STATE BANK OF INDIA versus V. RAMAKRISHNAN & ANR.

[2018] 10 S.C.R.

STATE BANK OF INDIA

V. RAMAKRISHNAN & ANR.

(Civil Appeal No. 3595 of 2018)

BAUGUST 14, 2018

[R. F. NARIMAN AND INDU MALHOTRA, JJ.]

Insolvency and Bankruptcy Code, 2016: s.14 – Applicabilityof, in case of personal guarantor – Whether s.14 of the Code whichprovides for moratorium for the limited period mentioned in theCCode, on admission of an insolvency petition, would apply to apersonal guarantor of corporate debtor – Held: s.14 is applicableonly in case of corporate debtor – Said section does not mentionabout the personal guarantor – So far as personal guarantors areconcerned, Part III has not been brought into force, and neitherDhas s.243, which repeals the Presidency-Towns Insolvency Act, 1909and the Provincial Insolvency Act, 1920 – The net result of this isthat so far as individual personal guarantors are concerned, theyshall continue to be proceeded against under the aforesaid twoInsolvency Acts and not under the Code – The scheme of s.60(2)and (3) of the Code is clear – the moment there is proceedingEagainst the corporate debtor pending under the 2016 Code, anybankruptcy proceeding against the individual personal guarantorwill, if already initiated before the proceeding against the corporatedebtor, be transferred to the National Company Law Tribunal or, ifinitiated after such proceedings had been commenced against theFcorporate debtor, be filed only in the National Company LawTribunal – However, the Tribunal is to decide such proceedingsonly in accordance with the Presidency-Towns Insolvency Act, 1909or the Provincial Insolvency Act, 1920, as the case may be –Presidency-Towns Insolvency Act, 1909 – Provincial Insolvency Act,1920 – Recovery of Debts Due to Banks and Financial InstitutionsGAct, 1993 – Banks/Banking.

Allowing the appeals, the Court

HELD: 1.1 Under Part II of the Code, which deals with“Insolvency Resolution and Liquidation for Corporate Persons”,Ha financial creditor or corporate debtor may make an application

to initiate this process. Once initiated, the Adjudicating Authority,after admission of such an application, shall by order, declare amoratorium for the purposes referred to in Section 14. [Para 16][989-E-F]

M/s. Sicom Investments and Finance Ltd. v. RajeshKumar Drolia and Anr. (2017) SCC Online Bom 9725;Sanjeev Shriya v. State Bank of India and Ors. (2018)2 All LJ 769 (decided on 06.09.2017) – referred to

1.2 Section 14 refers to four matters that may be prohibitedonce the moratorium comes into effect. In each of the mattersreferred to, be it institution or continuation of proceedings, thetransferring, encumbering or alienating of assets, action torecover security interest, or recovery of property by an ownerwhich is in possession of the corporate debtor, what isconspicuous by its absence is any mention of the personalguarantor. Indeed, the corporate debtor and the corporate debtoralone is referred to in the said Section. plain reading of the saidSection, therefore, leads to the conclusion that the moratoriumreferred to in Section 14 does not apply to personal guarantorsof corporate debtor. [Para 17] [989-F-H]2.1 Section 60 of the Code, in sub-section (1) thereof, refersto insolvency resolution and liquidation for both corporate debtorsand personal guarantors, the Adjudicating Authority for whichshall be the National Company Law Tribunal, having territorialjurisdiction over the place where the registered office of thecorporate person is located. This sub-section is only importantin that it locates the Tribunal which has territorial jurisdiction ininsolvency resolution processes against corporate debtors. Sofar as personal guarantors are concerned, Part III has not beenbrought into force, and neither has Section 243, which repealsthe Presidency-Towns Insolvency Act, 1909 and the ProvincialInsolvency Act, 1920. The net result of this is that so far asindividual personal guarantors are concerned, they will continueto be proceeded against under the aforesaid two Insolvency Actsand not under the Code. Indeed, by Press Release dated28.08.2017, the Government of India, through the Ministry ofFinance, cautioned that Section 243 of the Code, which providesfor the repeal of said enactments, has not been notified till date,

BCD

FGH

Aand further, that the provisions relating to insolvency resolutionand bankruptcy for individuals and partnerships as contained inPart III of the Code are yet to be notified. Hence, it was advisedthat stakeholders who intend to pursue their insolvency casesmay approach the appropriate authority/court under the existingenactments, instead of approaching the Debt Recovery Tribunals.BIt is for this reason that sub-section (2) of Section 60 speaks ofan application relating to the “bankruptcy” of personal guarantorof corporate debtor and states that any such bankruptcyproceedings shall be filed only before the National Company LawTribunal. [Paras 19, 20] [990-B-G]

C2.2 The scheme of Section 60(2) and (3) is clear – themoment there is proceeding against the corporate debtorpending under the 2016 Code, any bankruptcy proceeding againstthe individual personal guarantor will, if already initiated beforethe proceeding against the corporate debtor, be transferred toDthe National Company Law Tribunal or, if initiated after suchproceedings had been commenced against the corporate debtor,be filed only in the National Company Law Tribunal. However,the Tribunal is to decide such proceedings only in accordancewith the Presidency-Towns Insolvency Act, 1909 or the ProvincialInsolvency Act, 1920, as the case may be. It is clear that sub-Esection (4), which states that the Tribunal shall be vested with allthe powers of the Debt Recovery Tribunal, as contemplated underPart III of this Code, for the purposes of sub-section (2), wouldnot take effect, as the Debt Recovery Tribunal has not yet beenempowered to hear bankruptcy proceedings against individualsFunder Section 179 of the Code, as the said Section has not yetbeen brought into force. Also, Section 249, dealing with theconsequential amendment of the Recovery of Debts Act toempower Debt Recovery Tribunals to try such proceedings, hasalso not been brought into force. [Para 21] [991-B-E]

