Supreme Court of India
STATE BANK OF INDIAversusV. RAMAKRISHNAN & ANR.
- Citation
- 2018 INSC 711
- Decided
- 14 August 2018
- Disposal
- Appeal(s) allowed
- Bench
- R F NARIMAN
Holding
Section 14 of the Insolvency and Bankruptcy Code applies only to the corporate debtor and does not impose a moratorium on a personal guarantor.
Summary
State Bank of India (SBI) sought recovery of a loan from a corporate debtor whose managing director, V. Ramakrishnan, had also given a personal guarantee. After the corporate debtor defaulted, SBI invoked SARFAESI provisions and the debtor filed an insolvency petition under the Insolvency and Bankruptcy Code (IBC) 2016, leading to a moratorium under Section 14. Ramakrishnan applied for interim relief, arguing that the moratorium should extend to personal guarantors. The National Company Law Tribunal initially allowed this, but the appellate tribunal dismissed it, and the Supreme Court examined whether Section 14 applies to personal guarantors, considering Sections 60, 31, the status of Part III, and the 2018 amendment excluding sureties. The Court held that Section 14 applies only to the corporate debtor and does not impose a moratorium on personal guarantors, whose claims continue under existing statutes. Consequently, the Supreme Court allowed SBI's appeals, overturning the lower tribunal’s order.
Issues considered
- Whether Section 14 of the Insolvency and Bankruptcy Code, 2016 imposes a moratorium on a personal guarantor of a corporate debtor.
- Whether Section 60(2) and (3) of the IBC extend the moratorium to personal guarantors.
- The effect of the 2018 amendment inserting a surety exclusion in Section 14(3).
- The applicability of Part III of the IBC, which is not yet in force, to personal guarantors.
Legislation cited
- Companies Act, 2013
- Indian Contract Act, 1872s. 128
- Insolvency and Bankruptcy Code, 2016s. 101, s. 14, s. 243, s. 249, s. 31, s. 60, s. 96
- Presidency‑Towns Insolvency Act, 1909
- Provincial Insolvency Act, 1920
- Recovery of Debts Due to Banks and Financial Institutions Act, 1993
- Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
- Sick Industrial Companies (Special Provisions) Act, 1985s. 22
Subjects
Insolvency and Bankruptcy CodeSection 14personal guarantormoratoriumcorporate debtorbankruptcyPart III not in forceAmendment Act 2018National Company Law TribunalResolution Plan
Judgment
974 [2018]REPORTS
SUPREME COURT 10 S.C.R. 974 [2018] 10 S.C.R.
A STATE BANK OF INDIA
v.
V. RAMAKRISHNAN & ANR.
(Civil Appeal No. 3595 of 2018)
B AUGUST 14, 2018
[R. F. NARIMAN AND INDU MALHOTRA, JJ.]
Insolvency and Bankruptcy Code, 2016: s.14 – Applicability
of, in case of personal guarantor – Whether s.14 of the Code which
provides for a moratorium for the limited period mentioned in the
C
Code, on admission of an insolvency petition, would apply to a
personal guarantor of a corporate debtor – Held: s.14 is applicable
only in case of corporate debtor – Said section does not mention
about the personal guarantor – So far as personal guarantors are
concerned, Part III has not been brought into force, and neither
D has s.243, which repeals the Presidency-Towns Insolvency Act, 1909
and the Provincial Insolvency Act, 1920 – The net result of this is
that so far as individual personal guarantors are concerned, they
shall continue to be proceeded against under the aforesaid two
Insolvency Acts and not under the Code – The scheme of s.60(2)
and (3) of the Code is clear – the moment there is a proceeding
E
against the corporate debtor pending under the 2016 Code, any
bankruptcy proceeding against the individual personal guarantor
will, if already initiated before the proceeding against the corporate
debtor, be transferred to the National Company Law Tribunal or, if
initiated after such proceedings had been commenced against the
F corporate debtor, be filed only in the National Company Law
Tribunal – However, the Tribunal is to decide such proceedings
only in accordance with the Presidency-Towns Insolvency Act, 1909
or the Provincial Insolvency Act, 1920, as the case may be –
Presidency-Towns Insolvency Act, 1909 – Provincial Insolvency Act,
1920 – Recovery of Debts Due to Banks and Financial Institutions
G
Act, 1993 – Banks/Banking.
Allowing the appeals, the Court
HELD: 1.1 Under Part II of the Code, which deals with
“Insolvency Resolution and Liquidation for Corporate Persons”,
H a financial creditor or a corporate debtor may make an application
974
STATE BANK OF INDIA v. V. RAMAKRISHNAN & ANR. 975
to initiate this process. Once initiated, the Adjudicating Authority, A
after admission of such an application, shall by order, declare a
moratorium for the purposes referred to in Section 14. [Para 16]
[989-E-F]
M/s. Sicom Investments and Finance Ltd. v. Rajesh
Kumar Drolia and Anr. (2017) SCC Online Bom 9725; B
Sanjeev Shriya v. State Bank of India and Ors. (2018)
2 All LJ 769 (decided on 06.09.2017) – referred to
1.2 Section 14 refers to four matters that may be prohibited
once the moratorium comes into effect. In each of the matters
referred to, be it institution or continuation of proceedings, the C
transferring, encumbering or alienating of assets, action to
recover security interest, or recovery of property by an owner
which is in possession of the corporate debtor, what is
conspicuous by its absence is any mention of the personal
guarantor. Indeed, the corporate debtor and the corporate debtor
alone is referred to in the said Section. A plain reading of the said D
Section, therefore, leads to the conclusion that the moratorium
referred to in Section 14 does not apply to personal guarantors
of a corporate debtor. [Para 17] [989-F-H]
2.1 Section 60 of the Code, in sub-section (1) thereof, refers
to insolvency resolution and liquidation for both corporate debtors E
and personal guarantors, the Adjudicating Authority for which
shall be the National Company Law Tribunal, having territorial
jurisdiction over the place where the registered office of the
corporate person is located. This sub-section is only important
in that it locates the Tribunal which has territorial jurisdiction in F
insolvency resolution processes against corporate debtors. So
far as personal guarantors are concerned, Part III has not been
brought into force, and neither has Section 243, which repeals
the Presidency-Towns Insolvency Act, 1909 and the Provincial
Insolvency Act, 1920. The net result of this is that so far as
individual personal guarantors are concerned, they will continue G
to be proceeded against under the aforesaid two Insolvency Acts
and not under the Code. Indeed, by a Press Release dated
28.08.2017, the Government of India, through the Ministry of
Finance, cautioned that Section 243 of the Code, which provides
for the repeal of said enactments, has not been notified till date, H
976 SUPREME COURT REPORTS [2018] 10 S.C.R.
A and further, that the provisions relating to insolvency resolution
and bankruptcy for individuals and partnerships as contained in
Part III of the Code are yet to be notified. Hence, it was advised
that stakeholders who intend to pursue their insolvency cases
may approach the appropriate authority/court under the existing
enactments, instead of approaching the Debt Recovery Tribunals.
B
It is for this reason that sub-section (2) of Section 60 speaks of
an application relating to the “bankruptcy” of a personal guarantor
of a corporate debtor and states that any such bankruptcy
proceedings shall be filed only before the National Company Law
Tribunal. [Paras 19, 20] [990-B-G]
C 2.2 The scheme of Section 60(2) and (3) is clear – the
moment there is a proceeding against the corporate debtor
pending under the 2016 Code, any bankruptcy proceeding against
the individual personal guarantor will, if already initiated before
the proceeding against the corporate debtor, be transferred to
D the National Company Law Tribunal or, if initiated after such
proceedings had been commenced against the corporate debtor,
be filed only in the National Company Law Tribunal. However,
the Tribunal is to decide such proceedings only in accordance
with the Presidency-Towns Insolvency Act, 1909 or the Provincial
Insolvency Act, 1920, as the case may be. It is clear that sub-
E section (4), which states that the Tribunal shall be vested with all
the powers of the Debt Recovery Tribunal, as contemplated under
Part III of this Code, for the purposes of sub-section (2), would
not take effect, as the Debt Recovery Tribunal has not yet been
empowered to hear bankruptcy proceedings against individuals
F under Section 179 of the Code, as the said Section has not yet
been brought into force. Also, Section 249, dealing with the
consequential amendment of the Recovery of Debts Act to
empower Debt Recovery Tribunals to try such proceedings, has
also not been brought into force. [Para 21] [991-B-E]
G 3. Sections 96 and 101, when contrasted with Section 14,
would show that Section 14 cannot possibly apply to a personal
guarantor. When an application is filed under Part III, an interim-
moratorium or a moratorium is applicable in respect of any debt
due. First and foremost, this is a separate moratorium, applicable
separately in the case of personal guarantors against whom
H
STATE BANK OF INDIA v. V. RAMAKRISHNAN & ANR. 977
insolvency resolution processes may be initiated under Part III. A
Secondly, the protection of the moratorium under these Sections
is far greater than that of Section 14 in that pending legal
proceedings in respect of the debt and not the debtor are stayed.
