[By Vaishnavi Patel & Himangini Mishra]
The authors are students at the Gujarat National Law University, Gandhinagar.
Introduction
On 18th January 2022, the Supreme Court in its landmark judgment, Bank of Baroda and Anr. v. MBL infrastructures Limited clarified the scope of ineligibility of a personal guarantor as a Resolution Applicant (“RA”) under section 29A(h) of the Insolvency and Bankruptcy Code, 2016 (“Code”) . The court held that guarantee invoked by a creditor will operate in rem in relation to all the similarly placed Creditors.
Section 29A of the Code enumerates ineligibility criteria to prohibit RA to participate in a Corporate Insolvency Resolution Process (“CIRP”). Sub-section (h) of section 29A of the Code provides for disqualification of a guarantor who has executed a guarantee in favour of a creditor. The provision has been fraught with lacunas in terms of its scope, and needs clarification. In this article, the authors will discuss the jurisprudence surrounding Section 29A of the Code and critically analyze the recent Supreme Court decision. The authors will then discuss the implications of the judgment on a guarantor’s liability under the Code.
Factual background
RBL Bank and a few of the financial creditors invoked the guarantee of the personal guarantor and issued a notice under section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Act, 2002. Subsequently, RBL Bank filed a petition under section 7 of the Code to initiate CIRP against MBL Infrastructures Limited. Thereafter, the Resolution Professional received two resolution plans, one of which was submitted by the personal guarantor. The resolution plan was submitted prior to the insertion of section 29A of the Code. However, before the Committee of Creditors (“CoC”) could take any decision on the resolution plan submitted by the personal guarantor, section 29A of the Code was introduced. In view of this development, the personal guarantor filed an application in NCLT for an order to the effect that it does not attract any disqualification under sub-section (c) and (h) of 29A of the Code. NCLT also held that as per section 29A (h) of the Code, RA will not be disqualified for merely extending personal guarantee, if such guarantee has not been invoked. It also went on to note that such disqualification will not be attracted even when certain creditors have invoked the guarantee extended by RA.
CoC, thus, voted on the resolution plan of RA. However, the plan did not receive the requisite votes. Thereafter, RA filed an application under section 60 of the Code for directing the dissenting creditors to support the resolution plan. Consequently, the resolution plan was approved by CoC. Meanwhile, another amendment to section 29A(h) of the Code took effect in 2018 (supra), looming disqualification on RA. However, NCLT held that the issue in relation to section 29A(h) of the Code has already been concluded. It, thereby, directed that the resolution plan approved by CoC shall come into effect. This order was then challenged in the Supreme Court.
Ever-evolving jurisprudence on section 29A
Dynamic nature of the Code makes the committee reports and judicial opinions indispensable in furthering our understanding of the Code. The Insolvency Law Committee Report in 2018 while discussing Section 29A (h) of the Code questioned if the intent behind the provision was to disqualify a guarantor only where the guarantee had been invoked or if the provision sought to disqualify the guarantor even when the guarantee had not been invoked.
Therefore, the ambiguities inherent in the interpretation of the provision were required to be clarified. It was observed that the provision could not have intended to disqualify a guarantor merely for issuing an “enforceable” guarantee. Accordingly, the committee recommended that the word “enforceable” ought to be removed from clause (h) and the phrase “and such guarantee has been invoked by the creditor and remains unpaid in full or part by the guarantor” should be added to the said clause. The committee, rightfully, recognised the discriminatory nature of sub-section (h). Accordingly, the said recommendations were implemented by way of an amendment in 2018.
The courts have emphasised on adopting a purposive interpretation of the Code. In order to define the scope of the section, the Apex Court in Arcelormittal India Private Limited v. Satish Kumar Gupta considered the meaning of the terms “control” and “management”. Pursuantly, the court held that the intention behind the inclusion of section 29A of the Code was to prevent a backdoor entry of those in control or management who drove the corporate debtor to the doors of insolvency in the first place. The section gained another dimension in Arun Kumar Jagatramka v. Jindal Steel And Power Ltd. which laid down that a person ineligible to be RA under the Code was also ineligible from entering a compromise under the provisions of the Companies Act, 2013. Thus, section 29A of the Code was interpreted as a critical link in assuring that the Code’s objectives were not thwarted by permitting “ineligible persons” to return in a new form of RA, including but not limited to those in management.