G3. Sections 96 and 101, when contrasted with Section 14,would show that Section 14 cannot possibly apply to personalguarantor. When an application is filed under Part III, an interim-moratorium or moratorium is applicable in respect of any debtdue. First and foremost, this is separate moratorium, applicableseparately in the case of personal guarantors against whomH

insolvency resolution processes may be initiated under Part III.Secondly, the protection of the moratorium under these Sectionsis far greater than that of Section 14 in that pending legalproceedings in respect of the debt and not the debtor are stayed.The difference in language between Sections 14 and 101 is for areason. Section 14 refers only to debts due by corporate debtors,who are limited liability companies, and it is clear that in the vastmajority of cases, personal guarantees are given by Directorswho are in management of the companies. The object of the Codeis not to allow such guarantors to escape from an independentand co-extensive liability to pay off the entire outstanding debt,which is why Section 14 is not applied to them. However, insofaras firms and individuals are concerned, guarantees are given inrespect of individual debts by persons who have unlimited liabilityto pay them. And such guarantors may be complete strangers tothe debtor – often it could be personal friend. It is for this reasonthat the moratorium mentioned in Section 101 would cover suchpersons, as such moratorium is in relation to the debt and notthe debtor. It is open to mark the difference in language betweenSections 14 and 96 and 101, even though Sections 96 and 101have not yet been brought into force. [Para 23] [992-C-G]

State of Kerala and Ors. v. Mar Appraem Kuri Co. Ltd.and Anr. (2012) 7 SCC 106:[2012] 4 SCR 448; MadrasPetrochem Ltd. and Anr. v. Board for Industrial andFinancial Reconstruction and Ors. (2016) 4 SCC1: [2016] 11 SCR 419; CIT v. Shelly Products (2003) 5SCC 461 : [2003] 1 Suppl. SCR 79; CIT v. VatikaTownship (2015) 1 SCC 1 : [2014] 12 SCR 1037 –relied on.

Case Law Reference

ACIVIL APPELLATE JURISDICTION : Civil Appeal No. 3595

of 2018

From the Judgment and Order dated 28.02.2018 of the NationalCompany Law Appellate Tribunal at New Delhi in Company Appeal(AT) (Insolvency) No. 213 of 2017

WITH

C.A. No. 4553 of 2018

K. V. Vishwanathan, (A.C.), C. U. Singh, Sr. Advs., AbhishekKaushik, Ms. Vrinda Bhandari, Dhananjay B. Ray, Ravi R. Raghunath,Sanjay Kapur, Ms. Megha Karnwwal, Ms. Sheena Taqui, Ms. ShubhraKapur, P. S. Sudheer, Ms. Anne Mathew, Bharat Sood, Ms. Shruti Jose,Ayush Anand, Shubhendu Anand, Arvind Kumar Gupta, Ms. HennaGeorge, G. Balaji, Dilpreet Singh, Rajesh Bohra, Dhaval S. Deshpande,Amir Arsiwala, Arvind Gupta, Rahul Chitnish, Advs. for the appearingparties.

The Judgment of the Court was delivered byD

R. F. NARIMAN, J. 1. The present appeals revolve aroundwhether Section 14 of the Insolvency and Bankruptcy Code, 2016, whichprovides for moratorium for the limited period mentioned in the Code,on admission of an insolvency petition, would apply to personal guarantorof corporate debtor.

2. The factual backdrop of the present appeals is that theRespondent No.1 is the Managing Director of the corporate debtor,namely, the Respondent No.2 Company, and also the personal guarantorin respect of credit facilities that had been availed from the Appellant.The Guarantee Agreement entered into between the Appellant and theFRespondent No.1 is dated 22.02.2014.

3. As the Respondent No.2 Company did not pay its debts in time,the account of Respondent No.2 was classified as non-performingasset on 26.07.2015. Consequent thereto, the Appellant issued noticedated 04.08.2015 under Section 13(2) of the SARFAESI Act demandingGan outstanding amount of Rs.61,13,28,785.48 from the Respondents withinthe statutory period of 60 days. As no payment was forthcoming, apossession notice under Section 13(4) of the SARFAESI Act was issuedon 18.11.2016.

4.As matters stood thus, an application was filed by RespondentNo.2, the corporate debtor, under Section 10 of the Code on 20.05.2017Hto initiate the corporate insolvency resolution process against itself. On

19.06.2017, this petition filed under Section 10 was admitted, followedby the moratorium that is imposed statutorily by Section 14 of the Code.While the said proceedings were pending, an interim application wasfiled by Respondent No.1 as personal guarantor to the corporate debtor,in which Respondent No.1 took up the plea that Section 14 of the Codewould apply to the personal guarantor as well, as result of whichproceedings against the personal guarantor and his property would haveto be stayed. The National Company Law Tribunal, by its order dated18.09.2017, held that since under Section 31 of the Code, ResolutionPlan made thereunder would bind the personal guarantor as well, andsince, after the creditor is proceeded against, the guarantor stands in theshoes of the creditor, Section 14 would apply in favour of the personalguarantor as well. The interim application filed by Respondent No.1was thus allowed, and the Appellant was restrained from moving againstRespondent No.1.

5.An appeal filed to the National Company Law AppellateTribunal resulted in the appeal being dismissed. By the impugned judgmentdated 28.02.2018, the Appellate Tribunal relied upon Section 60(2) and(3) of the Code as well as Section 31 of the Code to find that themoratorium imposed under Section 14 would apply also to the personalguarantor. The reasoning was that since the personal guarantor can alsobe proceeded against, and forms part of Resolution Plan which isbinding on him, he is very much part of the insolvency process againstthe corporate debtor, and that, therefore, the moratorium imposed underSection 14 should apply to the personal guarantor as well.