The difference in language between Sections 14 and 101 is for a
reason. Section 14 refers only to debts due by corporate debtors,
B
who are limited liability companies, and it is clear that in the vast
majority of cases, personal guarantees are given by Directors
who are in management of the companies. The object of the Code
is not to allow such guarantors to escape from an independent
and co-extensive liability to pay off the entire outstanding debt,
which is why Section 14 is not applied to them. However, insofar C
as firms and individuals are concerned, guarantees are given in
respect of individual debts by persons who have unlimited liability
to pay them. And such guarantors may be complete strangers to
the debtor – often it could be a personal friend. It is for this reason
that the moratorium mentioned in Section 101 would cover such
D
persons, as such moratorium is in relation to the debt and not
the debtor. It is open to mark the difference in language between
Sections 14 and 96 and 101, even though Sections 96 and 101
have not yet been brought into force. [Para 23] [992-C-G]
State of Kerala and Ors. v. Mar Appraem Kuri Co. Ltd.
and Anr. (2012) 7 SCC 106:[2012] 4 SCR 448; Madras E
Petrochem Ltd. and Anr. v. Board for Industrial and
Financial Reconstruction and Ors. (2016) 4 SCC
1: [2016] 11 SCR 419; CIT v. Shelly Products (2003) 5
SCC 461 : [2003] 1 Suppl. SCR 79; CIT v. Vatika
Township (2015) 1 SCC 1 : [2014] 12 SCR 1037 – F
relied on.
Case Law Reference
[2012] 4 SCR 448 relied on Para 23
[2016] 11 SCR 419 relied on Para 25 G
[2003] 1 Suppl. SCR 79 relied on Para 29
[2014] 12 SCR 1037 relied on Para 29
H
978 SUPREME COURT REPORTS [2018] 10 S.C.R.
A CIVIL APPELLATE JURISDICTION : Civil Appeal No. 3595
of 2018
From the Judgment and Order dated 28.02.2018 of the National
Company Law Appellate Tribunal at New Delhi in Company Appeal
(AT) (Insolvency) No. 213 of 2017
B WITH
C.A. No. 4553 of 2018
K. V. Vishwanathan, (A.C.), C. U. Singh, Sr. Advs., Abhishek
Kaushik, Ms. Vrinda Bhandari, Dhananjay B. Ray, Ravi R. Raghunath,
Sanjay Kapur, Ms. Megha Karnwwal, Ms. Sheena Taqui, Ms. Shubhra
C Kapur, P. S. Sudheer, Ms. Anne Mathew, Bharat Sood, Ms. Shruti Jose,
Ayush Anand, Shubhendu Anand, Arvind Kumar Gupta, Ms. Henna
George, G. Balaji, Dilpreet Singh, Rajesh Bohra, Dhaval S. Deshpande,
Amir Arsiwala, Arvind Gupta, Rahul Chitnish, Advs. for the appearing
parties.
The Judgment of the Court was delivered by
D
R. F. NARIMAN, J. 1. The present appeals revolve around
whether Section 14 of the Insolvency and Bankruptcy Code, 2016, which
provides for a moratorium for the limited period mentioned in the Code,
on admission of an insolvency petition, would apply to a personal guarantor
of a corporate debtor.
E
2. The factual backdrop of the present appeals is that the
Respondent No.1 is the Managing Director of the corporate debtor,
namely, the Respondent No.2 Company, and also the personal guarantor
in respect of credit facilities that had been availed from the Appellant.
The Guarantee Agreement entered into between the Appellant and the
F Respondent No.1 is dated 22.02.2014.
3. As the Respondent No.2 Company did not pay its debts in time,
the account of Respondent No.2 was classified as a non-performing
asset on 26.07.2015. Consequent thereto, the Appellant issued a notice
dated 04.08.2015 under Section 13(2) of the SARFAESI Act demanding
G an outstanding amount of Rs.61,13,28,785.48 from the Respondents within
the statutory period of 60 days. As no payment was forthcoming, a
possession notice under Section 13(4) of the SARFAESI Act was issued
on 18.11.2016.
4. As matters stood thus, an application was filed by Respondent
No.2, the corporate debtor, under Section 10 of the Code on 20.05.2017
H to initiate the corporate insolvency resolution process against itself. On
STATE BANK OF INDIA v. V. RAMAKRISHNAN & ANR. 979
[R. F. NARIMAN, J.]
19.06.2017, this petition filed under Section 10 was admitted, followed A
by the moratorium that is imposed statutorily by Section 14 of the Code.
While the said proceedings were pending, an interim application was
filed by Respondent No.1 as personal guarantor to the corporate debtor,
in which Respondent No.1 took up the plea that Section 14 of the Code
would apply to the personal guarantor as well, as a result of which
B
proceedings against the personal guarantor and his property would have
to be stayed. The National Company Law Tribunal, by its order dated
18.09.2017, held that since under Section 31 of the Code, a Resolution
Plan made thereunder would bind the personal guarantor as well, and
since, after the creditor is proceeded against, the guarantor stands in the
shoes of the creditor, Section 14 would apply in favour of the personal C
guarantor as well. The interim application filed by Respondent No.1
was thus allowed, and the Appellant was restrained from moving against
Respondent No.1.
5. An appeal filed to the National Company Law Appellate
Tribunal resulted in the appeal being dismissed. By the impugned judgment D
dated 28.02.2018, the Appellate Tribunal relied upon Section 60(2) and
(3) of the Code as well as Section 31 of the Code to find that the
moratorium imposed under Section 14 would apply also to the personal
guarantor. The reasoning was that since the personal guarantor can also
be proceeded against, and forms part of a Resolution Plan which is
binding on him, he is very much part of the insolvency process against E
the corporate debtor, and that, therefore, the moratorium imposed under
Section 14 should apply to the personal guarantor as well.
6. Shri Sanjay Kapur, learned counsel appearing on behalf of the
Appellant in C.A. No. 3595 of 2018, and Shri C.U. Singh, learned Senior
Advocate appearing on behalf of Appellant in C.A. No. 4553 of 2018, F
both argued that the corporate debtor and personal guarantor are separate
entities and that a corporate debtor undergoing insolvency proceedings
under the Code would not mean that a personal guarantor is also
undergoing the same process. As the guarantor’s liability is distinct and
separate from that of the corporate debtor, a suit can be maintained
against the surety, though the principal debtor has not been sued. For G
this purpose, they relied upon Section 128 of the Indian Contract Act,
1872. They also relied heavily upon the reasoning contained in a judgment
by a Single Judge of the Bombay High Court in M/s. Sicom
Investments and Finance Ltd. v. Rajesh Kumar Drolia and Anr.1
1
(2017) SCC Online Bom 9725 (decided on 28.11.2017). H
980 SUPREME COURT REPORTS [2018] 10 S.C.R.
A They then referred to Part III of the Code, and in particular, to Sections
96 and 101. Although Part III of the Code has not been brought into
force, it is clear that if an insolvency resolution process is to be carried
out against a personal guarantor, it can be done only under Part III,
which contains a separate moratorium provision, namely, Sections 96
and 101, both of which would attach only if a separate insolvency process
B
were carried out as against the personal guarantor. Shri Singh, in particular,
relied heavily upon the difference in language between Section 14 and
Section 101. According to the learned senior counsel, Section 14, in all
its sub-sections, speaks only of the corporate debtor. When contrasted
with Section 101, it becomes clear that Section 14 cannot possibly attach
C to a personal guarantor as well, as Section 101 does not speak of a
‘debtor’ but speaks ‘in relation to the debt’ and is not only wider than
Section 14, but would attach only if Part III proceedings were to be
instituted against the personal guarantor. They also relied heavily upon
the Amendment Ordinance dated 06.06.2018, by which Section 14(3) of
the Code was substituted, including a surety in a contract of guarantee
D
to a corporate debtor. They relied upon the Insolvency Law Committee
proceedings, which led to the aforesaid amendment, stating that it had
been recommended to clarify, by way of an explanation, that all assets
of such guarantors to the corporate debtor shall be outside the scope of
the moratorium imposed under the Code. The very impugned judgment
E in the present proceedings was referred to by the Insolvency Law
Committee stating that such a broad interpretation of Section 14 would
curtail significant rights of the creditor. They relied upon judgments which
made it clear that clarificatory statutes, like this amendment, would have
retrospective operation and that, therefore, in any case, the impugned
judgment would have to be set aside.
