INDIA - NCLAT RULES THAT ASSETS OF A GUARANTOR CANNOT BE ATTACHED

On 28 February 2018, the National Company Law Appellate Tribunal (NCLAT) held in the case of State Bank of India vs Mr. V Ramakrishnan and Anr that assets of personal guarantors cannot be liquidated while a moratorium has been imposed on the alienation of the corporate debtors assets by the National Company Law Tribunal. 

Following is a brief overview of the facts of the case and the ruling of the NCLAT:

1. Mr V Ramakrishnan (Respondent) was the director of Veesons Energy Systems Private Limited (Company). The Company availed of certain loan facilities from the State Bank of India (SBI) for which the Respondent had given a personal guarantee and mortgaged some of his personal assets as collateral security.

2. Since the Company had defaulted in repayment of the loan, SBI proceeded against the Respondent under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) and issued a possession notice in respect of his mortgaged properties.

3. Meanwhile, the Company filed an application before the National Company Law Tribunal (NCLT) under Section 10 of the Insolvency and Bankruptcy Code, 2016 to initiate insolvency proceedings in respect of itself. The application was admitted, a moratorium was imposed and an insolvency resolution professional was appointed. Despite this, SBI continued the SARFAESI proceedings against the Respondent. Being aggrieved, the Respondent applied to the NCLT Chennai, for a stay on the SARFAESI proceedings against him, which was granted until the period of moratorium for the Company expired, which is the date of completion of the insolvency resolution process.

4. An appeal was filed by SBI in the NCLAT against the order of the NCLT Chennai, staying the SARFAESI proceedings. It was contended by the advocate for SBI that the order of moratorium against the Company will not affect the assets of the personal guarantor (Respondent) but only those of the Company.

5. The NCLAT held that upon a reading of the relevant provisions of the IBC it is clear that a resolution plan for the Company, approved by the committee of creditors constituted under the IBC and approved by the NCLT is not only binding on the Company but also on its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan, including the personal guarantors.

6. Therefore, the NCLAT held a moratorium imposed on the alienation/transfer/sale of the assets of the Company would also extend to the assets of the personal guarantors.

MHCO COMMENT:

The judgment of the NCLAT will bring great relief to personal guarantors of companies. The present judgement also overrides the judgement of NCLT, Mumbai in the case of Schweitzer Systemtek India Private Limited , where it had been held that a moratorium under the IBC will only apply to the corporate debtors assets. It remains to be seen whether this ruling is appealed to the Supreme Court. 

This update was released on 12 March 2018.