6.Shri Sanjay Kapur, learned counsel appearing on behalf of theAppellant in C.A. No. 3595 of 2018, and Shri C.U. Singh, learned SeniorAdvocate appearing on behalf of Appellant in C.A. No. 4553 of 2018,both argued that the corporate debtor and personal guarantor are separateentities and that corporate debtor undergoing insolvency proceedingsunder the Code would not mean that personal guarantor is alsoundergoing the same process. As the guarantor’s liability is distinct andseparate from that of the corporate debtor, suit can be maintainedagainst the surety, though the principal debtor has not been sued. Forthis purpose, they relied upon Section 128 of the Indian Contract Act,1872. They also relied heavily upon the reasoning contained in judgmentby Single Judge of the Bombay High Court in M/s. SicomInvestments and Finance Ltd. v. Rajesh Kumar Drolia and Anr.[1]

1 (2017) SCC Online Bom 9725 (decided on 28.11.2017).

AThey then referred to Part III of the Code, and in particular, to Sections96 and 101. Although Part III of the Code has not been brought intoforce, it is clear that if an insolvency resolution process is to be carriedout against personal guarantor, it can be done only under Part III,which contains separate moratorium provision, namely, Sections 96and 101, both of which would attach only if separate insolvency processBwere carried out as against the personal guarantor. Shri Singh, in particular,relied heavily upon the difference in language between Section 14 andSection 101. According to the learned senior counsel, Section 14, in allits sub-sections, speaks only of the corporate debtor. When contrastedwith Section 101, it becomes clear that Section 14 cannot possibly attachCto personal guarantor as well, as Section 101 does not speak of a‘debtor’ but speaks ‘in relation to the debt’ and is not only wider thanSection 14, but would attach only if Part III proceedings were to beinstituted against the personal guarantor. They also relied heavily uponthe Amendment Ordinance dated 06.06.2018, by which Section 14(3) of

the Code was substituted, including surety in contract of guaranteeDto corporate debtor. They relied upon the Insolvency Law Committeeproceedings, which led to the aforesaid amendment, stating that it hadbeen recommended to clarify, by way of an explanation, that all assetsof such guarantors to the corporate debtor shall be outside the scope ofthe moratorium imposed under the Code. The very impugned judgmentEin the present proceedings was referred to by the Insolvency LawCommittee stating that such broad interpretation of Section 14 wouldcurtail significant rights of the creditor. They relied upon judgments whichmade it clear that clarificatory statutes, like this amendment, would haveretrospective operation and that, therefore, in any case, the impugnedjudgment would have to be set aside.F

7.Learned counsel appearing on behalf of the Respondents firsttook shelter under Section 60(2) of the Code, as according to the learnedcounsel, the said Section precludes the bank from proceeding againstthe personal guarantor under SARFAESI or any other Act outside theCode. He relied upon the reasoning of the Tribunal and took shelterGunder Section 31, as did the Tribunal. He also relied upon judgment ofthe Allahabad High Court in Sanjeev Shriya v. State Bank of Indiaand Ors.,[2] which stated that as proceeding relatable to the corporatedebtor is pending adjudication in two forums, it is not permissible to

proceed against the personal guarantor. financial creditor cannotoperate in manner that imperils the value of the property of the personaldebtor. He also relied strongly upon the Insolvency and Bankruptcy Code(Amendment) Act, 2018 which came into effect on 23.11.2017, by which,clause (e) of Section 2 was substituted so as to include within the sweepof the Code, personal guarantors to corporate debtors. He then reliedupon the Statement of Objects of the Amendment Act, 2018, whichwas, interalia, to extend the provisions of the Code to personal guarantorsof corporate debtors, to further strengthen the corporate insolvencyresolution process. He then relied upon certain statutory forms whichare contained in the Insolvency and Bankruptcy (Application toAdjudicating Authority) Rules, 2016 and in particular, to Annexure VI(e)to Form 6. Regulation 36(2) of the Insolvency and Bankruptcy Board ofIndia (Insolvency Resolution Process for Corporate Persons) Regulations,2016 also provides, as did Annexure VI(e), that information as to personalguarantees have to be given in relation to the debts of the corporatedebtor when an insolvency process is initiated against the corporate debtor.All this would show that since the personal guarantor is very much partof the overall process, the moratorium contained in Section 14 of theCode should apply to the personal guarantor as well.8.We appointed Shri K.V. Viswanathan, learned SeniorAdvocate, to assist us as Amicus Curiae in this matter. We thank himfor the valuable assistance that he has rendered. He has pointed out thatthe whole idea of the Insolvency Code was that the history of debtrecovery had shown that the earlier statutes were loaded heavily in favourof corporate debtors and that, as result, huge outstanding debts tobanks and financial institutions had not been repaid. In particular, hepointed out Section 22 of the Sick Industrial Companies (SpecialProvisions) Act, 1985, and stated that as result of the said Sectionapplying to guarantors as well, creditors could not proceed againstguarantors as well after the company had been declared sick under thesaid Act, without permission from the Board for Industrial and FinancialReconstruction. Now that the said Act has been repealed, and the factthat several later enactments, including the Companies Act, 2013 hadomitted provision akin to Section 22, would show that the enactment ofSection 14 of the Code was deliberate, and that the idea was that thereshould be no stay of proceedings against the guarantor while the corporatedebtor is undergoing an insolvency proceeding. For this, he cited variousjudgments. He also relied upon the Amendment Act, 2018 and stated

Athat since the Act was to get over the appellate judgment in particular,and since it was clarificatory, the position in law would be that it wouldbe retrospective, and would thus govern the case at hand.

9.Before dealing with the arguments of learned counsel on bothsides, it is important at this stage to set out some of the provisions of theBCode. One difficulty that we faced when hearing the matter was thatdifferent provisions of the Code were brought into force on differentdates, as Section 1(3) indicates. Also, certain important provisions of theCode have not yet been brought into force. This we will advert to littlelater in our judgment.

