The National Company Law Tribunal (NCLT) in Kochi recently clarified an important aspect regarding the moratorium under the Insolvency and Bankruptcy Code (IBC). The NCLT bench, consisting of Justice T Krishna Valli (Retd.) and Shri. Shyam Babu Gautam, issued a verdict emphasizing that the moratorium under sections 96 and 101 of the IBC does not intend to prevent legal actions under sections 7, 9, or 10 of the IBC. This clarification is crucial as it pertains to actions against a company or body corporate, not individuals.
Background: Furnace Fabrica’s Default
The case revolved around Furnace Fabrica, the corporate debtor, which had defaulted on credit facilities provided by a consortium of banks, led by SBI, including EXIM Bank, Axis Bank, and Standard Chartered Bank. Personal guarantees from individuals secured these credit facilities. Standard Chartered Bank initiated an insolvency resolution process against one of the personal guarantors, Mr. Abdul Rehman Basheeruddin, leading to an interim moratorium under Section 96 of the IBC concerning all the debts.
Interim Moratorium and State Bank of India’s Application
Section 96(1)(a) of the IBC imposes an interim moratorium on all debts of the personal guarantor. This means that during this period:
- Any legal actions related to debts are stayed.
- Creditors of the debtor cannot initiate legal actions regarding these debts.
However, the term “debt” in Section 3(11) of the IBC includes financial and operational obligations due from a person. On May 23, 2023, the State Bank of India, as a financial creditor, filed a Section 7 application to initiate the Corporate Insolvency Resolution Process (CIRP) against Furnace Fabrica.
Applicant’s Argument
Furnace Fabrica argued that the Section 7 application should be stayed because another company petition related to the same credit facilities had been filed. The applicant contended that the application under Section 7 should be bound by the interim moratorium under Sections 96 and 101 of the IBC.
Respondent’s Counterargument
The State Bank of India opposed this argument, asserting that simultaneous proceedings against both the corporate debtor and guarantor for the same debt are permissible. They referred to a Supreme Court case, Laxmi Pat Surana vs. Union Bank of India & Ann, which held that the right of cause of action allows the financial creditor to proceed against the principal borrower and guarantor equally in case of debt default.
The respondent also cited Section 128 of the Indian Contract Act, 1872, which states that the guarantor’s obligation is coextensive with that of the principal borrower. Furthermore, they referenced Axis Trustee Services Limited vs. Brij Bhushan Singh and Ors. to argue that Section 96’s moratorium applies to debts of the personal guarantor alone, not to other co-guarantors, even if the debts arise from the same source.
NCLT’s Verdict
The NCLT rejected the applicant’s request, emphasizing that the moratorium under Sections 96 and 101 of the IBC is not intended to obstruct actions under Sections 7, 9, or 10 of the IBC. The tribunal highlighted that the term “in relation to debt” should be interpreted in harmony with other parts of the IBC, taking into account the terms and purpose of guarantee and loan agreements.
The NCLT’s analysis of the IBC structure revealed that it does not expressly state that the Section 96 moratorium affects proceedings under Sections 7, 9, or 10. It distinguished between the moratoriums that follow admission under Sections 7, 9, or 10 and the moratorium that commences with the initiation of personal insolvency proceedings. These different moratoriums are governed by separate sections in the IBC, indicating the legislature’s intent to address distinct situations. The bench concluded that if the Section 96 or 101 moratorium were meant to prohibit Section 7 proceedings, it would essentially invalidate the primary contract, which is not the IBC’s objective.
