Personal Property of Guarantors Cannot Be Transferred During CIRP of Corporate Debtor: NCLAT

The National Company Law Appellate Tribunal has held that the personal property of the Guarantors could not be transferred in the Corporate Insolvency Resolution Process of the Corporate Debtor, even though, their properties were mortgaged with the Financial Creditors.

Officiating Chairperson AIS Cheema and Technical Member Alok Srivastava held under Section 61(3) of IBC that the Resolution Plan as approved by NCLT was in contravention of the provisions of law and there were material irregularities in exercise of powers by NCLT when it directed the Appellants that they shall enter into a Tripartite Agreement for transfer of the premises.

Furthermore, the part of the order which said that the Financial Creditors were at liberty to proceed against the properties of the Promoters, was like a blank cheque given to proceed even with regard to any other property also of the Personal Guarantors.

In our view, without resorting to appropriate proceedings against the Personal Guarantors of Corporate Debtor this is irregular exercise of powers. 

The Tribunal relied on the Supreme Court's the judgment in the matter of "State Bank of India v. V. Ramakrishnan & Anr.", and noted that if Moratorium under Section 14 of the IBC during CIRP did not apply to Personal Guarantors of the Corporate Debtor, personal properties of the Corporate Debtor could not be realized by sale/ transfer etc. in the CIRP of the Corporate Debtor without resorting to proceeding before appropriate authority/ Court under the existing enactment before portion of Part-III of IBC had been applied to the Personal Guarantors of Corporate Debtor.

"Now, after portion of Part-III has been applied to Personal Guarantors of Corporate Debtor, one would have to resort to those provisions under IBC if Personal Guarantors of Corporate Debtor are to be proceeded against. In Resolution Plan of Corporate Debtor provision relating to right of Financial Creditor to proceed against Personal Guarantor can be there, but enforcement of such right has to be as per provisions of law as discussed", it added. 

The legal question that arose before the Tribunal was whether a CIRP against Corporate Debtor could be treated as Resolution Process against Personal Guarantors, so as to transfer personal properties of the Personal Guarantors in CIRP of Corporate Debtor. 

Background:

The instant appeal was filed by the Promoter and Suspended Directors of the Corporate Debtor- 'Simrut Foods & Hospitality Private Limited' against the impugned order passed by NCLT, Mumbai Bench allowing the Application filed by Resolution Professional seeking approval of the Resolution Plan (submitted by Respondent No.1- 'Sanidhya Industries LLP') which had been approved by the Committee of Creditors.

It was alleged that the Resolution Plan had provisions to transfer personal properties of the Appellants who had given their personal properties as security in favour of the Corporate Debtor, on whom Corporate Debtor took loan.

They claimed that the personal properties of the Shareholders/ Directors could not form part of the Resolution Plan under Regulation 37 of the CIRP Regulations. without proceeding against them.

It was further alleged that the Information Memorandum did not show the personal properties of the Appellants as properties of the Corporate Debtor. However, in the Resolution Plan the properties were included and sought to be transferred. They claimed that in the CIRP, their personal properties were not valued.

The appellants further alleged collusion between the Resolution Professional and the Successful Resolution Applicant and stated that the Resolution Plan was approved without deciding the objections raised by them.

The Resolution Professional claimed that during the pendency of CIRP, the Respondent Nos.4 and 5- Financial Creditors, in exercise of their statutory powers under SARFAESI Act took physical possession of the assets of the Appellants and the said assets are in custody of the Financial Creditors. He submitted that in such contingency, the Resolution Plan came to be accepted.

The Financial Creditors in their reply argued that the Appellants had mortgaged the subject properties to them in 2014 and had executed personal guarantees in order to secure the advances given to the Corporate Debtor.

Courts' Findings:

The Tribunal noted that the impugned Resolution Plan was approved on November 13, 2019 and Section 2(e) and provisions of Part-III of IBC came to be notified on November 15, 2019 enforcing Part III of IBC to limited extent of making it possible to enforce Resolution relating to personal Guarantors of the Corporate Debtor. 

It was found that the Adjudicating Authority at the time of passing the impugned order also passed orders in M.A 3486/2019 which had raised objections with regard to the Resolution Plan and they had been approved.

With regard to the Respondents claim that the Appellants had not challenged the order in MA 3486/2019 and without challenging that order the Appellants could not make grievance with the, the Tribunal observed,

"Rather the order approving the Resolution Plan is the primary order which is source of grievance for the Appellants and their objections being more legal are required to be considered as affected parties."

The Court noted that as per Sub-clause (f) of Regulation 36(2) the Information Memorandum should give details of guarantees that have been given in relation to the debts of the Corporate Debtor by other persons, specifying which of the guarantors is a related party.

"Thus reference to details of Guarantees given by Related Party has to be there. That reference does not make property of Guarantor a property of Corporate Debtor for which Section 36(2) (a) is there."

Furthermore, the Tribunal noted that the personal properties of the Appellants were neither valued nor included in the Information Memorandum and had been allowed by the Resolution Professional to be included in the Resolution Plan so as to transfer the same to the Successful Resolution Applicant.

Since Part-III of the IBC had not been enforced, the provisions operating with regard to Personal Guarantors of the Corporate Debtor were- the 'Presidency Towns Insolvency Act, 1909', 'the Provincial Insolvency Act, 1920' and 'Recovery of Debts Due to Banks and Financial Institutions Act, 1993', the Tribunal remarked.

"When Resolution Plan was approved in the present matter by the Adjudicating Authority, those provisions under those Acts were as much applicable and if the Financial Creditors had to proceed against the Personal Guarantors, the same would have to be done under those Acts."

Accordingly, the Appeal was allowed and the impugned order was quashed.

"The Resolution Plan approved by the Adjudicating Authority is rejected. All actions taken in consequence of the impugned order approving the Resolution Plan shall stand set aside. As the Insolvency Resolution Process period under Section 12 of the IBC is already over, the matter is remitted back to the Adjudicating Authority to pass appropriate order of liquidation under Section 33 of the IBC", stated the Order.

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