C10. Section 2(e) of the Code, as originally enacted, reads as under:

“2. Application.— The provisions of this Code shall apply to—

xxx xxx xxx

(e) partnership firms and individuals;

Dxxx xxx xxx”

By the Amendment Act, 2018, this Section was substituted as follows:

“2. Application.— The provisions of this Code shall apply to—

xxx xxx xxxE

(e) personal guarantors to corporate debtors;

xxx xxx xxx”

Though the original Section 2(e) did not come into force at all, thesubstituted Section 2(e) has come into force w.e.f. 23.11.2017.

F11. Section 3(7), (8) and (11) of the Code read as under:

“3. Definitions.— In this Code, unless the context otherwiserequires,—

(7) “corporate person” means company as defined in clause(20) of Section 2 of the Companies Act, 2013 (18 of 2013), aGlimited liability partnership, as defined in clause (n) of sub-section(1) of Section 2 of the Limited Liability Partnership Act, 2008 (6of 2009), or any other person incorporated with limited liabilityunder any law for the time being in force but shall not includeany financial service provider;

(8) “corporate debtor” means corporate person who owes adebt to any person;”

xxx xxx xxx

“(11) “debt” means liability or obligation in respect of claimwhich is due from any person and includes financial debt andoperational debt;”

12. Section 5(8)(i) of the Code reads as follows:

“5. Definitions.— In this Part, unless the context otherwiserequires,—

xxx xxx xxx

(8) “financial debt” means debt along with interest, if any, whichis disbursed against the consideration for the time value of moneyand includes—

xxx xxx xxx

(i) the amount of any liability in respect of any of the guaranteeor indemnity for any of the items referred to in sub-clauses (a)to (h) of this clause;

xxx xxx xxx”

13. Section 5(22) of the Code read as follows:

“5. Definitions.— In this Part, unless the context otherwiserequires,—

xxx xxx xxx

(22) “personal guarantor” means an individual who is the suretyin contract of guarantee to corporate debtor;”

14. Sections 14, 31, 60, 95, 101, 238, 243, and 249 of the Coderead as under:

“14. Moratorium.— (1) Subject to provisions of sub-sections(2) and (3), on the insolvency commencement date, theAdjudicating Authority shall by order declare moratorium forprohibiting all of the following, namely—

(a) the institution of suits or continuation of pending suits orproceedings against the corporate debtor including execution

of any judgment, decree or order in any court of law, tribunal,arbitration panel or other authority;

(b) transferring, encumbering, alienating or disposing of by thecorporate debtor any of its assets or any legal right or beneficialinterest therein;

(c) any action to foreclose, recover or enforce any securityinterest created by the corporate debtor in respect of its propertyincluding any action under the Securitisation and Reconstructionof Financial Assets and Enforcement of Security Interest Act,2002 (54 of 2002);

(d) the recovery of any property by an owner or lessor wheresuch property is occupied by or in the possession of thecorporate debtor.

(2) The supply of essential goods or services to the corporatedebtor as may be specified shall not be terminated or suspendedor interrupted during moratorium period.

(3) The provisions of sub-section (1) shall not apply to suchtransactions as may be notified by the Central Government inconsultation with any financial sector regulator.

(4) The order of moratorium shall have effect from the date ofsuch order till the completion of the corporate insolvencyresolution process:

Provided that where at any time during the corporate insolvencyresolution process period, if the Adjudicating Authority approvesthe resolution plan under sub-section (1) of Section 31 or passesan order for liquidation of corporate debtor under Section 33, themoratorium shall cease to have effect from the date of suchapproval or liquidation order, as the case may be.”

xxx xxx xxx

“31. Approval of resolution plan.— (1) If the AdjudicatingAuthority is satisfied that the resolution plan as approved by thecommittee of creditors under sub-section (4) of section 30 meetsthe requirements as referred to in sub-section (2) of Section 30,it shall by order approve the resolution plan which shall be binding

on the corporate debtor and its employees, members, creditors,guarantors and other stakeholders involved in the resolution plan.

(2) Where the Adjudicating Authority is satisfied that theresolution plan does not confirm to the requirements referredto in sub-section (1), it may, by an order, reject the resolutionplan.

(3) After the order of approval under sub-section (1),—

(a) the moratorium order passed by the AdjudicatingAuthority under Section 14 shall cease to have effect; and

(b) the resolution professional shall forward all recordsrelating to the conduct of the corporate insolvency resolutionprocess and the resolution plan to the Board to be recordedon its database.”

xxx xxx xxx

“60. Adjudicating Authority for corporate persons.— (1)The Adjudicating Authority, in relation to insolvency resolutionand liquidation for corporate persons including corporate debtorsand personal guarantors thereof shall be the National CompanyLaw Tribunal having territorial jurisdiction over the place wherethe registered office of the corporate person is located.

(2) Without prejudice to sub-section (1) and notwithstandinganything to the contrary contained in this Code, where corporateinsolvency resolution process or liquidation proceeding of acorporate debtor is pending before National Company LawTribunal, an application relating to the insolvency resolution orbankruptcy of personal guarantor of such corporate debtorshall be filed before such National Company Law Tribunal.

(3) An insolvency resolution process or bankruptcy proceedingof personal guarantor of the corporate debtor pending in anycourt or tribunal shall stand transferred to the AdjudicatingAuthority dealing with insolvency resolution process or liquidationproceeding of such corporate debtor.

(4) The National Company Law Tribunal shall be vested with allthe powers of the Debts Recovery Tribunal as contemplatedunder Part III of this Code for the purpose of sub-section (2).

(5) Notwithstanding anything to the contrary contained in anyother law for the time being in force, the National CompanyLaw Tribunal shall have jurisdiction to entertain or dispose of—

(a) any application or proceeding by or against the corporatedebtor or corporate person;

(b) any claim made by or against the corporate debtor orcorporate person, including claims by or against any of itssubsidiaries situated in India; and

(c) any question of priorities or any question of law or facts,arising out of or in relation to the insolvency resolution orliquidation proceedings of the corporate debtor or corporateperson under this Code.