F
7. Learned counsel appearing on behalf of the Respondents first
took shelter under Section 60(2) of the Code, as according to the learned
counsel, the said Section precludes the bank from proceeding against
the personal guarantor under SARFAESI or any other Act outside the
Code. He relied upon the reasoning of the Tribunal and took shelter
G under Section 31, as did the Tribunal. He also relied upon a judgment of
the Allahabad High Court in Sanjeev Shriya v. State Bank of India
and Ors.,2 which stated that as a proceeding relatable to the corporate
debtor is pending adjudication in two forums, it is not permissible to
2
H (2018) 2 All LJ 769 (decided on 06.09.2017).
STATE BANK OF INDIA v. V. RAMAKRISHNAN & ANR. 981
[R. F. NARIMAN, J.]
proceed against the personal guarantor. A financial creditor cannot A
operate in a manner that imperils the value of the property of the personal
debtor. He also relied strongly upon the Insolvency and Bankruptcy Code
(Amendment) Act, 2018 which came into effect on 23.11.2017, by which,
clause (e) of Section 2 was substituted so as to include within the sweep
of the Code, personal guarantors to corporate debtors. He then relied
B
upon the Statement of Objects of the Amendment Act, 2018, which
was, inter alia, to extend the provisions of the Code to personal guarantors
of corporate debtors, to further strengthen the corporate insolvency
resolution process. He then relied upon certain statutory forms which
are contained in the Insolvency and Bankruptcy (Application to
Adjudicating Authority) Rules, 2016 and in particular, to Annexure VI(e) C
to Form 6. Regulation 36(2) of the Insolvency and Bankruptcy Board of
India (Insolvency Resolution Process for Corporate Persons) Regulations,
2016 also provides, as did Annexure VI(e), that information as to personal
guarantees have to be given in relation to the debts of the corporate
debtor when an insolvency process is initiated against the corporate debtor.
D
All this would show that since the personal guarantor is very much part
of the overall process, the moratorium contained in Section 14 of the
Code should apply to the personal guarantor as well.
8. We appointed Shri K.V. Viswanathan, learned Senior
Advocate, to assist us as Amicus Curiae in this matter. We thank him
for the valuable assistance that he has rendered. He has pointed out that E
the whole idea of the Insolvency Code was that the history of debt
recovery had shown that the earlier statutes were loaded heavily in favour
of corporate debtors and that, as a result, huge outstanding debts to
banks and financial institutions had not been repaid. In particular, he
pointed out Section 22 of the Sick Industrial Companies (Special F
Provisions) Act, 1985, and stated that as a result of the said Section
applying to guarantors as well, creditors could not proceed against
guarantors as well after the company had been declared sick under the
said Act, without permission from the Board for Industrial and Financial
Reconstruction. Now that the said Act has been repealed, and the fact
that several later enactments, including the Companies Act, 2013 had G
omitted a provision akin to Section 22, would show that the enactment of
Section 14 of the Code was deliberate, and that the idea was that there
should be no stay of proceedings against the guarantor while the corporate
debtor is undergoing an insolvency proceeding. For this, he cited various
judgments. He also relied upon the Amendment Act, 2018 and stated H
982 SUPREME COURT REPORTS [2018] 10 S.C.R.
A that since the Act was to get over the appellate judgment in particular,
and since it was clarificatory, the position in law would be that it would
be retrospective, and would thus govern the case at hand.
9. Before dealing with the arguments of learned counsel on both
sides, it is important at this stage to set out some of the provisions of the
B Code. One difficulty that we faced when hearing the matter was that
different provisions of the Code were brought into force on different
dates, as Section 1(3) indicates. Also, certain important provisions of the
Code have not yet been brought into force. This we will advert to a little
later in our judgment.
C 10. Section 2(e) of the Code, as originally enacted, reads as under:
“2. Application.— The provisions of this Code shall apply to—
xxx xxx xxx
(e) partnership firms and individuals;
D xxx xxx xxx”
By the Amendment Act, 2018, this Section was substituted as follows:
“2. Application.— The provisions of this Code shall apply to—
xxx xxx xxx
E (e) personal guarantors to corporate debtors;
xxx xxx xxx”
Though the original Section 2(e) did not come into force at all, the
substituted Section 2(e) has come into force w.e.f. 23.11.2017.
F 11. Section 3(7), (8) and (11) of the Code read as under:
“3. Definitions.— In this Code, unless the context otherwise
requires,—
(7) “corporate person” means a company as defined in clause
(20) of Section 2 of the Companies Act, 2013 (18 of 2013), a
G limited liability partnership, as defined in clause (n) of sub-section
(1) of Section 2 of the Limited Liability Partnership Act, 2008 (6
of 2009), or any other person incorporated with limited liability
under any law for the time being in force but shall not include
any financial service provider;
H
STATE BANK OF INDIA v. V. RAMAKRISHNAN & ANR. 983
[R. F. NARIMAN, J.]
(8) “corporate debtor” means a corporate person who owes a A
debt to any person;”
xxx xxx xxx
“(11) “debt” means a liability or obligation in respect of a claim
which is due from any person and includes a financial debt and
operational debt;” B
12. Section 5(8)(i) of the Code reads as follows:
“5. Definitions.— In this Part, unless the context otherwise
requires,—
xxx xxx xxx C
(8) “financial debt” means a debt along with interest, if any, which
is disbursed against the consideration for the time value of money
and includes—
xxx xxx xxx
D
(i) the amount of any liability in respect of any of the guarantee
or indemnity for any of the items referred to in sub-clauses (a)
to (h) of this clause;
xxx xxx xxx”
13. Section 5(22) of the Code read as follows: E
“5. Definitions.— In this Part, unless the context otherwise
requires,—
xxx xxx xxx
(22) “personal guarantor” means an individual who is the surety F
in a contract of guarantee to a corporate debtor;”
14. Sections 14, 31, 60, 95, 101, 238, 243, and 249 of the Code
read as under:
“14. Moratorium.— (1) Subject to provisions of sub-sections
(2) and (3), on the insolvency commencement date, the G
Adjudicating Authority shall by order declare moratorium for
prohibiting all of the following, namely—
(a) the institution of suits or continuation of pending suits or
proceedings against the corporate debtor including execution
H
984 SUPREME COURT REPORTS [2018] 10 S.C.R.
A of any judgment, decree or order in any court of law, tribunal,
arbitration panel or other authority;
(b) transferring, encumbering, alienating or disposing of by the
corporate debtor any of its assets or any legal right or beneficial
interest therein;
B (c) any action to foreclose, recover or enforce any security
interest created by the corporate debtor in respect of its property
including any action under the Securitisation and Reconstruction
of Financial Assets and Enforcement of Security Interest Act,
2002 (54 of 2002);
C (d) the recovery of any property by an owner or lessor where
such property is occupied by or in the possession of the
corporate debtor.
(2) The supply of essential goods or services to the corporate
debtor as may be specified shall not be terminated or suspended
D or interrupted during moratorium period.
(3) The provisions of sub-section (1) shall not apply to such
transactions as may be notified by the Central Government in
consultation with any financial sector regulator.
