IBC Moratorium For Guarantors Won't Shield Borrower Without Pending CIRP: Bombay High Court

The Bombay High Court on Monday held that moratoriums under the Insolvency and Bankruptcy Code (IBC) in favour of guarantors cannot be used to block recovery proceedings against a principal borrower.

The court allowed IL&FS Financial Services Ltd.'s Rs 203.66 crore suit to proceed against Serveall Constructions Pvt Ltd in a case involving HDIL promoters Rakesh Wadhawan and Sarang Wadhawan.

“Therefore, the benefit of the interim moratorium under Section 96 in the IRP proceedings for the personal guarantor cannot be extended to a principal borrower in a summary suit for recovery of amounts when no proceedings under the IB Code are initiated against such borrower,” the court said.

A single-judge Bench of Justice Gauri Godse was hearing a commercial summary suit filed by IL&FS against Serveall Constructions, Housing Development and Infrastructure Ltd (HDIL) as the corporate guarantor, and its promoters Rakesh Wadhawan and Sarang Wadhawan as personal guarantors.

The dispute stems from term loan facilities extended by IL&FS to Serveall Constructions, with HDIL backing the loan as corporate guarantor and Rakesh and Sarang Wadhawan furnishing personal guarantees.

Corporate insolvency resolution proceedings (CIRP) were initiated against HDIL by an order dated August 20, 2019, later upheld by the appellate tribunal in July 2020.

Separate proceedings were also initiated against the Wadhawans under Section 95 of the IBC in December 2021, triggering an interim moratorium under Section 96.

IL&FS told the court it was, at this stage, pressing its claim only against the principal borrower, against whom no insolvency proceedings had been initiated.

Accepting this, the court drew a distinction between moratoriums under Sections 14 and 96 of the IBC. It held that while Section 14 bars proceedings against a corporate debtor undergoing insolvency, and Section 96 provides interim protection in personal insolvency, such protection is confined to the concerned debtor and cannot be extended to a separate entity like a principal borrower.

The court further clarified that the liability of a principal borrower remains independent and is not extinguished by any resolution plan concerning guarantors.

“However, the principal borrower against whom no proceedings are initiated under the IB Code will not have its liability discharged under the resolution plan of the guarantor. The adjudication of the liability of the principal borrower would therefore fall within the jurisdiction of the civil court when no proceedings under the IB Code are initiated against the principal borrower,” the court said.

The High Court accordingly permitted the suit to proceed against Serveall Constructions, while staying proceedings against HDIL and Rakesh and Sarang Wadhawan during the subsistence of the moratorium.