(6) Notwithstanding anything contained in the Limitation Act,1963 (36 of 1963) or in any other law for the time being in force,in computing the period of limitation specified for any suit orDapplication by or against corporate debtor for which an orderof moratorium has been made under this Part, the period duringwhich such moratorium is in place shall be excluded.”

xxx xxx xxx

“96. Interim-moratorium.— (1) When an application is filedEunder Section 94 or Section 95—

(a) an interim-moratorium shall commence on the date of theapplication in relation to all the debts and shall cease to haveeffect on the date of admission of such application; and

(b) during the interim-moratorium period—

(i) any legal action or proceeding pending in respect of anydebt shall be deemed to have been stayed; and

(ii) the creditors of the debtor shall not initiate any legalaction or proceedings in respect of any debt.

(2) Where the application has been made in relation to firm,the interim-moratorium under sub-section (1) shall operate againstall the partners of the firm as on the date of the application.

(3) The provisions of sub-section (1) shall not apply to suchtransactions as may be notified by the Central Government inHconsultation with any financial sector regulator.”

xxx xxx xxx

“101. Moratorium.— (1) When the application is admittedunder Section 100, moratorium shall commence in relation toall the debts and shall cease to have effect at the end of theperiod of one hundred and eighty days beginning with the date ofadmission of the application or on the date the AdjudicatingAuthority passes an order on the repayment plan under Section114, whichever is earlier.

(2) During the moratorium period—

(a) any pending legal action or proceeding in respect of anydebt shall be deemed to have been stayed;

(b) the creditors shall not initiate any legal action or legalproceedings in respect of any debt; and

(c) the debtor shall not transfer, alienate, encumber or disposeof any of his assets or his legal rights or beneficial interesttherein;

(3) Where an order admitting the application under Section 96has been made in relation to firm, the moratorium under sub-section (1) shall operate against all the partners of the firm.

(4) The provisions of this section shall not apply to suchtransactions as may be notified by the Central Government inconsultation with any financial sector regulator.”

xxx xxx xxx

“238. Provisions of this Code to override other laws.—The provisions of this Code shall have effect, notwithstandinganything inconsistent therewith contained in any other law forthe time being in force or any instrument having effect by virtueof any such law.”

xxx xxx xxx

“243. Repeal of certain enactments and savings.— (1) ThePresidency-Towns Insolvency Act, 1909 (3 of 1909) and theProvincial Insolvency Act, 1920 (5 of 1920) are hereby repealed.

(2) Notwithstanding the repeal under sub-sections (1),—

(i) all proceedings pending under and relating to the Presidency-Towns Insolvency Act, 1909, and the Provincial Insolvency

Act, 1920 immediately before the commencement of this Codeshall continue to be governed under the aforementioned Actsand be heard and disposed of by the concerned courts ortribunals, as if the aforementioned Acts have not been repealed;

(ii) any order, rule, notification, regulation, appointment,conveyance, mortgage, deed, document or agreement made,fee directed, resolution passed, direction given, proceedingtaken, instrument executed or issued, or thing done under or inpursuance of any repealed enactment shall, if in force at thecommencement of this Code, continue to be in force, and shallhave effect as if the aforementioned Acts have not beenrepealed;

(iii) anything done or any action taken or purported to havebeen done or taken, including any rule, notification, inspection,order or notice made or issued or any appointment or declarationmade or any operation undertaken or any direction given orany proceeding taken or any penalty, punishment, forfeiture orfine imposed under the repealed enactments shall be deemedvalid;

(iv) any principle or rule of law, or established jurisdiction, formor course of pleading, practice or procedure or existing usage,custom, privilege, restriction or exemption shall not be affected,notwithstanding that the same respectively may have been inany manner affirmed or recognised or derived by, in, or from,the repealed enactments;

(v) any prosecution instituted under the repealed enactmentsand pending immediately before the commencement of thisCode before any court or tribunal shall, subject to the provisionsof this Code, continue to be heard and disposed of by theconcerned court or tribunal;

(vi) any person appointed to any office under or by virtue ofany repealed enactment shall continue to hold such office untilsuch time as may be prescribed; and

(vii) any jurisdiction, custom, liability, right, title, privilege,restriction, exemption, usage, practice, procedure or othermatter or thing not in existence or in force shall not be revisedor restored.

(3) The mention of particular matters in sub-section (2) shall notbe held to prejudice the general application of Section 6 of theGeneral Clauses Act, 1897 (10 of 1897) with regard to the effectof repeal of the repealed enactments or provisions of theenactments mentioned in the Schedule.”

xxx xxx xxx

“249. Amendments of Act, 51 of 1993.— The Recovery ofDebts Due to Banks and Financial Institutions Act, 1993 shall beamended in the manner specified in the Fifth Schedule.”

15. The first important thing that needs to be noticed is that, ashas been stated earlier in this judgment, Part III of the Code has not yetbeen brought into force. This part is entitled “Insolvency Resolution andBankruptcy for Individuals and Partnership Firms”. The repealingprovision, namely Section 243, which repeals the Presidency TownsInsolvency Act, 1909 and the Provincial Insolvency Act, 1920, has alsonot been brought into force. Section 249, which amends the Recoveryof Debts Due to Banks and Financial Institutions Act, 1993, so that theDebt Recovery Tribunals under that Act can exercise the jurisdiction ofthe Adjudicating Authority conferred by the Code, has also not beenbrought into force.

16. Under Part II of the Code, which deals with “InsolvencyResolution and Liquidation for Corporate Persons”, financial creditoror corporate debtor may make an application to initiate this process.Once initiated, the Adjudicating Authority, after admission of such anapplication, shall by order, declare moratorium for the purposes referredto in Section 14 (See Section 13 of the Code).

17. Section 14 refers to four matters that may be prohibited oncethe moratorium comes into effect. In each of the matters referred to, beit institution or continuation of proceedings, the transferring, encumberingor alienating of assets, action to recover security interest, or recovery ofproperty by an owner which is in possession of the corporate debtor,what is conspicuous by its absence is any mention of the personalguarantor. Indeed, the corporate debtor and the corporate debtor aloneis referred to in the said Section. plain reading of the said Section,therefore, leads to the conclusion that the moratorium referred to inSection 14 can have no manner of application to personal guarantors ofa corporate debtor.

