Allahabad HC clarifies on liability of guarantors for companies facing moratorium under IBC

The Allahabad High Court has, while responding to two writ petitions, interpreted various provisions of the Insolvency and Bankruptcy Code, 2016 (Code) vis-a-vis the liability of guarantors of a corporate debtor, where such corporate debtor has been accorded moratorium..This is the first judgement which, inter alia, clarifies the liability of guarantors of a Corporate Debtor during the subsistence of a moratorium under Section 14 of the Code..Justice Mahesh Chandra Tripathi has stayed the proceedings against the guarantors of Lohia Machines Limited (LML), which had entered into a Multi Partite Agreement with State Bank of India (SBI) and other lenders..The petitions in the High Court were filed by the (ex) directors of LML, namely, Sanjeev Shriya, Deepak Singhania and Anurag Kumar Singhania. These three directors also happen to be the guarantors for a Rs. 72.75 crore loan granted by the SBI to LML..Upon declaration of LML as a “sick company” by the BIFR in 2007, SBI approached the Debt Recovery Tribunal (DRT) in 2017 under Section 19(3) of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDBFI) for recovery of the amount due against LML and the three guarantors..While the proceedings before the DRT were pending, an application was moved before the Allahabad bench of the NCLT by LML under Section 10 of the Code for initiation of insolvency resolution process. Upon admission, moratorium was declared and the guarantors sought to seek a stay on proceedings before the DRT..While the DRT stayed proceedings against LML in view of the moratorium declared by the NCLT, it admonished the guarantors for tactfully trying to delay the recovery proceedings. While doing so, it noted that the NCLT’s order imposing moratorium would be applicable only to the corporate debtor and not to its guarantors. It further directed the guarantors to disclose certain information, inter alia, relating to their assets..During the pendency of proceedings before the DRT, the petitioners approached the High Court raising an important question of law, as to whether the guarantors of a company will be liable while moratorium under the Code has been declared against such company..The Allahabad High Court answered in the negative while making the following three observations:.(1) Section 60(1) of the Code makes NCLT the adjudicating authority for insolvency resolution for corporate persons including corporate debtors as well as “personal guarantors.”.(2) Insolvency proceedings have been initiated, where the SBI has also admittedly submitted its claim before the resolution professional. SBI cannot be allowed to pursue two remedies on the same cause of action.(3) In view of the moratorium, proceedings are still in fluid stage and until liability is crystallised, against debtors/guarantors, there is no occasion for the DRT to proceed against the corporate guarantors..The Allahabad High Court, therefore stayed the proceedings before the DRT till the time moratorium period exists or resolution plan/liquidation proposal is admitted by the NCLT..The writ petition was filed by Wadhwa Law Chambers, and the matter was argued by Senior Advocate Navin Sinha, who was assisted by Aditya Singh, Rahul Agarwal, K.K. Wadhwa, Avirudh Wadhwa, Anandava Handa and Vipul Kumar. M.L. Lahoti was assisted by Dinesh Kakker and Akash Chandra Maurya for petitioner no. 2. Satish Chaturvedi and Siddharth appeared on behalf of SBI..(Read the judgment)