SARFAESI Action Against Personal Guarantors Can Continue Without No Pending IBC Case: Telangana High Court

The Telangana High Court has held that a secured creditor is not barred from proceeding against personal guarantors under the SARFAESI Act merely because insolvency proceedings are pending against the corporate debtor.

It observed that where no insolvency proceedings have been initiated against the guarantors before the National Company Law Tribunal (NCLT), there is "no legal argument against a secured creditor proceeding against personal guarantors for realization of its dues" under the SARFAESI Act.

A division bench of Justice Moushumi Bhattacharya and Justice Gadi Praveen Kumar held that the Debts Recovery Tribunal (DRT) wrongly treated a demand notice issued under the Insolvency and Bankruptcy Code (IBC) as equivalent to filing an application to initiate insolvency proceedings against the guarantors. It held that the bank had only issued the demand notice and had not initiated insolvency proceedings against them.

“The law makes a conscious demarcation between a Corporate Debtor and its personal guarantors in terms of initiation of Insolvency and Bankruptcy proceedings against each of them2. The IBC also clarifies that distinction by putting the relief of moratorium in relation to a Corporate Debtor and in relation to an individual/guarantor under distinct and separate chapters of the IBC (sections 14 and 96, respectively). Hence, there also cannot be any legal argument against a secured creditor proceeding against personal guarantors for realization of its dues under a different statute altogether i.e., the SARFAESI Act when there are no proceedings pending against the personal guarantors before the NCLT in respect of the same debt.”, the court ruled.

The bank classified the borrower's account as a non-performing asset in April 2017 and issued a demand notice under the SARFAESI Act in January 2018. The borrower company was admitted into the corporate insolvency resolution process in September 2019, which concluded in October 2020.

In November 2021, the bank issued a demand notice to the guarantors under Rule 7(1) of the Insolvency and Bankruptcy Rules. It later auctioned the secured assets and issued sale certificates to the successful purchasers.

The guarantors challenged the possession notice and auction sale before the DRT. The tribunal allowed their securitisation application, directed the bank to refund the auction purchaser's money with 6% interest, and ordered restoration of possession to the guarantors.

The Debts Recovery Appellate Tribunal stayed the operative part of that order. The bank challenged the DRT's decision before the High Court, while the guarantors challenged the DRAT's order.

The bank argued that the DRT had exceeded its jurisdiction under the SARFAESI Act. The guarantors contended that after the Rule 7(1) notice was issued, proceedings against them ought to continue before the NCLT.

The auction purchaser argued that a Rule 7(1) notice did not amount to filing an insolvency application and that the DRT had granted reliefs beyond those sought.

The High Court held that the DRT proceeded on an incorrect factual premise. It noted that although the bank had issued a Rule 7(1) demand notice, it never filed an application under Section 95 of the IBC against the guarantors. Without such an application, no interim moratorium could arise.

“Hence, it is clear that section 7 does not contemplate delivery of any Demand Notice by the financial creditor to the debtor for the purpose of initiation of CIRP. The initiation of the CIRP against personal guarantors by a financial creditor commences only upon admission of an application under section 95 of the IBC.”, the court ruled.

The court further held that the moratorium applicable to the corporate debtor did not extend to the personal guarantors. Since no insolvency proceedings had been initiated against the guarantors, there was no bar on the bank continuing recovery proceedings against them under the SARFAESI Act.

It also held that consolidation before the NCLT becomes relevant only where insolvency proceedings have been initiated against both the corporate debtor and the personal guarantors.

Finding that the DRT's order rested on an erroneous factual premise, the High Court set it aside, rendering the challenge to the DRAT's order redundant.