(4) The order of moratorium shall have effect from the date of
E
such order till the completion of the corporate insolvency
resolution process:
Provided that where at any time during the corporate insolvency
resolution process period, if the Adjudicating Authority approves
the resolution plan under sub-section (1) of Section 31 or passes
F
an order for liquidation of corporate debtor under Section 33, the
moratorium shall cease to have effect from the date of such
approval or liquidation order, as the case may be.”
xxx xxx xxx
G “31. Approval of resolution plan.— (1) If the Adjudicating
Authority is satisfied that the resolution plan as approved by the
committee of creditors under sub-section (4) of section 30 meets
the requirements as referred to in sub-section (2) of Section 30,
it shall by order approve the resolution plan which shall be binding
H
STATE BANK OF INDIA v. V. RAMAKRISHNAN & ANR. 985
[R. F. NARIMAN, J.]
on the corporate debtor and its employees, members, creditors, A
guarantors and other stakeholders involved in the resolution plan.
(2) Where the Adjudicating Authority is satisfied that the
resolution plan does not confirm to the requirements referred
to in sub-section (1), it may, by an order, reject the resolution
plan. B
(3) After the order of approval under sub-section (1),—
(a) the moratorium order passed by the Adjudicating
Authority under Section 14 shall cease to have effect; and
(b) the resolution professional shall forward all records C
relating to the conduct of the corporate insolvency resolution
process and the resolution plan to the Board to be recorded
on its database.”
xxx xxx xxx
“60. Adjudicating Authority for corporate persons.— (1) D
The Adjudicating Authority, in relation to insolvency resolution
and liquidation for corporate persons including corporate debtors
and personal guarantors thereof shall be the National Company
Law Tribunal having territorial jurisdiction over the place where
the registered office of the corporate person is located.
E
(2) Without prejudice to sub-section (1) and notwithstanding
anything to the contrary contained in this Code, where a corporate
insolvency resolution process or liquidation proceeding of a
corporate debtor is pending before a National Company Law
Tribunal, an application relating to the insolvency resolution or
F
bankruptcy of a personal guarantor of such corporate debtor
shall be filed before such National Company Law Tribunal.
(3) An insolvency resolution process or bankruptcy proceeding
of a personal guarantor of the corporate debtor pending in any
court or tribunal shall stand transferred to the Adjudicating
Authority dealing with insolvency resolution process or liquidation G
proceeding of such corporate debtor.
(4) The National Company Law Tribunal shall be vested with all
the powers of the Debts Recovery Tribunal as contemplated
under Part III of this Code for the purpose of sub-section (2).
H
986 SUPREME COURT REPORTS [2018] 10 S.C.R.
A (5) Notwithstanding anything to the contrary contained in any
other law for the time being in force, the National Company
Law Tribunal shall have jurisdiction to entertain or dispose of—
(a) any application or proceeding by or against the corporate
debtor or corporate person;
B (b) any claim made by or against the corporate debtor or
corporate person, including claims by or against any of its
subsidiaries situated in India; and
(c) any question of priorities or any question of law or facts,
arising out of or in relation to the insolvency resolution or
C liquidation proceedings of the corporate debtor or corporate
person under this Code.
(6) Notwithstanding anything contained in the Limitation Act,
1963 (36 of 1963) or in any other law for the time being in force,
in computing the period of limitation specified for any suit or
D application by or against a corporate debtor for which an order
of moratorium has been made under this Part, the period during
which such moratorium is in place shall be excluded.”
xxx xxx xxx
“96. Interim-moratorium.— (1) When an application is filed
E
under Section 94 or Section 95—
(a) an interim-moratorium shall commence on the date of the
application in relation to all the debts and shall cease to have
effect on the date of admission of such application; and
F (b) during the interim-moratorium period—
(i) any legal action or proceeding pending in respect of any
debt shall be deemed to have been stayed; and
(ii) the creditors of the debtor shall not initiate any legal
action or proceedings in respect of any debt.
G (2) Where the application has been made in relation to a firm,
the interim-moratorium under sub-section (1) shall operate against
all the partners of the firm as on the date of the application.
(3) The provisions of sub-section (1) shall not apply to such
transactions as may be notified by the Central Government in
H consultation with any financial sector regulator.”
STATE BANK OF INDIA v. V. RAMAKRISHNAN & ANR. 987
[R. F. NARIMAN, J.]
xxx xxx xxx A
“101. Moratorium.— (1) When the application is admitted
under Section 100, a moratorium shall commence in relation to
all the debts and shall cease to have effect at the end of the
period of one hundred and eighty days beginning with the date of
admission of the application or on the date the Adjudicating B
Authority passes an order on the repayment plan under Section
114, whichever is earlier.
(2) During the moratorium period—
(a) any pending legal action or proceeding in respect of any
debt shall be deemed to have been stayed; C
(b) the creditors shall not initiate any legal action or legal
proceedings in respect of any debt; and
(c) the debtor shall not transfer, alienate, encumber or dispose
of any of his assets or his legal rights or beneficial interest
D
therein;
(3) Where an order admitting the application under Section 96
has been made in relation to a firm, the moratorium under sub-
section (1) shall operate against all the partners of the firm.
(4) The provisions of this section shall not apply to such E
transactions as may be notified by the Central Government in
consultation with any financial sector regulator.”
xxx xxx xxx
“238. Provisions of this Code to override other laws.—
The provisions of this Code shall have effect, notwithstanding F
anything inconsistent therewith contained in any other law for
the time being in force or any instrument having effect by virtue
of any such law.”
xxx xxx xxx
“243. Repeal of certain enactments and savings.— (1) The G
Presidency-Towns Insolvency Act, 1909 (3 of 1909) and the
Provincial Insolvency Act, 1920 (5 of 1920) are hereby repealed.
(2) Notwithstanding the repeal under sub-sections (1),—
(i) all proceedings pending under and relating to the Presidency-
Towns Insolvency Act, 1909, and the Provincial Insolvency H
988 SUPREME COURT REPORTS [2018] 10 S.C.R.
A Act, 1920 immediately before the commencement of this Code
shall continue to be governed under the aforementioned Acts
and be heard and disposed of by the concerned courts or
tribunals, as if the aforementioned Acts have not been repealed;
(ii) any order, rule, notification, regulation, appointment,
B conveyance, mortgage, deed, document or agreement made,
fee directed, resolution passed, direction given, proceeding
taken, instrument executed or issued, or thing done under or in
pursuance of any repealed enactment shall, if in force at the
commencement of this Code, continue to be in force, and shall
have effect as if the aforementioned Acts have not been
C repealed;
(iii) anything done or any action taken or purported to have
been done or taken, including any rule, notification, inspection,
order or notice made or issued or any appointment or declaration
made or any operation undertaken or any direction given or
D any proceeding taken or any penalty, punishment, forfeiture or
fine imposed under the repealed enactments shall be deemed
valid;
(iv) any principle or rule of law, or established jurisdiction, form
or course of pleading, practice or procedure or existing usage,
E custom, privilege, restriction or exemption shall not be affected,
notwithstanding that the same respectively may have been in
any manner affirmed or recognised or derived by, in, or from,
the repealed enactments;
(v) any prosecution instituted under the repealed enactments
F and pending immediately before the commencement of this
Code before any court or tribunal shall, subject to the provisions
of this Code, continue to be heard and disposed of by the
concerned court or tribunal;
(vi) any person appointed to any office under or by virtue of
G any repealed enactment shall continue to hold such office until
such time as may be prescribed; and
(vii) any jurisdiction, custom, liability, right, title, privilege,
restriction, exemption, usage, practice, procedure or other
matter or thing not in existence or in force shall not be revised
H or restored.
STATE BANK OF INDIA v. V. RAMAKRISHNAN & ANR. 989
[R. F. NARIMAN, J.]
(3) The mention of particular matters in sub-section (2) shall not A
be held to prejudice the general application of Section 6 of the
General Clauses Act, 1897 (10 of 1897) with regard to the effect
of repeal of the repealed enactments or provisions of the
enactments mentioned in the Schedule.”
xxx xxx xxx B
“249. Amendments of Act, 51 of 1993.— The Recovery of
Debts Due to Banks and Financial Institutions Act, 1993 shall be
amended in the manner specified in the Fifth Schedule.”
