The High Court of Delhi ruled that Section 96 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC”) puts a stay on all pending legal proceedings as soon as the application is filed. It further held that the language of Section 96 is such that merely because Section 96 applies to one of the co-guarantors, the same would not ipso facto apply to all other co-guarantors. The Court also ruled that the Section only talks about all debts of that particular corporate debtor and does not include all co-guarantors.
Brief Facts (Axis Trustee Services):
Axis Trustee filed a summary suit against the ex-promoters of Bhushan Steel Ltd. for a recovery of EUR 64,751,108.73. Plaintiff was appointed as the security agent under the facility agreement executed between Bhushan Steel and other financial creditors. On default in repayments by Bhushan Steel, Plaintiff invoked a personal guarantee in his capacity as a security agent. Subsequently, CIRP was initiated against Bhushan Steel and the resolution plan was approved by the NCLT. The financial creditors of Bhushan Steel were given the right to recover unresolved financial debt from the guarantors concerning their personal guarantee. A notice was issued in this regard but having received no reply from the Defendants, the present suit was filed for seeking recovery of money.
Brief Facts (Norddeusche Landes Bank Girozentrale):
A summary suit was filed by the Plaintiff against the Defendants as they were the personal guarantors concerning 3 facility agreements executed in favour of Bhushan Steel.
Both the suits had similar issues and therefore, were decided together. The insolvency proceedings against both the Defendants had commenced and therefore, the issue was whether present suits can proceed as applications had already been filed under Section 95 of the IBC.
Contentions of the Defendants:
It was contended that since insolvency proceedings were started before, Section 96 of IBC came into play, and therefore, the present suit would not be maintainable. It was contended that the insolvency proceedings involving the personal guarantors of a corporate debtor would lie before NCLT and not DRT. The moratorium under Section 96 being debt centric would apply to both Defendants as they were co-guarantors and the same would not be separable. It was also argued that for the interim moratorium, the relevant date would be the date of filing an application under Section 94/95 of IBC.
Contentions of the Plaintiff:
Relying on Sections 78 and 79 of the IBC, it was argued that the adjudicating authority for personal insolvency matters is DRT and not NCLT and therefore, the moratorium cannot be claimed. It was argued that Part III of IBC vests DRT with the powers to deal with Section 95 applications. Since the CIRP was concluded, the insolvency proceedings could not be filed to avail the benefit of Section 96. It was contended that the Defendants were jointly and severally liable and therefore, the legal incapacity of Defendant No.2 cannot impact the remedies against another guarantor. It was further argued that the verdict in the present case would not affect the diminishing assets of the Defendants and therefore, the court should pronounce judgment.
Observations of the Court:
The Court relied on the case of Embassy Property Development Pvt. Ltd. v. State of Karnataka & Ors. (2020 13 SCC 308) and noted that the adjudicating authority would be NCLT in the case of personal guarantors of corporate persons. It observed that as per Section 60 of IBC, even if CIRP is not pending, the adjudicating authority would always be NCLT.
The High Court opined that Section 179(1) which vests power with DRT is subject to Section 60 of the IBC. The Court harmoniously read Section 60(1) and Section 60(2) and observed that the former applies even if CIRP was not pending against the corporate debtor. The purpose of Section 60(2) and (3) is to ensure that the proceedings against the personal guarantor shall be before the same NCLT.
The Bench in respect of the contention made by Plaintiff that Defendant No.2 had himself raised objections on the maintainability of an application under Section 95 opined that it was a legal objection and against admissions on the facts, no estoppel is applicable.
Based on the abovementioned reasons, the Court expounded that for insolvency proceedings against the Defendants as personal guarantors, the adjudicating authority would be NCLT and since proceedings were initiated before the filing of the present suit, the interim moratorium would be applicable.
For the relevant date for application under Section 94/95 of IBC, the Court held that it is specifically stated by the Legislature that the relevant date would be when the application is filed and not when it is registered.
The Delhi High Court further remarked that the present case was not filed with mala fide intention to take benefit of the interim moratorium. Further, the Court noted that even if the relevant date is taken to be the date on which the application was registered, it would not make any difference as the present judgment was yet to be pronounced on that date and the matter is pending till the time the judgment is pronounced, signed and dated. Before pronouncing the verdict, the parties are free to bring to attention any subsequent developments in the case and it is then up to the decision of the Court to determine whether cognizance of such developments is required or not. As for the present case, the subsequent development was the filing of the insolvency applications against Defendant.
Further, the Bench added that Section 96 of IBC unequivocally states that an interim moratorium comes into play as soon as an application under Section 94/95 is filed and the consequence is that all pending legal proceedings are deemed to have been stayed. This is different from the concept of moratorium under Section 14 of the IBC where the moratorium only comes into the picture on an order passed by NCLT.
Concerning co-guarantors, the High Court propounded that language of Section 96(1) cannot be stretched to include all co-guarantors. The words used “all the debts” is in respect of all debts of that particular debtor and therefore, the interim moratorium would only be in respect of the debt of a particular debtor and no other independent guarantor can be included in the same. The Court opined that merely because Section 96 applies to one of the co-guarantors, the same would not ipso facto apply to all other co-guarantors.
Decision of the Court:
Accordingly, the Delhi High Court stayed the proceedings in the present suit against both the Defendants considering the statutory mandate of Section 96 of IBC.
Case Title: Axis Trustee Services Ltd. V. Brij Bhushan Singhal & Anr. with Norddeusche Landes Bank Girozentrale v. Brij Bhushan Singhal & Anr.
Coram: Hon’ble Mr. Justice Amit Bansal
Case No.: CS (Comm) No.8/2021 & 20/2021
Advocates for Petitioner: Advs. Mr. Dayan Krishnan, Ms. Misha, Mr. Vijayant Paliwal, Ms. Moulshree Shukla, Mr. Sukrit Seth, Mr. Parth Gokhale, Ms. Megha Khandelwal, Mr. Daksh Kadian, Ms. Shally Bhasin, Mr. Chaitanya Safaya, Mr. Prateek Yadav, Mr. Prateek Gupta
Advocates for Respondent: Mr. Sandeep Sethi, Ms. Ranjana Roy Gawai, Ms. Vasudha Sen, Ms. Aayushi Singh, Mr. Parminder Singh, Mr. Pranjit K. Bhattacharya
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