NCLT Kochi: Moratorium U/S 96 And 101 Of IBC Cannot Be Meant To Prohibit The Right To Action U/S 7, 9 Or 10 Of IBC

The Bench has further observed that the word ‘in relation to debt’ should be read in harmony with other parts of IBC and due importance should be given to the purpose and terms of a contract of guarantee and loan agreements.

Background Facts

Furnace Fabrica (“Corporate Debtor/Applicant”) defaulted in paying off credit facilities sanctioned and granted by a consortium of banks namely, SBI as the lead bank, EXIM Bank, Axis Bank and Standard Chartered Bank.

The security credit facility was secured by personal guarantees of individuals. On 11.05.2023, Standard Chartered Bank initiated an insolvency resolution process under section 95 against one of the personal guarantors, Mr Abdul Rehman Basheeruddin in CP(IBC)/12/KOB/2023. Following this, as per Section 96 of IBC, an interim moratorium commenced in relation to all the debts.

“Interim moratorium under section 96(1)(a) of the code commences in relation to all debts of the personal guarantor and during such period: -

• any legal action or proceeding pending in respect of any debt shall be deemed to have been stayed;
• the creditors of the debtor shall not initiate any legal action or proceedings in respect of any debt.

Further, debt under section 3(11) means a liability or obligation in respect of a claim which is due from any person and includes financial debt and operational debt.”

On 23.05.2023, the State Bank of India (‘Respondent”) as the Financial Creditor of the Applicant filed a section 7 application for the initiation of the Corporate Insolvency Resolution Process (“CIRP’).

Contentions of Applicant

The Applicant argued that the company petition under Section 7 should be stayed as another company petition arising out from the same credit facilities granted by the creditors under the same documents has been filed and therefore application under Section 7 is bound by the interim moratorium under Section 96 and under section 101 of the IBC.

Contentions of Respondent

The Respondent opposed the submissions of the Applicant and argued that it is a well-settled position of law that simultaneous proceedings can be initiated against both the Corporate Debtor and guarantor for the same debt.

The Respondent argued that in Laxmi Pat Surana vs. Union Bank of India & Ann, the Supreme Court has held that the right of cause of action would ensure the financial creditor to proceed against the principal borrower and guarantor in equal measure in case of default of debt acting jointly and severally.

The Respondent pointed out that, the obligation of the guarantor is coterminous and coextensive with that of the principal borrower to defray the debt as stated in section 128 of the Indian Contract Act, 1872.

The Respondent further relied on Axis Trustee Services Limited vs Brij Bhushan Singh and Ors. (Delhi High Court) to state that section 96 moratorium applies to debts of personal guarantor alone and not to other co-guarantors even if arising out of the same debt.

NCLT Verdict

The NCLT rejected the application, observing that the moratorium under sections 96 and 101 of IBC cannot be meant to prohibit the right to action under sections 7, 9 or 10 of IBC.

NCLT further observed that the word ‘in relation to debt’ should be read in harmony with other parts of IBC and due importance should be given to the purpose and terms of a contract of guarantee and loan agreements.

“Now it is profitable to look into the scheme of IBC, 2016. On going through the IBC, it is seen that nowhere in the code, it is mentioned that the moratorium in section 96 shall affect the proceedings under section 7 9 or 10. Infact there are 2 moratoriums one which comes after admission under section 7 or 9 or 10 and another which comes on initiation of personal insolvency process. Both are governed by separate parts in IBC and hence the legislature has provided separate action for different situations. The structure of the IBC is such that moratorium under section 14 comes out of the primary debt of CD and the moratorium under section 96 or 101 comes out of the secondary debt i,e default of guarantee. If moratorium under section 96 or 101 is meant to prohibit section 7 proceedings, then what it means is to essentially invalidate the primary contract which cannot be the object of IBC”.

The Bench thus held that the resolution process for the corporate debtor and personal guarantor is separate. The resolution under Section 95 arises out of the liability of a guarantor and it does not absolve the right to initiate a CIRP under Sections 7, 9 or 10 of IBC.

Case Title: Furnace Fabrica (India) Limited vs State Bank of India

Case No.: IA (IBC)/339/KOB/2023 IN CP(IBC)/14/KOB/2023

Counsel For Applicant: Mr. Rohan Kumar, Advocate

Counsel For Respondent: Mr. Vinod P V, Advocate

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