Clarificatory amendment to S. 14 IBC retrospective, Moratorium does not extend to Personal Guarantees: SC

The Supreme Court today clarified that moratorium under Section 14 of the Insolvency and Bankruptcy Code (IBC) does not apply with respect to personal guarantees..The Court noted that a clarificatory amendment had already been passed in this regard by way of an ordinance dated June 6, 2018 and the same has retrospective application..The Court, therefore, set aside the judgment of the National Company Law Appellate Tribunal (NCLAT) and ruled that personal guarantees can be invoked when the company in favour of whom the guarantee was extended, is under moratorium..The judgment was delivered by a Bench of Justices Rohinton Nariman and Indu Malhotra in the case of State Bank of India v. V Ramakrishnan..The present appeal to the Supreme Court was filed by the State Bank of India (SBI), against an NCLAT judgment in the case of Veesons Energry Private Ltd. The NCLAT had ruled that personal guarantees cannot be invoked when the company in favour of whom the guarantee was extended, is under moratorium..The managing director of Veesons, V Ramakrishnan, had extended a personal guarantee and mortgaged his property in favour of SBI. While the company was in moratorium, SBI issued a notice for the sale of assets of the personal guarantor..An interlocutory application was filed by Ramakrishnan with the Mumbai Bench of the NCLT, where it was held that the protection accorded under moratorium period will extend to the property of the personal guarantor as well. On an appeal by the SBI, the NCLAT upheld the findings of the NCLT..SBI had argued that Section 14 applies only to assets of the corporate debtor. It contended that a guarantee is an independent contract and that Section 128 of the Indian Contract Act, 1872 provides that the liability of the surety is co-extensive with that of the principal debtor..Accordingly, SBI had prayed for setting aside the judgment of the NCLAT..During the pendency of the petition, Section 14(3) was substituted by way of an amendment ordinance which made it clear that the provisions of sub-section (1) of Section 14 shall not apply to a surety in a contract of guarantee for corporate debtor..Placing reliance on judgments including CIT v. Shelly Products [(2003) 5 SCC 461] and CIT v. Vatika Township [(2015) 1 SCC 1], the Court ruled that a clarificatory amendment is retrospective in nature..Further, the court was also of the opinion that 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 guarantor..The corporate debtor and the corporate debtor alone is referred to in the said Section, the Court observed. It, therefore, held that a plain reading of the said Section led to the conclusion that the moratorium referred to in Section 14 can have no manner of application to personal guarantors of a corporate debtor..The NCLAT itself had, in the cases of Alpha & Omega Diagnostics v Asset Reconstruction of Company India Limited and Schweitzer Systemic India Private Limited v Phoenix ARC, taken different views that the moratorium will apply only to property of the corporate debtor and no other person..Both these rulings were made observing the language contained in Section 14 of the IBC, which makes the moratorium applicable only to the assets of the corporate debtor..Contrary views had also been taken by the Allahabad High Court and the Bombay High Court on the subject. While the Allahabad High Court had ruled that the moratorium is applicable to a personal guarantor since the liability hasn’t been fructified, the Bombay High Court did not agree with this view and held that moratorium would be applicable only to the corporate debtor..Further, the IBC Committee Report which was published in April this year had suggested that the assets of a such a guarantor should fall outside the scope of the moratorium and be allowed to be proceeded against independently. The Report recommended insertion of an explanation to Section 14, which clarifies that the provision does not intend to bar actions against assets of guarantors. Subsequently, the amendment ordinance had clarified the same..Read the judgment below.