18. However, Sections 2(e) and Section 60 are strongly reliedupon by learned counsel for the Respondents as, according to them, theCode will apply to personal guarantors of corporate debtors, and bySection 60, proceedings against such personal guarantors will show thatsuch moratorium extends to the guarantor as well.

B19. We are afraid that such arguments have to be turned down ona careful reading of the Sections relied upon. Section 60 of the Code, insub-section (1) thereof, refers to insolvency resolution and liquidationfor both corporate debtors and personal guarantors, the AdjudicatingAuthority for which shall be the National Company Law Tribunal, havingterritorial jurisdiction over the place where the registered office of theCcorporate person is located. This sub-section is only important in that itlocates the Tribunal which has territorial jurisdiction in insolvencyresolution processes against corporate debtors. So far as personalguarantors are concerned, we have seen that Part III has not been broughtinto force, and neither has Section 243, which repeals the Presidency-DTowns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920.The net result of this is that so far as individual personal guarantors areconcerned, they will continue to be proceeded against under the aforesaidtwo Insolvency Acts and not under the Code. Indeed, by Press Releasedated 28.08.2017, the Government of India, through the Ministry ofFinance, cautioned that Section 243 of the Code, which provides for theErepeal of said enactments, has not been notified till date, and further, thatthe provisions relating to insolvency resolution and bankruptcy forindividuals and partnerships as contained in Part III of the Code are yetto be notified. Hence, it was advised that stakeholders who intend topursue their insolvency cases may approach the appropriate authority/Fcourt under the existing enactments, instead of approaching the DebtRecovery Tribunals.

20. It is for this reason that sub-section (2) of Section 60 speaksof an application relating to the “bankruptcy” of personal guarantor ofa corporate debtor and states that any such bankruptcy proceedingsGshall be filed only before the National Company Law Tribunal. Theargument of the learned counsel on behalf of the Respondents that“bankruptcy” would include SARFAESI proceedings must be turneddown as “bankruptcy” has reference only to the two Insolvency Actsreferred to above. Thus, SARFAESI proceedings against the guarantorcan continue under the SARFAESI Act. Similarly, sub-section (3) speaks

of bankruptcy proceeding of personal guarantor of the corporatedebtor pending in any Court or Tribunal, which shall stand transferred tothe Adjudicating Authority dealing with the insolvency resolution processor liquidation proceedings of such corporate debtor. An “AdjudicatingAuthority”, defined under Section 5(1) of the Code, means the NationalCompany Law Tribunal constituted under the Companies Act, 2013.

21. The scheme of Section 60(2) and (3) is thus clear – the momentthere is proceeding against the corporate debtor pending under the2016 Code, any bankruptcy proceeding against the individual personalguarantor will, if already initiated before the proceeding against thecorporate debtor, be transferred to the National Company Law Tribunalor, if initiated after such proceedings had been commenced against thecorporate debtor, be filed only in the National Company Law Tribunal.However, the Tribunal is to decide such proceedings only in accordancewith the Presidency-Towns Insolvency Act, 1909 or the ProvincialInsolvency Act, 1920, as the case may be. It is clear that sub-section(4), which states that the Tribunal shall be vested with all the powers ofthe Debt Recovery Tribunal, as contemplated under Part III of this Code,for the purposes of sub-section (2), would not take effect, as the DebtRecovery Tribunal has not yet been empowered to hear bankruptcyproceedings against individuals under Section 179 of the Code, as thesaid Section has not yet been brought into force. Also, we have seenthat Section 249, dealing with the consequential amendment of theRecovery of Debts Act to empower Debt Recovery Tribunals to trysuch proceedings, has also not been brought into force. It is thus clearthat Section 2(e), which was brought into force on 23.11.2017 would,when it refers to the application of the Code to personal guarantor of

corporate debtor, apply only for the limited purpose contained in Section60(2) and (3), as stated hereinabove. This is what is meant bystrengthening the Corporate Insolvency Resolution Process in theStatement of Objects of the Amendment Act, 2018.

22. Section 31 of the Act was also strongly relied upon by theRespondents. This Section only states that once Resolution Plan, asapproved by the Committee of Creditors, takes effect, it shall be bindingon the corporate debtor as well as the guarantor. This is for the reasonthat otherwise, under Section 133 of the Indian Contract Act, 1872, anychange made to the debt owed by the corporate debtor, without thesurety’s consent, would relieve the guarantor from payment.

ASection 31(1), in fact, makes it clear that the guarantor cannot escapepayment as the Resolution Plan, which has been approved, may wellinclude provisions as to payments to be made by such guarantor. This isperhaps the reason that Annexure VI(e) to Form 6 contained in theRules and Regulation 36(2) referred to above, require information as topersonal guarantees that have been given in relation to the debts of theBcorporate debtor. Far from supporting the stand of the Respondents, it isclear that in point of fact, Section 31 is one more factor in favour of apersonal guarantor having to pay for debts due without any moratoriumapplying to save him.

