Under Section 128 of the Indian
Contract Act, 1882 (Hereinafter referred to as “Act”), liability of the Guarantor is co-extensive with the
liability of Principal Debtor. The principle of co-extensiveness suggests that
the liability of one is subject to the liability of the other. This equips the
Creditor with an option of recovering the amount from Guarantors, without first
exhausting all available legal remedies against the Principal Debtor. Thus, the
proceedings against Guarantor can be initiated parallel with proceeding against
the Principal Debtor. The principle of co-extensiveness can also be inferred
from Section 134, of the Act, which states that the discharge of Principal
Debtor absolves the liability of Guarantor as well. Thus, If a debtor is
liable, so is guarantor, but if a debtor is discharged, the liability of
guarantor also stands discharged. This doctrine of co-extensiveness has again
reiterated by Hon’ble Mahesh Chandra
Tripathi, J. recently in the landmark Judgment of Sanjeev Shriya v. State Bank
of India & Another (Allahabad High Court) (Civil Writ Petition No. 30285 of
2017) delivered on 06.09.2017. Though, the Judgment caters to
corporate guarantee, but the basic principal of Contract Act remains applicable
to the personal or individual Guarantors to Corporate Debtors as well.
The brief facts of the case are such
that State Bank of India (“SBI”) had
filed for the recovery of loan amount of Rs. 72 Crore against Lohia Machines
Limited (“LML”) and three of its Guarantors.
Meanwhile, LML applied to NCLT (hereinafter referred to as “Tribunal”) under Section 10 of the Insolvency and Bankruptcy code,
2016 (hereinafter referred to as “Code”)
for the initiation of the Insolvency Resolution Process and also for the
imposition of moratorium under section 14 of the Code. The Tribunal admitted
the application and simultaneously imposed the moratorium as well. The
insolvency resolution professional was appointed subsequently.
The Debt Recovery Tribunal (hereinafter
referred to as “DRT”) in pursuance
of the order from the Tribunal stayed the proceeding against LML but continued
hearing the proceedings against the three ex-directors for enforcement of
guarantees. DRT even directed them to submit the list of assets held by them. DRT
took such step after taking into consideration the fact that there is no
restriction in taking action against the corporate debtor under the provisions
of the Code. DRT even criticized the act of filing application to NCLT as a mere
counter blast and as just a step towards delaying the proceedings. Against such
order of the Tribunal, the directors filed a writ petition before the Allahabad
High Court.
Accordingly, the issue that arose in
the present case was whether financial creditor can proceed against guarantor
under DRT when NCLT was already ceased of the matter and had declared
moratorium under Section 14 of the “Code”.
In this case it was held that once a
moratorium has been imposed under Section 14 of the Insolvency & Bankruptcy
Code, 2016, no action can be instituted
against Corporate Debtor, till either the expiry of resolution procedure (under
Section 31 of the Code) or till the proposal for finalization of liquidation [under
Section 33(1)] or till the expiry of 180 days, whichever is earlier, subject to
further extension of up to 90 days being granted by the tribunal and because of
doctrine of co-extensiveness of liability, the proceedings stands stayed
against Corporate Guarantor as well.
The reasoning behind the order was
that Section 60 of the Code stipulates that even for corporate debtors and
personal guarantors during the insolvency resolution process, the adjudicating
authority shall be NCLT. Thus, the insolvency resolution and bankruptcy process
against personal guarantor of corporate debtor also needs to be filed in NCLT
itself. Also held that liability of Principal debtor and guarantor is
co-extensive and for the same cause of action two simultaneous proceedings in
DRT as well as NCLT cannot proceed. Since, NCLT is already ceased with the
insolvency resolution process; there is no point in proceeding against the
guarantors under the DRT. The principal protects the interest of guarantor. Since,
the proceedings cannot be filed against a corporate debtor and so it cannot be
filed against corporate guarantor as well because of co-extensiveness of the
liability. The purpose behind such ruling is that the multiplicity of
proceedings should be eliminated at all cost.
The
way forward
The Court in this case has failed to
take into consideration the scope of actions to be taken against Guarantors
when the Principal Debtor is either an individual or a firm. Part III of the “Code” provides for insolvencies
relating to individuals and firm and DRT shall be the sole adjudicating
authority in such cases, unlike corporate insolvency wherein NCLT stands tall.
This chapter has not come into effect but the judgment is silent about how the
personal guarantor would be liable once the provisions are enforced and whether
the moratorium will likely be applicable on them as well? But, the basic
principle of the Contract Act of co-extensiveness of liability should be
applicable in such cases as well. A clear and express explanation on the point
is awaited.
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