Before we begin to understand the question of law which has been decided by the Delhi High Court, it will be better to understand the following basic definition of some of the terms:
Principal borrower- The person or entity borrowing money from the Bank of Financial Institution.
Guarantee- A guarantee, legally speaking, is a contract to perform a promise , or discharge the liability of the principal borrower in case of default
Guarantor/Surety – A person who gives a guarantee that the person borrowing the loan amount will repay his dues or the Guarantor will pay the dues on behalf of the person who has taken the loan from the bank.
The High Court of Delhi has recently held that proceedings against a Guarantor under the SARFAESI Act, 2002 at the Debt Recovery Tribunal (DRT) will be maintainable when the Proceedings under Insolvency and Bankruptcy Code, 2016 at National Company Law Tribunal (NCLT) against the principal borrower are pending for hearing.
In the case of “Kiran Gupta Vs. State Bank of India & Anr.”decided on 2nd November 2020, M/s Metenere Ltd., the principal borrower, had obtained loans from State Bank of India. The wife of the promoter of the principal borrower stood as the Guarantor for repayment of loans.
Now, the Bank has filed an insolvency petition under the provisions of IBC before the NCLT, Delhi. During the pendency of the insolvency proceedings against the principal borrower, the bank began the proceedings under the SARFAESI Act, 2002 and filed two cases against the principal borrower and the Guarantor at DRT- II, Delhi.
It was argued by the Guarantor before the Delhi High Court that:
- If the Resolution Plan will be accepted, then under Section 31 of the IB Code, all Guarantees will become ineffective as the resolution plan is being on the Guarantors. A plea has been taken that after approval of the Resolution Plan under the IB Code, the liability of the Guarantor comes to an end.
- It had also been stated that during the COVID -19 pandemic, the Bank would not be in a position to fetch a good value of the property and therefore, it will not be prudent to go ahead with the sale of the property.
- The final contention of the Guarantor was that from the date of admission of an application for initiating Corporate Insolvency process by the Adjudicating authority, the Adjudicating Authority by order declares a moratorium prohibiting institution or continuation of suits, arbitrations and other proceedings against the entity against which the Insolvency proceedings have commenced.
The Bank elaborated upon the nature of Guarantors, Sureties and Borrowers. The Bank brought notice of the court to Section 128 of the Contract Act which provides that the liability of a Guarantor is coextensive with that of a Principal Debtor.
The Delhi High Court held that since the liability of a Guarantor is co-extensive with that of the principal debtor and not in the alternative, it cannot be said that the proceedings in NCLT can be said to be a bar to institution of or continuation of proceedings against the Guarantor under the SARFAESI Act. The Court also settled the law on proceeding against the Guarantor even after the proceedings under the IB Code have been initiated against the principal borrower.
The court observed that the issue is squarely covered by the judgment of the Supreme Court of India in the case of “State Bank of India Vs. V. Ramakrishnan and Anr.” decided on 14th August 2018 where the view expressed by the Honourable Supreme Court amply demonstrates that neither Section 14 nor Section 31 of the IB Code place any bar on Banks/ Financial Institutions from initiation and continuation of the proceedings against the Guarantor for recovering their dues.
Therefore, it is always best to keep in mind that just because the insolvency case is going on against the principal borrower the Guarantor will not face any action. It is always best to consult a legal professional at the very first instance to protect your interests.
