Moratorium Under Section 14 IBC Does Not Protect Personal Guarantors: NCLT Chandigarh

The Chandigarh Bench of the National Company Law Tribunal (NCLT) on 18 March held that the moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 does not extend to personal guarantors of a corporate debtor and therefore allows creditors to continue proceedings against them even during the pendency of the corporate insolvency resolution process (CIRP).

A Bench comprising Judicial Member Khetrabasi Biswal and Technical Member Shishir Agarwal admitted insolvency petitions filed by the State Bank of India against personal guarantors Jitendra Singh and Gurmeet Sodhi. The Tribunal observed:

“…the statutory protection of moratorium is confined to the Corporate Debtor and does not bar proceedings against personal guarantors. Consequently, even during the subsistence of CIRP against the Corporate Debtor, the Financial Creditor remains legally entitled to pursue remedies against the Personal Guarantors.”

State Bank of India (SBI), as part of a consortium of lenders, extended credit facilities to Kudos Chemie Ltd. (corporate, which were later restructured under the Corporate Debt Restructuring (CDR) mechanism. To secure repayment, Singh and Sodhi executed personal guarantee deeds in 2014.

After the borrower defaulted, the corporate debtor's account was classified as a Non-Performing Asset (NPA). SBI issued a demand notice under Section 13(2) of the SARFAESI Act on 5 November 2016 invoking the guarantees. Recovery proceedings before the Debt Recovery Tribunal culminated in the issuance of a Recovery Certificate dated 6 January 2020.

SBI then filed petitions under Section 95 of the Code seeking initiation of insolvency resolution proceedings against Singh and Sodhi.

The guarantors objected to the petitions, arguing that they were barred by limitation. They contended that the date of default was 31 May 2015, when the account was classified as NPA, and asserted that acknowledgements in the corporate debtor's balance sheets could not extend limitation against guarantors.

They also argued that the SARFAESI demand notice dated 5 November 2016 was issued only for enforcement of secured assets and did not amount to a valid invocation of the guarantee for proceedings under the Code.

Further, they contended that the Recovery Certificate dated 6 January 2020 could not sustain the proceedings because the CIRP against the corporate debtor had already been admitted on 5 July 2019 and the moratorium under Section 14 was in operation.

Rejecting these objections, the Tribunal relied on Dena Bank v. C. Shivakumar Reddy and Anr., in which the Supreme Court held that the issuance of a Recovery Certificate gives rise to a fresh cause of action for initiating proceedings under the Code. The Bench noted that the DRT issued the Recovery Certificate on 6 January 2020 and that SBI filed the petitions on 10 August 2021, well within the three-year limitation period.

On the effect of the moratorium, the Tribunal reiterated that Section 14(1) does not extend the moratorium to a surety in a contract of guarantee to the corporate debtor.

The NCLT also examined Clause 20 of the guarantee deed, which required only a notice demanding payment. The Tribunal held that the SARFAESI demand notice dated 5 November 2016, addressed to both the corporate debtor and the guarantors, satisfied this requirement and validly invoked the guarantees.

Accordingly, the Tribunal admitted the petitions under Section 95 of the Code, initiated insolvency resolution proceedings against Singh and Sodhi, and declared a moratorium for 180 days.

For Appellant: Advocates Harsh Garg and Pulkit Goyal

For Respondens: Advocates Aalok Jagga, Sahil Lohan, APS Madaan, Advocates Aryaman Jagga, Madhav Singhal