Secured Creditor Not Precluded From Filing Petition U/S 95 Of IBC, Even If Security Interest In Mortgaged Property Is Enforced: NCLT Mumbai

The National Company Law Tribunal (NCLT), Mumbai Bench, comprising Shri Kuldip Kumar Kareer (Judicial Member) and Shri Anil Raj Chellan (Technical Member), held that merely because a secured creditor has taken action to realise/enforce its security interest in the mortgaged property, the secured creditor is not precluded from initiating insolvency resolution process of the Personal Guarantor unless of course the debt is recovered in full. In this case, a petition under section 95 of the Insolvency and Bankruptcy Code (IBC) was filed by Yes Bank Limited (financial creditor) against Mrs. Jiwarajka (personal guarantor).

Brief Facts

A loan amount to the tune of Rs. 25 crores was advanced by the financial creditor to JSK Marketing Ltd. (corporate debtor) under a Master Facility Agreement executed on June 2, 2017. It also included a cash credit facility of Rs. 10 crores along with a working capital demand loan of Rs. 15 crores. This debt was secured by personal guarantor by executing a deed of guarantee.

When the corporate debtor defaulted in paying the loan amount, its account was classified as a Non-Performing Assets on June 18, 2019 as per guidelines issued by Reserve Bank of India. Thereafter, the financial creditor invoked the personal guarantee and demanded Rs. 24.76 crores from the personal guarantor which remained unpaid. Consequently, when no payment was made, the present petition was filed in which the total loan amount to the tune of Rs. 32,36,25,431.67 was claimed.

The corporate debtor was ordered to be liquidated by the NCLT on December 2, 2021.

Contentions

The petitioner contended that petition under section 95 of the IBC was filed when corporate debtor defaulted and no payment was made by the personal guarantor. It was further submitted that the personal guarantor will remain liable for the debts even if the debts are recovered from the liquidation estate of the corporate debtor. It was further argued that two secured properties were put up for auction under SARFAESI Act but the sale could not be materialised therefore the personal guarantor was still liable to pay the debts. It was further contended that section 238 of the IBC will override section 68 of the Transfer of Property Act (TOPA). It was submitted that since the petition was filed under section 95 of the IBC, section 68 of the TOPA will not be applicable. It was further submitted that the personal guarantee could not be discharged until the full debt is repaid or the personal guarantors are discharged from their obligations.

Per contra, the respondent submitted that the present petition could not be entertained due to section 68 of the TOPA as security interest in the form of two properties amounting to Rs. 25 Crores owned by the personal guarantor had already been enforced. It was argued that since the debt amount was recovered by enforcing the security interest, no petition under section 95 of the IBC could be filed to recover the same debt. It was argued that the respondent had been discharged from its obligation when the debt was assigned to Assets Reconstruction Company. Since this assignment materially altered the deed of guarantee, the respondent was entitled to be discharged under section 133 of the Indian Contract Act.

NCLT's Analysis

The NCLT carefully analysed the arguments and observed that section 68 of the TOPA applies when a suit for mortgage money is filed whereas a petition under section 95 of the IBC is filed for insolvency resolution and not mere a debt recovery mechanism therefore both are distinct proceedings. It held that the petitioner is not precluded from initiating the insolvency resolution just because security interest was enforced under the SARFAESI act unless the debt was completely recovered. In addition to that the respondent failed to prove that any debt was recovered from the enforcement of security interest. It was held as under:

“However, the Tribunal is unable to agree with the aforesaid contention for the reason that bar u/s 68 of the Transfer of Property Act, 1882 applies to suits or proceedings for mortgage money; whereas the proceedings under IBC cannot equated with a suit or a proceeding for recovering the mortgage money from the debtor. It is trite to say that proceedings under Section 95 of the Code is for insolvency resolution of the Personal Guarantor to the Corporate Debtor and not for mere recovery of debt by the creditor. Therefore, the bar u/s 68 which applies to suits for mortgage money, cannot be extended to proceedings u/s 95 of the Code as the debt recovery proceedings and the insolvency resolution process stand on totally different footing.Further, merely because a secured creditor has taken action to realise/enforce its security interest in the mortgaged property, the secured creditor is not precluded from initiating insolvency resolution process of the Personal Guarantor unless of course the debt is recovered in full”.

The NCLT further held that just because the debt was assigned to a third party, it does not amount to variance in the terms of the contract between the corporate debtor and the creditor therefore the benefit under section 133 of the Indian Contract Act cannot be given to the respondent. Additionally, it is well settled that assignee steps into the shoes of the assignor therefore the assignee becomes entitle to exercise all rights which the assignor could have exercised. Furthermore, section 5 of the SARFAESI Act permits such assignment. It was observed as under:

“However, in our considered view, mere assignment of debt cannot be said to be a variance in the terms of the contract between the principal debtor and the creditor. After assignment of debt, the assignee steps into the shoes of the creditor and exercises the same rights under the contract which the assignor/erstwhile creditor had against the debtor. Even otherwise, in view of Section 5 of the SARFAESI Act, 2002, the aforesaid contention of the learned Counsel for the Respondent cannot be entertained”.

The Tribunal further noted that a substitution application was filed by assignee which was allowed therefore insolvency petition under section 95 cannot be dismissed merely on the ground that the petitioner did not amend the cause title to continue the proceedings. The tribunal further observed that nothing prevents the Adjudicating Authority under part III from being guided by the provisions of the CPC.It was held as under:

“Thus, in the given case, there cannot be dismissal of the insolvency proceedings initiated by the Petitioner herein merely on account of failure of the assignee to make necessary amendments to the cause title and the captioned Petition to continue to proceedings especially when the substitution application was already allowed by this Court”.

Conclusion

The NCLT concluded that petitioner is not precluded from initiating insolvency proceedings under section 95 of the IBC even if security interest was enforced under SARFAESI Act provided the debt has not been recovered in full. Accordingly, the present petition was admitted and insolvency proceedings against the personal guarantor was initiated.

Case Title: YES Bank Ltd. v. Mrs. Sakshi Jiwarajka

Court: National Company Law Tribunal, Mumbai

Case Reference: CP (IB) No. 906/MB/2022 and I.A. No. 3244 of 2024

Judgment Date: 07/10/2024

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