Liquidation of personal guarantor’s assets halted

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The National Company Law Appellate Tribunal (NCLAT) recently held that assets of personal guarantors cannot be liquidated while a moratorium is being imposed on the alienation of a corporate debtor’s assets by the National Company Law Tribunal (NCLT).

In State Bank of India v Mr V Ramakrishnan and M/s Veesons Energy Systems Pvt Ltd, Veesons had access to certain loan facilities from State Bank of India (SBI) for which its director, Ramakrishnan, had provided a personal guarantee and mortgaged some of his personal assets as collateral security.

Subsequently, Veesons defaulted on repayment of the loan, which prompted SBI to invoke its right and issue a notice under section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act), against Ramakrishnan to recover the outstanding dues that was challenged before the Madras High Court and dismissed.

Subsequently, SBI issued a possession notice under section 13(4) of the SARFAESI Act and took symbolic possession of the secured assets. Veesons filed an application under section 10 of the Insolvency and Bankruptcy Code (IBC) before the NCLT, Chennai, which passed an order of moratorium and appointed an interim resolution professional.

However, SBI continued to proceed against the property of Ramakrishnan by issuing a sale notice under the SARFAESI Act even after the declaration of the moratorium. Ramakrishnan then filed an application before the NCLT for a stay of proceedings under the SARFAESI Act and the NCLT passed an order restraining SBI from proceeding against him until the period of moratorium was over.

SBI filed an appeal with NCLAT against the NCLT order to determine the following issue: Whether SBI can proceed against the assets of Ramakrishnan while Veesons is undergoing a corporate insolvency resolution process?

On a combined reading of sections 30 and 31 of the IBC, which deal with the approval of the resolution plan, NCLAT answered the legal issue in the negative and held that once a resolution plan is approved by the committee of creditors and subsequently by the adjudicating authority, the plan would not only be binding on Veesons but would also cover under its ambit, employees, members, creditors, guarantors and other stakeholders involved in the resolution plan, including Ramakrishnan, the personal guarantor.

In light of the above, NCLAT concluded that the effect of the moratorium would also be applicable to Ramakrishnan, since Veesons’ resolution plan was binding on him.

The dispute digest is compiled by Bhasin & Co, Advocates, a corporate law firm based in New Delhi. The authors can be contacted at lbhasin@bhasinco.in or lbhasin@gmail.com. Readers should not act on the basis of this information without seeking professional legal advice.