23. We are also of the opinion that Sections 96 and 101, whenCcontrasted with Section 14, would show that Section 14 cannot possiblyapply to personal guarantor. When an application is filed under PartIII, an interim-moratorium or moratorium is applicable in respect ofany debt due. First and foremost, this is separate moratorium, applicableseparately in the case of personal guarantors against whom insolvencyDresolution processes may be initiated under Part III. Secondly, theprotection of the moratorium under these Sections is far greater thanthat of Section 14 in that pending legal proceedings in respect of the debtand not the debtor are stayed. The difference in language betweenSections 14 and 101 is for reason. Section 14 refers only to debts dueby corporate debtors, who are limited liability companies, and it is clearEthat in the vast majority of cases, personal guarantees are given byDirectors who are in management of the companies. The object of theCode is not to allow such guarantors to escape from an independent andco-extensive liability to pay off the entire outstanding debt, which is whySection 14 is not applied to them. However, insofar as firms and individualsFare concerned, guarantees are given in respect of individual debts bypersons who have unlimited liability to pay them. And such guarantorsmay be complete strangers to the debtor – often it could be personalfriend. It is for this reason that the moratorium mentioned in Section 101would cover such persons, as such moratorium is in relation to the debt

and not the debtor. We may hasten to add that it is open to us to mark theGdifference in language between Sections 14 and 96 and 101, even thoughSections 96 and 101 have not yet been brought into force. This is for thereason, as has been held in State of Kerala and Ors. v. Mar AppraemKuri Co. Ltd. and Anr., (2012) 7 SCC 106, that law ‘made’ by theLegislature is law on the statute book even though it may not haveHbeen brought into force. The said judgment states:

“79. The proviso to Article 254(2) provides that law made bythe State Legislature with the President’s assent shall not preventParliament from making at any time any law with respect to thesame matter including law adding to, amending, varying orrepealing the law so made by State Legislature. Thus,Parliament need not wait for the law made by the StateLegislature with the President’s assent to be brought into forceas it can repeal, amend, vary or add to the assented State law nosooner it is made or enacted. We see no justification for inhibitingParliament from repealing, amending or varying any Statelegislation, which has received the President’s assent, overridingwithin the State’s territory, an earlier parliamentary enactmentin the concurrent sphere, before it is brought into force.Parliament can repeal, amend, or vary such State law no soonerit is assented to by the President and that it need not wait tillsuch assented-to State law is brought into force. This view findssupport in the judgment of this Court in Tulloch [AIR 1964 SC1284 : (1964) 4 SCR 461] .

80. Lastly, the definitions of the expressions “laws in force” inArticle 13(3)(b) and Article 372(3) Explanation I and “existinglaw” in Article 366(10) show that the laws in force include lawspassed or made by legislature before the commencement ofthe Constitution and not repealed, notwithstanding that any suchlaw may not be in operation at all. Thus, the definition of theexpression “laws in force” in Article 13(3)(b) and Article 372(3)Explanation I and the definition of the expression “existing law”in Article 366(10) demolish the argument of the State of Keralathat law has not been made for the purposes of Article 254,unless it is enforced. The expression “existing law” finds placein Article 254. In Edward Mills Co. Ltd. v. State of Ajmer [AIR1955 SC 25], this Court has held that there is no differencebetween an “existing law” and “law in force”.

81. Applying the tests enumerated hereinabove, we hold thatthe Kerala Chitties Act, 1975 became void on the making of theChit Funds Act, 1982 on 19-8-1982, [when it received the assentof the President and got published in the Official Gazette] as theCentral 1982 Act intended to cover the entire field with regardto the conduct of the chits and further that the State Finance

Act 7 of 2002, introducing Section 4(1)(a) into the State 1975Act, was void as the State Legislature was denuded of its authorityto enact the said Finance Act 7 of 2002, except under Article254(2), after the (Central) Chit Funds Act, 1982 occupied theentire field as envisaged in Article 254(1) of the Constitution.”

24. Thus, for the purpose of interpretation, it is certainly open forus to contrast Section 14 with Sections 96 and 101, as Sections 96 and101 are laws made by the Legislature, even though they have not yetbeen brought into force.

25. As argued by Shri Viswanathan, the historical background ofCthe Code now needs to be looked at. Section 22 of the Sick IndustrialCompanies (Special Provisions) Act, 1985 reads as follows:

“22. Suspension of legal proceedings, contracts, etc.—(1)Where in respect of an industrial company, an inquiry underSection 16 is pending or any scheme referred to under Section17 is under preparation or consideration or sanctioned schemeis under implementation or where an appeal under Section 25relating to an industrial company is pending, then, notwithstandinganything contained in the Companies Act, 1956 (1 of 1956), orany other law or the memorandum and articles of association ofthe industrial company or any other instrument having effectunder the said Act or other law, no proceedings for the windingup of the industrial company or for execution, distress or the likeagainst any of the properties of the industrial company or for theappointment of receiver in respect thereof [and no suit for therecovery of money or for the enforcement of any security againstthe industrial company or of any guarantee in respect of anyloans or advance granted to the industrial company] shall lie orbe proceeded with further, except with the consent of the Boardor, as the case may be, the Appellate Authority.

(2) Where the management of the sick industrial company istaken over or changed [in pursuance of any scheme sanctionedunder Section 18] notwithstanding anything contained in theCompanies Act, 1956 (1 of 1956), or any other law or in thememorandum and articles of association of such company orany instrument having effect under the said Act or other law—

(a) it shall not be lawful for the shareholders of such companyor any other person to nominate or appoint any person to be adirector of the company;

(b) no resolution passed at any meeting of the shareholders ofsuch company shall be given effect to unless approved by theBoard.

(3) [Where an inquiry under Section 16 is pending or any schemereferred to in Section 17 is under preparation or during the period]of consideration of any scheme under Section 18 or where anysuch scheme is sanctioned thereunder, for due implementationof the scheme, the Board may by order declare with respect tothe sick industrial company concerned that the operation of allor any of the contracts, assurances of property, agreements,settlements, awards, standing orders or other instruments in force,to which such sick industrial company is party or which maybe applicable to such sick industrial company immediately beforethe date of such order, shall remain suspended or that all or anyof the rights, privileges, obligations and liabilities accruing or arisingthereunder before the said date, shall remain suspended or shallbe enforceable with such adaptations and in such manner asmay be specified by the Board:

Provided that such declaration shall not be made for periodexceeding two years which may be extended by one year at atime so, however, that the total period shall not exceed sevenyears in the aggregate.