15. The first important thing that needs to be noticed is that, as
has been stated earlier in this judgment, Part III of the Code has not yet C
been brought into force. This part is entitled “Insolvency Resolution and
Bankruptcy for Individuals and Partnership Firms”. The repealing
provision, namely Section 243, which repeals the Presidency Towns
Insolvency Act, 1909 and the Provincial Insolvency Act, 1920, has also
not been brought into force. Section 249, which amends the Recovery D
of Debts Due to Banks and Financial Institutions Act, 1993, so that the
Debt Recovery Tribunals under that Act can exercise the jurisdiction of
the Adjudicating Authority conferred by the Code, has also not been
brought into force.
16. Under Part II of the Code, which deals with “Insolvency E
Resolution and Liquidation for Corporate Persons”, a financial creditor
or a corporate debtor may make an application to initiate this process.
Once initiated, the Adjudicating Authority, after admission of such an
application, shall by order, declare a moratorium for the purposes referred
to in Section 14 (See Section 13 of the Code).
F
17. Section 14 refers to four matters that may be prohibited once
the moratorium comes into effect. In each of the matters referred to, be
it institution or continuation of proceedings, the transferring, encumbering
or alienating of assets, action to recover security interest, or recovery of
property by an owner which is in possession of the corporate debtor,
what is conspicuous by its absence is any mention of the personal G
guarantor. Indeed, the corporate debtor and the corporate debtor alone
is referred to in the said Section. A plain reading of the said Section,
therefore, leads to the conclusion that the moratorium referred to in
Section 14 can have no manner of application to personal guarantors of
a corporate debtor.
H
990 SUPREME COURT REPORTS [2018] 10 S.C.R.
A 18. However, Sections 2(e) and Section 60 are strongly relied
upon by learned counsel for the Respondents as, according to them, the
Code will apply to personal guarantors of corporate debtors, and by
Section 60, proceedings against such personal guarantors will show that
such moratorium extends to the guarantor as well.
B 19. We are afraid that such arguments have to be turned down on
a careful reading of the Sections relied upon. Section 60 of the Code, in
sub-section (1) thereof, refers to insolvency resolution and liquidation
for both corporate debtors and personal guarantors, the Adjudicating
Authority for which shall be the National Company Law Tribunal, having
territorial jurisdiction over the place where the registered office of the
C corporate person is located. This sub-section is only important in that it
locates the Tribunal which has territorial jurisdiction in insolvency
resolution processes against corporate debtors. So far as personal
guarantors are concerned, we have seen that Part III has not been brought
into force, and neither has Section 243, which repeals the Presidency-
D Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920.
The net result of this is that so far as individual personal guarantors are
concerned, they will continue to be proceeded against under the aforesaid
two Insolvency Acts and not under the Code. Indeed, by a Press Release
dated 28.08.2017, the Government of India, through the Ministry of
Finance, cautioned that Section 243 of the Code, which provides for the
E repeal of said enactments, has not been notified till date, and further, that
the provisions relating to insolvency resolution and bankruptcy for
individuals and partnerships as contained in Part III of the Code are yet
to be notified. Hence, it was advised that stakeholders who intend to
pursue their insolvency cases may approach the appropriate authority/
F court under the existing enactments, instead of approaching the Debt
Recovery Tribunals.
20. It is for this reason that sub-section (2) of Section 60 speaks
of an application relating to the “bankruptcy” of a personal guarantor of
a corporate debtor and states that any such bankruptcy proceedings
G shall be filed only before the National Company Law Tribunal. The
argument of the learned counsel on behalf of the Respondents that
“bankruptcy” would include SARFAESI proceedings must be turned
down as “bankruptcy” has reference only to the two Insolvency Acts
referred to above. Thus, SARFAESI proceedings against the guarantor
can continue under the SARFAESI Act. Similarly, sub-section (3) speaks
H
STATE BANK OF INDIA v. V. RAMAKRISHNAN & ANR. 991
[R. F. NARIMAN, J.]
of a bankruptcy proceeding of a personal guarantor of the corporate A
debtor pending in any Court or Tribunal, which shall stand transferred to
the Adjudicating Authority dealing with the insolvency resolution process
or liquidation proceedings of such corporate debtor. An “Adjudicating
Authority”, defined under Section 5(1) of the Code, means the National
Company Law Tribunal constituted under the Companies Act, 2013.
B
21. The scheme of Section 60(2) and (3) is thus clear – the moment
there is a proceeding against the corporate debtor pending under the
2016 Code, any bankruptcy proceeding against the individual personal
guarantor will, if already initiated before the proceeding against the
corporate debtor, be transferred to the National Company Law Tribunal
or, if initiated after such proceedings had been commenced against the C
corporate debtor, be filed only in the National Company Law Tribunal.
However, the Tribunal is to decide such proceedings only in accordance
with the Presidency-Towns Insolvency Act, 1909 or the Provincial
Insolvency Act, 1920, as the case may be. It is clear that sub-section
(4), which states that the Tribunal shall be vested with all the powers of D
the Debt Recovery Tribunal, as contemplated under Part III of this Code,
for the purposes of sub-section (2), would not take effect, as the Debt
Recovery Tribunal has not yet been empowered to hear bankruptcy
proceedings against individuals under Section 179 of the Code, as the
said Section has not yet been brought into force. Also, we have seen
that Section 249, dealing with the consequential amendment of the E
Recovery of Debts Act to empower Debt Recovery Tribunals to try
such proceedings, has also not been brought into force. It is thus clear
that Section 2(e), which was brought into force on 23.11.2017 would,
when it refers to the application of the Code to a personal guarantor of
a corporate debtor, apply only for the limited purpose contained in Section F
60(2) and (3), as stated hereinabove. This is what is meant by
strengthening the Corporate Insolvency Resolution Process in the
Statement of Objects of the Amendment Act, 2018.
22. Section 31 of the Act was also strongly relied upon by the
Respondents. This Section only states that once a Resolution Plan, as G
approved by the Committee of Creditors, takes effect, it shall be binding
on the corporate debtor as well as the guarantor. This is for the reason
that otherwise, under Section 133 of the Indian Contract Act, 1872, any
change made to the debt owed by the corporate debtor, without the
surety’s consent, would relieve the guarantor from payment.
H
992 SUPREME COURT REPORTS [2018] 10 S.C.R.
A Section 31(1), in fact, makes it clear that the guarantor cannot escape
payment as the Resolution Plan, which has been approved, may well
include provisions as to payments to be made by such guarantor. This is
perhaps the reason that Annexure VI(e) to Form 6 contained in the
Rules and Regulation 36(2) referred to above, require information as to
personal guarantees that have been given in relation to the debts of the
B
corporate debtor. Far from supporting the stand of the Respondents, it is
clear that in point of fact, Section 31 is one more factor in favour of a
personal guarantor having to pay for debts due without any moratorium
applying to save him.
23. We are also of the opinion that Sections 96 and 101, when
C contrasted with Section 14, would show that Section 14 cannot possibly
apply to a personal guarantor. When an application is filed under Part
III, an interim-moratorium or a moratorium is applicable in respect of
any debt due. First and foremost, this is a separate moratorium, applicable
separately in the case of personal guarantors against whom insolvency
D resolution processes may be initiated under Part III. Secondly, the
protection of the moratorium under these Sections is far greater than
that of Section 14 in that pending legal proceedings in respect of the debt
and not the debtor are stayed. The difference in language between
Sections 14 and 101 is for a reason. Section 14 refers only to debts due
by corporate debtors, who are limited liability companies, and it is clear
E that in the vast majority of cases, personal guarantees are given by
Directors who are in management of the companies. The object of the
Code is not to allow such guarantors to escape from an independent and
co-extensive liability to pay off the entire outstanding debt, which is why
Section 14 is not applied to them. However, insofar as firms and individuals
F are concerned, guarantees are given in respect of individual debts by
persons who have unlimited liability to pay them. And such guarantors
may be complete strangers to the debtor – often it could be a personal
friend. It is for this reason that the moratorium mentioned in Section 101
would cover such persons, as such moratorium is in relation to the debt
and not the debtor. We may hasten to add that it is open to us to mark the
G difference in language between Sections 14 and 96 and 101, even though
Sections 96 and 101 have not yet been brought into force. This is for the
reason, as has been held in State of Kerala and Ors. v. Mar Appraem
Kuri Co. Ltd. and Anr., (2012) 7 SCC 106, that a law ‘made’ by the
Legislature is a law on the statute book even though it may not have
H been brought into force. The said judgment states:
STATE BANK OF INDIA v. V. RAMAKRISHNAN & ANR. 993
[R. F. NARIMAN, J.]