In RBL Bank Ltd. v. MBL Infrastructures Ltd., NCLT bench of Kolkata specifically looked into meaning and significance of sub-section (h) of section 29A of the Code. Guarantors who may be regarded to be excluded from sub-section (h) of section 29A of the Code only include those who have antecedents possibly jeopardizing the reliability of the processes under the Code. Thus, the sub-section doesn’t exclude the entire class of guarantors. Further, following in the footsteps of the insolvency committee, the tribunal observed that the word “enforceable” in the section should be aligned with the objectives of the Code. The phrase should not be understood in its ordinary or literal sense. As law couldn’t be allowed to operate in vacuum and penalise the guarantors who weren’t provided a chance to make good of the dues by invocation of guarantee.
Another decision of NCLT in Punjab National Bank v. Concord Hospitality (P.) Ltd. is pertinent to be discussed on this aspect. Here, NCLT noted that RA would not become ineligible merely because he furnished a guarantee in favour of a corporate debtor when the guarantee is not invoked.
Scope of 29A(h) of the Code
The court adopted a purposive interpretation approach to determine the scope of section 29A(h) of the Code. It was observed that the section only requires that the guarantee should be availed by “a creditor”. As was propounded in the case of Swiss Ribbon v. Union of India that once the insolvency process is initiated it is considered to be in rem. It would then result in placing the rights of all the similarly placed creditors at par with each other. The court held that the similar principle would apply in the present case.
The court also answered the question if the creditor filling an application should be the same as the one invoking the guarantee extended by a personal guarantor. It was observed that even if the guarantee has been invoked by a creditor, while the application has been filed by another, there would be a bar to eligibility under section 29A(h) of the Code. Further, any guarantee which has been extended, notwithstanding unpaid or paid partially would result into ineligibility by virtue of section 29A(h) of the Code.
Additionally, the court observed that the term “such creditor” in section 29A(h) of the Code should be interpreted to mean “similarly placed creditors”. Thereby, it is open for other creditors to exercise their rights for protection of their interests. The same was observed by the court keeping in view that the stance of the judiciary should in line with the objects of the Code.
It was further explained that mere submission of the resolution plan by RA does not create or extinguish any rights in their favour. Resultantly, until the date of the adjudication by an authority or approval of CoC a resolution plan or RA can incur a bar qua a subsequent amendment.
However, in the present case the court found that the resolution plan is in interest of the employees and other stakeholders. Moreover, the object of the Code is the revival of the corporate debtor, thus, the court upheld the resolution plan approved by CoC.
Implications and Conclusion
Over the past year, the courts have been addressing myriad of issues concerning the liability of personal guarantors under the Code. Lalit Kumar Jain v. Union of India was yet another landmark decision by the Apex Court in this direction. The judgement dealt with the personal guarantor’s liability to a corporate debtor. With the judgment into effect, the creditors are now able to initiate insolvency proceedings against persons such as the promoters or the management who act as personal guarantors on services provided to the corporate debtors. Through the judgement, the personal guarantors now have a stricter obligation under the Code.
In the present case, the court has again adopted a stern approach against the personal guarantors of a corporate debtor by holding that guarantee invoked by one would be operative as against all. Thus, the personal guarantors should be cautious before extending the guarantee to a creditor as it may result in the crystallization of debt owed to all the creditors and subsequent breach of the terms of the guarantee. However, this judgement is a welcome move in reinforcing the liability of the guarantors under the Code. In doing so, the court has again not allowed the stakeholders to hide behind the technicality of the provisions in order to misuse the processes of the Code.