial company, an inquiry under section 16 is pending or any scheme referred to under section 17 is under preparation or consideration or a sanctioned scheme is under implementation or where an appeal under section 25 relating to an industrial company is pending, then, notwithstanding anything contained in the Companies Act, 1956 (1 of 1956), or any other law…no proceedings for the winding up of the industrial company or for execution, distress or the like against any of the properties of the industrial company or for the appointment of a receiver in respect thereof and no suit for the recovery of money or for the enforcement of any security against the industrial company or of any guarantee in respect of any loans or advance granted to the industrial company shall lie or be proceeded with further, except with the consent of the Board or, as the case may be, the Appellate Authority.

This provision came up for consideration before the Supreme Court in Kailash Nath Agarwal v. Pradeshiya Industrial and Investment Corporation of U.P. The Supreme Court first took note of section 128 of the Indian Contract Act, 1872, which provides that the liability of a surety is co-extensive with that of the principal debtor, unless it is otherwise provided by contract. While reviewing the section, the Supreme Court also relied on the well established principle of statutory interpretation that where the language of the provision is explicit, the language of the statute must prevail. The Court held that, in section 22, the terms ‘proceedings’ and ‘suit’ have not been used interchangeably. ‘Proceedings’ being a wider term than ‘suit’, the bar on ‘proceedings’ applies only with respect to the industrial company. The Court, therefore, held that proceedings other than a suit for recovery can be proceeded with against the personal guarantors.

Now, section 14(1) of the IBC lays down as follows-

(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.

Clearly, there is no language in this section barring proceedings against personal guarantors. In fact, in Schweitzer Systemek India Pvt. Ltd. v. Phoenix ARC Pvt. Ltd., the NCLT, Mumbai Bench clearly interpreted the benefit of the moratorium to be limited only to corporate debtors. It is unfortunate that Schewitzer Systemek India was not brought to the attention of the Allahabad High Court. It is more unfortunate that, even though the Kailash Nath case was quoted in the course of the submissions, the Allahabad High Court did not consider it in the judgment.

The IBC has been envisaged as a creditor-friendly legislation. In the absence of clear language in section 14 extending the moratorium to personal guarantors, the High Court appears to have read into section 14 that which Parliament never intended. It is hoped that, in an appropriate case, the National Company Law Appellate Tribunal or the Supreme Court, will soon settle the issue whether personal guarantors, in respect of the dues owed by a corporate debtor, are entitled to the protection of the moratorium under the IBC.