“79. The proviso to Article 254(2) provides that a law made by A
the State Legislature with the President’s assent shall not prevent
Parliament from making at any time any law with respect to the
same matter including a law adding to, amending, varying or
repealing the law so made by a State Legislature. Thus,
Parliament need not wait for the law made by the State
B
Legislature with the President’s assent to be brought into force
as it can repeal, amend, vary or add to the assented State law no
sooner it is made or enacted. We see no justification for inhibiting
Parliament from repealing, amending or varying any State
legislation, which has received the President’s assent, overriding
within the State’s territory, an earlier parliamentary enactment C
in the concurrent sphere, before it is brought into force.
Parliament can repeal, amend, or vary such State law no sooner
it is assented to by the President and that it need not wait till
such assented-to State law is brought into force. This view finds
support in the judgment of this Court in Tulloch [AIR 1964 SC
D
1284 : (1964) 4 SCR 461] .
80. Lastly, the definitions of the expressions “laws in force” in
Article 13(3)(b) and Article 372(3) Explanation I and “existing
law” in Article 366(10) show that the laws in force include laws
passed or made by a legislature before the commencement of
the Constitution and not repealed, notwithstanding that any such E
law may not be in operation at all. Thus, the definition of the
expression “laws in force” in Article 13(3)(b) and Article 372(3)
Explanation I and the definition of the expression “existing law”
in Article 366(10) demolish the argument of the State of Kerala
that a law has not been made for the purposes of Article 254, F
unless it is enforced. The expression “existing law” finds place
in Article 254. In Edward Mills Co. Ltd. v. State of Ajmer [AIR
1955 SC 25], this Court has held that there is no difference
between an “existing law” and a “law in force”.
81. Applying the tests enumerated hereinabove, we hold that G
the Kerala Chitties Act, 1975 became void on the making of the
Chit Funds Act, 1982 on 19-8-1982, [when it received the assent
of the President and got published in the Official Gazette] as the
Central 1982 Act intended to cover the entire field with regard
to the conduct of the chits and further that the State Finance
H
994 SUPREME COURT REPORTS [2018] 10 S.C.R.
A Act 7 of 2002, introducing Section 4(1)(a) into the State 1975
Act, was void as the State Legislature was denuded of its authority
to enact the said Finance Act 7 of 2002, except under Article
254(2), after the (Central) Chit Funds Act, 1982 occupied the
entire field as envisaged in Article 254(1) of the Constitution.”
B 24. Thus, for the purpose of interpretation, it is certainly open for
us to contrast Section 14 with Sections 96 and 101, as Sections 96 and
101 are laws made by the Legislature, even though they have not yet
been brought into force.
25. As argued by Shri Viswanathan, the historical background of
C the Code now needs to be looked at. Section 22 of the Sick Industrial
Companies (Special Provisions) Act, 1985 reads as follows:
“22. Suspension of legal proceedings, contracts, etc.—(1)
Where in respect of an industrial company, an inquiry under
Section 16 is pending or any scheme referred to under Section
D 17 is under preparation or consideration or a sanctioned scheme
is under implementation or where an appeal under Section 25
relating to an industrial company is pending, then, notwithstanding
anything contained in the Companies Act, 1956 (1 of 1956), or
any other law or the memorandum and articles of association of
the industrial company or any other instrument having effect
E under the said Act or other law, no proceedings for the winding
up of the industrial company or for execution, distress or the like
against any of the properties of the industrial company or for the
appointment of a receiver in respect thereof [and no suit for the
recovery of money or for the enforcement of any security against
F the industrial company or of any guarantee in respect of any
loans or advance granted to the industrial company] shall lie or
be proceeded with further, except with the consent of the Board
or, as the case may be, the Appellate Authority.
(2) Where the management of the sick industrial company is
G taken over or changed [in pursuance of any scheme sanctioned
under Section 18] notwithstanding anything contained in the
Companies Act, 1956 (1 of 1956), or any other law or in the
memorandum and articles of association of such company or
any instrument having effect under the said Act or other law—
H
STATE BANK OF INDIA v. V. RAMAKRISHNAN & ANR. 995
[R. F. NARIMAN, J.]
(a) it shall not be lawful for the shareholders of such company A
or any other person to nominate or appoint any person to be a
director of the company;
(b) no resolution passed at any meeting of the shareholders of
such company shall be given effect to unless approved by the
Board. B
(3) [Where an inquiry under Section 16 is pending or any scheme
referred to in Section 17 is under preparation or during the period]
of consideration of any scheme under Section 18 or where any
such scheme is sanctioned thereunder, for due implementation
of the scheme, the Board may by order declare with respect to C
the sick industrial company concerned that the operation of all
or any of the contracts, assurances of property, agreements,
settlements, awards, standing orders or other instruments in force,
to which such sick industrial company is a party or which may
be applicable to such sick industrial company immediately before
the date of such order, shall remain suspended or that all or any D
of the rights, privileges, obligations and liabilities accruing or arising
thereunder before the said date, shall remain suspended or shall
be enforceable with such adaptations and in such manner as
may be specified by the Board:
Provided that such declaration shall not be made for a period E
exceeding two years which may be extended by one year at a
time so, however, that the total period shall not exceed seven
years in the aggregate.
(4) Any declaration made under sub-section (3) with respect to
a sick industrial company shall have effect notwithstanding F
anything contained in the Companies Act, 1956 (1 of 1956), or
any other law, the memorandum and articles of association of
the company or any instrument having effect under the said Act
or other law or any agreement or any decree or order of a court,
tribunal, officer or other authority or of any submission, settlement G
or standing order and accordingly,—
(a) any remedy for the enforcement of any right, privilege,
obligation and liability suspended or modified by such
declaration, and all proceedings relating thereto pending before
H
996 SUPREME COURT REPORTS [2018] 10 S.C.R.
A any court, tribunal, officer or other authority shall remain stayed
or be continued subject to such declaration; and
(b) on the declaration ceasing to have effect—
(i) any right, privilege, obligation or liability so remaining
suspended or modified, shall become revived and
B enforceable as if the declaration had never been made; and
(ii) any proceeding so remaining stayed shall be proceeded
with subject to the provisions of any law which may then
be in force, from the stage which had been reached when
the proceedings became stayed.
C
(5) In computing the period of limitation for the enforcement of
any right, privilege, obligation or liability, the period during which
it or the remedy for the enforcement thereof remains suspended
under this section shall be excluded.
D It will be clear from a reading of sub-section (1) thereof that suits for the
enforcement of any guarantee in respect of loans or advances granted
to the industrial company, shall not lie or be proceeded with further,
except with the consent of the Board or Appellate Authority. It may be
noted that the Sick Industrial Companies (Special Provisions) Act, 1985
was repealed on 01.12.2016. By a notification dated 30.11.2016, Section
E 14 of the Code was brought into force w.e.f. 01.12.2016. In Madras
Petrochem Ltd. and Anr. v. Board for Industrial and Financial
Reconstruction and Ors., (2016) 4 SCC 1, this Court found:
“40. An interesting pointer to the direction Parliament has taken
after enactment of the Securitisation and Reconstruction of
F Financial Assets and Enforcement of Security Interest Act, 2002
is also of some relevance in this context. The Eradi Committee
Report relating to insolvency and winding up of companies dated
31-7-2000, observed that out of 3068 cases referred to BIFR
from 1987 to 2000 all but 1062 cases have been disposed of. Out
of the cases disposed of, 264 cases were revived, 375 cases
G
were under negotiation for revival process, 741 cases were
recommended for winding up, and 626 cases were dismissed as
not maintainable. These facts and figures speak for themselves
and place a big question mark on the utility of the Sick Industrial
Companies (Special Provisions) Act, 1985. The Committee further
H pointed out that effectiveness of the Sick Industrial Companies
STATE BANK OF INDIA v. V. RAMAKRISHNAN & ANR. 997
[R. F. NARIMAN, J.]
