THE MORATORIUM UNDER BANKRUPTCY CODE NOT A BAR ON SARFAESI ACTION AGAINST GUARANTOR’S PROPERTIES

The Insolvency and Bankruptcy Code, 2016 (IBC) has been introduced to yield faster results in the recovery of Corporate NPAs. The erstwhile SICA, was enacted to address the corporate debts and to facilitate faster recovery, rehabilitation and revival of the sick company. Contrary to this legislative intention to revive the sick companies, the provisions of SICA were used by the Corporate Debtors to weave a protective cocoon around themselves under BIFR. Thus once a company entered into BIFR, nobody could recover money from them. The need for a new legal system was necessitated by such inbuilt provisions of SICA which helped the Corporate Defaulters to thwart and delay the recovery process by the financial creditors.

 The IBC also stipulates for a moratorium period from the date of commencement of the Insolvency proceedings until the approval of a resolution plan under Section 31 of the Code. Unlike SICA , under the provisions of the new Code if at any time during the corporate insolvency resolution process period, if the Adjudicating Authority approves the resolution plan under Section 31(1) or passes an order for liquidation of corporate debtor under section 33, the moratorium shall cease to have effect from the date of such approval or liquidation order, as the case may be. Further the IBC has restricted the insolvency resolution process period to 180 days, beginning from the insolvency commencement date and ending on One Hundred and Eightieth day.

The Supreme Court in Innoventive Industries Ltd v. ICICI Bank Ltd (2017) had observed that the intent behind the moratorium was “to provide the debtors a breathing spell in which he is to seek to reorganize his business.” Section 14 (1) (c) of the IBC prohibits 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 SARFAESI Act during the moratorium period. The view of the Apex Court that this provision intends to give a “breathing spell” to corporate debtor raises a question as to whether the same breathing space was intended to be extended to the promoters and guarantors to the corporate debtor also. The question as to whether this moratorium envisaged under IBC shall give protection to the promoters/guarantors, whose personal properties have been mortgaged for securing the credit facilities availed by the Corporate Debtor, was not answered till the NCLAT decision in Alpha & Omega Diagnostics India Ltd v Asset Reconstruction Company of India Ltd.  

Without bothering to read between the lines to give a broader scope to the provision, the Appellate Tribunal had concurred with the view of the NCLT which had adopted the canons of literal interpretation in understanding the scope of the provision. The Tribunal pointed out that the language of the sub section is clearly prohibiting any action to recover or enforce any security interest created by the Corporate Debtor in respect of "its" property. It was held that the term “its” used in the language of Section 14 (1) (c) denotes the property owned by the Corporate Debtor, which is reflected in the balance sheet of the Corporate Debtor. The Tribunal had concluded that such properties which are not owned by the Corporate Debtor do not fall within the ambit of the Moratorium declared under the Code. The Appellate tribunal had further clarified that just by the mere fact that the assets, movable or immovable, of a third party (i.e., promoter or a guarantor) have been proceeded against before the Debt Recovery Tribunal, does not qualify to bring it within the scope of Moratorium envisaged under the Code.

From the language of this decision it becomes very clear that there is no bar for financial creditors/banks to proceed against the Guarantor/s or to initiate SARFAESI proceedings against the properties in the personal name of the promoters/guarantors which have been offered as a security for the credit facilities availed by a corporate debtor.