(Special Provisions) Act, 1985 as has been pointed out earlier, A
has been severely undermined by reason of the enormous delays
involved in the disposal of cases by BIFR. (See Paras 5.8, 5.9
and 5.15 of the Report.) Consequently, the Committee
recommended that the Sick Industrial Companies (Special
Provisions) Act, 1985 be repealed and the provisions thereunder
B
for revival and rehabilitation should be telescoped into the
structure of the Companies Act, 1956 itself.
41. Pursuant to the Eradi Committee Report, the Companies Act
was amended in 2002 by providing for the constitution of a
National Company Law Tribunal as a substitute for the Company
Law Board, the High Court, BIFR and AAIFR. The Eradi C
Committee Report was further given effect to by inserting
Sections 424-A to 424-H into the Companies Act, 1956 which,
with a few changes, mirrored the provisions of Sections 15 to 21
of the Sick Industrial Companies (Special Provisions) Act, 1985.
Interestingly, the Companies Amendment Act, 2002 omitted a D
provision similar to Section 22(1) of the Sick Industrial Companies
(Special Provisions) Act, 1985. Consequently, creditors were
given liberty to file suits or initiate other proceedings for recovery
of dues despite pendency of proceedings for the revival or
rehabilitation of sick companies before the National Company
Law Tribunal. E
xxx xxx xxx
43. Close on the heels of the amendment made to the Companies
Act came the Sick Industrial Companies (Special Provisions)
Repeal Act, 2003. This particular Act was meant to repeal the F
Sick Industrial Companies (Special Provisions) Act, 1985
consequent to some of its provisions being telescoped into the
Companies Act. Thus, the Companies Amendment Act, 2002
and the SICA Repeal Act formed part of one legislative scheme,
and neither has yet been brought into force. In fact, even the
Companies Act, 2013, which repeals the Companies Act, 1956, G
contains Chapter 19 consisting of Sections 253 to 269 dealing
with revival and rehabilitation of sick companies along the lines
of Sections 424-A to 424-H of the amended Companies Act,
1956. Conspicuous by its absence is a provision akin to Section
22(1) of the Sick Industrial Companies (Special Provisions) Act, H
998 SUPREME COURT REPORTS [2018] 10 S.C.R.
A 1985 in the 2013 Act. However, this Chapter is also yet to be
brought into force. These statutory provisions, though not yet
brought into force, are also an important pointer to the fact that
Section 22(1) of the Sick Industrial Companies (Special
Provisions) Act, 1985 has been statutorily sought to be excluded,
Parliament veering around from wanting to protect sick industrial
B
companies and rehabilitate them to giving credence to the public
interest contained in the recovery of public monies owing to banks
and financial institutions. These provisions also show that the
aforesaid construction of the provisions of the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security
C Interest Act, 2002 vis-à-vis the Sick Industrial Companies (Special
Provisions) Act, 1985, leans in favour of creditors being able to
realise their debts outside the court process over sick industrial
companies being revived or rehabilitated. In fact, another
interesting document is the Report on Trend and Progress of
Banking in India 2011-2012 for the year ended 30-6-2012
D
submitted by Reserve Bank of India to the Central Government
in terms of Section 36(2) of the Banking Regulation Act, 1949.
In Table IV.14 the Report provides statistics regarding trends in
non-performing assets bank-wise, group-wise. As per the said
Table, the opening balance of non-performing assets in public
E sector banks for the year 2011-2012 was Rs 746 billion but the
closing balance for 2011-2012 was Rs 1172 billion only. The total
amount recovered through the Securitisation and Reconstruction
of Financial Assets and Enforcement of Security Interest Act,
2002 during 2011-2012 registered a decline compared to the
previous year, but, even then, the amounts recovered under the
F
said Act constituted 70% of the total amount recovered. The
amounts recovered under the Recovery of Debts Due to Banks
and Financial Institutions Act, 1993 constituted only 28%. All
this would go to show that the amounts that public sector banks
and financial institutions have to recover are in staggering figures
G and at long last at least one statutory measure has proved to be
of some efficacy. This Court would be loathe to give such an
interpretation as would thwart the recovery process under the
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 which Act alone
seems to have worked to some extent at least.
H
STATE BANK OF INDIA v. V. RAMAKRISHNAN & ANR. 999
[R. F. NARIMAN, J.]
44. It will, thus, be seen that notwithstanding the non obstante A
clauses in Sections 22(1) and (4), read with Section 32, Section
22 of the Sick Industrial Companies (Special Provisions) Act,
1985 will have to give way to the measures taken under the
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002, more particularly
B
referred to in Section 13 of the said Act, and that this being the
case, the sale notices issued both in 2003 and 2013 could continue
without in any manner being thwarted by Section 22 of the Sick
Industrial Companies (Special Provisions) Act, 1985.”
(emphasis supplied)
C
It is thus clear that for this reason also, it is obvious that Parliament,
when it enacted Section 14, had this history in mind and specifically did
not provide for any moratorium along the lines of Section 22 of the Sick
Industrial Companies (Special Provisions) Act, 1985 in Section 14 of the
Code.
D
26. The reasoning of the Bombay High Court in the judgment of
M/s. Sicom Investments and Finance Ltd. (supra) commends itself
to us. The reasoning of the Allahabad High Court, on the other hand,
does not.
27. We now come to the argument that the amendment of 2018, E
which makes it clear that Section 14(3), is now substituted to read that
the provisions of sub-section (1) of Section 14 shall not apply to a surety
in a contract of guarantee for corporate debtor. The amended Section
reads as follows:
“14. Moratorium.— F
xxx xxx xxx
(3) The provisions of sub-section (1) shall not apply to—
(a) such transactions as may be notified by the Central
Government in consultation with any financial sector regulator;
G
(b) a surety in a contract of guarantee to a corporate debtor.”
28. The Insolvency Law Committee, appointed by the Ministry of
Corporate Affairs, by its Report dated 26.03.2018, made certain key
recommendations, one of which was:
H
1000 SUPREME COURT REPORTS [2018] 10 S.C.R.
A “(iv) to clear the confusion regarding treatment of assets of
guarantors of the corporate debtor vis-à-vis the moratorium
on the assets of the corporate debtor, it has been recommended
to clarify by way of an explanation that all assets of such
guarantors to the corporate debtor shall be outside scope of
moratorium imposed under the Code;”
B
The Committee insofar as the moratorium under Section 14 is concerned,
went on to find:
“5.5 Section 14 provides for a moratorium or a stay on institution
or continuation of proceeding, suits, etc. against the corporate
C debtor and its assets. There have been contradicting views on
the scope of moratorium regarding its application to third parties
affected by the debt of the corporate debtor, like guarantors or
sureties. While some courts have taken the view that Section 14
may be interpreted literally to mean that it only restricts actions
against the assets of the corporate debtor, a few others have
D taken an interpretation that the stay applies on enforcement of
guarantee as well, if a CIRP is going on against the corporate
debtor.”
xxx xxx xxx
E “5.7 The Allahabad High Court subsequently took a differing
view in Sanjeev Shriya v. State Bank of India, 2017 (9) ADJ
723, by applying moratorium to enforcement of guarantee against
personal guarantor to the debt. The rationale being that if a CRIP
is going on against the corporate debtor, then the debt owed by
the corporate debtor is not final till the resolution plan is approved,
F and thus the liability of the surety would also be unclear. The
Court took the view that until debt of the corporate debtor is
crystallised, the guarantor’s liability may not be triggered. The
Committee deliberated and noted that this would meant that
surety’s liabilities are put on hold if a CIRP is going on against
G the corporate debtor, and such an interpretation may lead to the
contracts of guarantee being infructuous, and not serving the
purpose for which they have been entered into.
5.8 In State Bank of India v. V. Ramakrishnan and Veeson
Energy Systems, NCLAT, New Delhi, Company Appeal (AT)
(Insolvency) No. 213/2017 [Date of decision – 28 February, 2018],
H
STATE BANK OF INDIA v. V. RAMAKRISHNAN & ANR. 1001
[R. F. NARIMAN, J.]
the NCLAT took a broad interpretation of Section 14 and held A
that it would bar proceedings or actions against sureties. While
doing so, it did not refer to any of the above judgments but instead
held that proceedings against guarantors would affect the CIRP
and may thus be barred by moratorium. The Committee felt that
such a broad interpretation of the moratorium may curtail
B
significant rights of the creditor which are intrinsic to a contract
of guarantee.”
5.9 A contract of guarantee is between the creditor, the principal
debtor and the surety, where under the creditor has a remedy in
relation to his debt against both the principal debtor and the surety
[National Project Construction Corporation Limited v. C
Sandhu and Co., AIR 1990 P&H 300]. The surety here may
be a corporate or a natural person and the liability of such person
goes as far the liability of the principal debtor. As per section 128
of the Indian Contract Act, 1872, the liability of the surety is co-
extensive with that of the principal debtor and the creditor may D
go against either the principal debtor, or the surety, or both, in no
particular sequence [Chokalinga Chettiar v.
Dandayunthapani Chattiar, AIR 1928 Mad 1262]. Though this
may be limited by the terms of the contract of guarantee, the
general principle of such contracts is that the liability of the
principal debtor and the surety is co-extensive and is joint and E
several [Bank of Bihar v. Damodar Prasad, AIR 1969 SC
297]. The Committee noted that this characteristic of such
contracts i.e. of having remedy against both the surety and the
corporate debtor, without the obligation to exhaust the remedy
against one of the parties before proceeding against the other, is F
of utmost important for the creditor and is the hallmark of a
guarantee contract, and the availability of such remedy is in most
cases the basis on which the loan may have been extended.
5.10 The Committee further noted that a literal interpretation of
Section 14 is prudent, and a broader interpretation may not be G
necessary in the above context. The assets of the surety are
separate from those of the corporate debtor, and proceedings
against the corporate debtor may not be seriously impacted by
the actions against assets of third parties like sureties. Additionally,
enforcement of guarantee may not have a significant impact on
H
1002 SUPREME COURT REPORTS [2018] 10 S.C.R.
A the debt of the corporate debtor as the right of the creditor against
the principal debtor is merely shifted to the surety, to the extent
of payment by the surety. Thus, contractual principles of
guarantee require being respected even during a moratorium and
an alternate interpretation may not have been the intention of
the Code, as is clear from a plain reading of Section 14.
B
5.11 Further, since many guarantees for loans of corporates are
given by its promoters in the form of personal guarantees, if
there is a stay on actions against their assets during a CIRP,
such promoters (who are also corporate applicants) may file
frivolous applications to merely take advantage of the stay and
C guard their assets. In the judgments analysed in this relation,
many have been filed by the corporate applicant under Section
10 of the Code and this may corroborate the above apprehension
of abuse of the moratorium provision. The Committee concluded
that Section 14 does not intend to bar actions against assets of
D guarantors to the debts of the corporate debtor and recommended
that an explanation to clarify this may be inserted in Section 14
of the Code. The scope of the moratorium may be restricted to
the assets of the corporate debtor only.”
29. The Report of the said Committee makes it clear that the
E object of the amendment was to clarify and set at rest what the Committee
thought was an overbroad interpretation of Section 14. That such
clarificatory amendment is retrospective in nature, would be clear from
the following judgments:
(i) CIT v. Shelly Products, (2003) 5 SCC 461:
F “38. It was submitted that after 1-4-1989, in case the assessment
is annulled the assessee is entitled to refund only of the amount,
if any, of the tax paid in excess of the tax chargeable on the total
income returned by the assessee. But before the amendment
came into effect the position in law was quite different and that
G is why the legislature thought it proper to amend the section and
insert the proviso. On the other hand learned counsel for the
Revenue submitted that the proviso is merely declaratory and
does not change the legal position as it existed before the
amendment. It was submitted that this Court in CIT v. Chittor
Electric Supply Corpn [(1995) 2 SCC 430 : (1995) 212 ITR
H 404] has held that proviso (a) to Section 240 is declaratory and,
STATE BANK OF INDIA v. V. RAMAKRISHNAN & ANR. 1003
[R. F. NARIMAN, J.]
therefore, proviso (b) should also be held to be declaratory. In A
our view that is not the correct position in law. Where the proviso
consists of two parts, one part may be declaratory but the other
part may not be so. Therefore, merely because one part of the
proviso has been held to be declaratory it does not follow that
the second part of the proviso is also declaratory. However, the
B
view that we have taken supports the stand of the Revenue that
proviso (b) to Section 240 is also declaratory. We have held that
even under the unamended Section 240 of the Act, the assessee
was only entitled to the refund of tax paid in excess of the tax
chargeable on the total income returned by the assessee. We
have held so without taking the aid of the amended provision. It, C
therefore, follows that proviso (b) to Section 240 is also
declaratory. It seeks to clarify the law so as to remove doubts
leading to the courts giving conflicting decisions, and in several
cases directing the Revenue to refund the entire amount of income
tax paid by the assessee where the Revenue was not in a position
D
to frame a fresh assessment. Being clarificatory in nature it must
be held to be retrospective, in the facts and circumstances of the
case. It is well settled that the legislature may pass a declaratory
Act to set aside what the legislature deems to have been a judicial
error in the interpretation of statute. It only seeks to clear the
meaning of a provision of the principal Act and make explicit E
that which was already implicit.”
(ii) CIT v. Vatika Township, (2015) 1 SCC 1:
“32. Let us sharpen the discussion a little more. We may note
that under certain circumstances, a particular amendment can
be treated as clarificatory or declaratory in nature. Such statutory F
provisions are labelled as “declaratory statutes”. The
circumstances under which provisions can be termed as
“declaratory statutes” are explained by Justice G.P. Singh
[Principles of Statutory Interpretation, (13th Edn., Lexis Nexis
Butterworths Wadhwa, Nagpur, 2012)] in the following manner: G
“Declaratory statutes
The presumption against retrospective operation is not applicable
to declaratory statutes. As stated in CRAIES [W.F. Craies, Craies
on Statute Law (7th Edn., Sweet and Maxwell Ltd., 1971)] and
approved by the Supreme Court [in Central Bank of India v. H
1004 SUPREME COURT REPORTS [2018] 10 S.C.R.
A Workmen, AIR 1960 SC 12, para 29]: ‘For modern purposes a
declaratory Act may be defined as an Act to remove doubts
existing as to the common law, or the meaning or effect of any
statute. Such Acts are usually held to be retrospective. The usual
reason for passing a declaratory Act is to set aside what
Parliament deems to have been a judicial error, whether in the
B
statement of the common law or in the interpretation of statutes.
Usually, if not invariably, such an Act contains a Preamble, and
also the word “declared” as well as the word “enacted”.’ But
the use of the words ‘it is declared’ is not conclusive that the Act
is declaratory for these words may, at times, be used to introduced
C new rules of law and the Act in the latter case will only be
amending the law and will not necessarily be retrospective. In
determining, therefore, the nature of the Act, regard must be
had to the substance rather than to the form. If a new Act is ‘to
explain’ an earlier Act, it would be without object unless construed
retrospective. An explanatory Act is generally passed to supply
D
an obvious omission or to clear up doubts as to the meaning of
the previous Act. It is well settled that if a statute is curative or
merely declaratory of the previous law retrospective operation
is generally intended. The language ‘shall be deemed always to
have meant’ is declaratory, and is in plain terms retrospective. In
E the absence of clear words indicating that the amending Act is
declaratory, it would not be so construed when the pre-amended
provision was clear and unambiguous. An amending Act may be
purely clarificatory to clear a meaning of a provision of the
principal Act which was already implicit. A clarificatory
amendment of this nature will have retrospective effect and,
F
therefore, if the principal Act was existing law which the
Constitution came into force, the amending Act also will be part
of the existing law.”
The above summing up is factually based on the judgments of this
Court as well as English decisions.”
G
30. For all these reasons, we are of the view that the impugned
judgment of the Tribunal has to be set aside. The appeals are accordingly
allowed.
Devika Gujral Appeals allowed.
H
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