(4) Any declaration made under sub-section (3) with respect toa sick industrial company shall have effect notwithstandinganything contained in the Companies Act, 1956 (1 of 1956), orany other law, the memorandum and articles of association ofthe company or any instrument having effect under the said Actor other law or any agreement or any decree or order of court,tribunal, officer or other authority or of any submission, settlementor standing order and accordingly,—

(a) any remedy for the enforcement of any right, privilege,obligation and liability suspended or modified by suchdeclaration, and all proceedings relating thereto pending before

Aany court, tribunal, officer or other authority shall remain stayedor be continued subject to such declaration; and

(b) on the declaration ceasing to have effect—

(i) any right, privilege, obligation or liability so remainingsuspended or modified, shall become revived andBenforceable as if the declaration had never been made; and

(ii) any proceeding so remaining stayed shall be proceededwith subject to the provisions of any law which may thenbe in force, from the stage which had been reached whenthe proceedings became stayed.

(5) In computing the period of limitation for the enforcement ofany right, privilege, obligation or liability, the period during whichit or the remedy for the enforcement thereof remains suspendedunder this section shall be excluded.

DIt will be clear from reading of sub-section (1) thereof that suits for theenforcement of any guarantee in respect of loans or advances grantedto the industrial company, shall not lie or be proceeded with further,except with the consent of the Board or Appellate Authority. It may benoted that the Sick Industrial Companies (Special Provisions) Act, 1985was repealed on 01.12.2016. By notification dated 30.11.2016, SectionE14 of the Code was brought into force w.e.f. 01.12.2016. In MadrasPetrochem Ltd. and Anr. v. Board for Industrial and FinancialReconstruction and Ors., (2016) 4 SCC 1, this Court found:

“40. An interesting pointer to the direction Parliament has takenafter enactment of the Securitisation and Reconstruction ofFFinancial Assets and Enforcement of Security Interest Act, 2002is also of some relevance in this context. The Eradi CommitteeReport relating to insolvency and winding up of companies dated31-7-2000, observed that out of 3068 cases referred to BIFRfrom 1987 to 2000 all but 1062 cases have been disposed of. Outof the cases disposed of, 264 cases were revived, 375 casesGwere under negotiation for revival process, 741 cases wererecommended for winding up, and 626 cases were dismissed asnot maintainable. These facts and figures speak for themselvesand place big question mark on the utility of the Sick IndustrialCompanies (Special Provisions) Act, 1985. The Committee furtherHpointed out that effectiveness of the Sick Industrial Companies

(Special Provisions) Act, 1985 as has been pointed out earlier,has been severely undermined by reason of the enormous delaysinvolved in the disposal of cases by BIFR. (See Paras 5.8, 5.9and 5.15 of the Report.) Consequently, the Committeerecommended that the Sick Industrial Companies (SpecialProvisions) Act, 1985 be repealed and the provisions thereunderfor revival and rehabilitation should be telescoped into thestructure of the Companies Act, 1956 itself.

41. Pursuant to the Eradi Committee Report, the Companies Actwas amended in 2002 by providing for the constitution of aNational Company Law Tribunal as substitute for the CompanyLaw Board, the High Court, BIFR and AAIFR. The EradiCommittee Report was further given effect to by insertingSections 424-A to 424-H into the Companies Act, 1956 which,with few changes, mirrored the provisions of Sections 15 to 21of the Sick Industrial Companies (Special Provisions) Act, 1985.Interestingly, the Companies Amendment Act, 2002 omitted aprovision similar to Section 22(1) of the Sick Industrial Companies(Special Provisions) Act, 1985. Consequently, creditors weregiven liberty to file suits or initiate other proceedings for recoveryof dues despite pendency of proceedings for the revival orrehabilitation of sick companies before the National CompanyLaw Tribunal.

xxx xxx xxx

43. Close on the heels of the amendment made to the CompaniesAct came the Sick Industrial Companies (Special Provisions)Repeal Act, 2003. This particular Act was meant to repeal theSick Industrial Companies (Special Provisions) Act, 1985consequent to some of its provisions being telescoped into theCompanies Act. Thus, the Companies Amendment Act, 2002and the SICA Repeal Act formed part of one legislative scheme,and neither has yet been brought into force. In fact, even theCompanies Act, 2013, which repeals the Companies Act, 1956,contains Chapter 19 consisting of Sections 253 to 269 dealingwith revival and rehabilitation of sick companies along the linesof Sections 424-A to 424-H of the amended Companies Act,1956. Conspicuous by its absence is provision akin to Section22(1) of the Sick Industrial Companies (Special Provisions) Act,

1985 in the 2013 Act.However, this Chapter is also yet to bebrought into force. These statutory provisions, though not yetbrought into force, are also an important pointer to the fact thatSection 22(1) of the Sick Industrial Companies (SpecialProvisions) Act, 1985 has been statutorily sought to be excluded,Parliament veering around from wanting to protect sick industrialcompanies and rehabilitate them to giving credence to the publicinterest contained in the recovery of public monies owing to banksand financial institutions. These provisions also show that theaforesaid construction of the provisions of the Securitisation andReconstruction of Financial Assets and Enforcement of SecurityInterest Act, 2002 vis-à-vis the Sick Industrial Companies (SpecialProvisions) Act, 1985, leans in favour of creditors being able torealise their debts outside the court process over sick industrialcompanies being revived or rehabilitated. In fact, anotherinteresting document is the Report on Trend and Progress ofBanking in India 2011-2012 for the year ended 30-6-2012submitted by Reserve Bank of India to the Central Governmentin terms of Section 36(2) of the Banking Regulation Act, 1949.In Table IV.14 the Report provides statistics regarding trends innon-performing assets bank-wise, group-wise. As per the saidTable, the opening balance of non-performing assets in publicsector banks for the year 2011-2012 was Rs 746 billion but theclosing balance for 2011-2012 was Rs 1172 billion only. The totalamount recovered through the Securitisation and Reconstructionof Financial Assets and Enforcement of Security Interest Act,2002 during 2011-2012 registered decline compared to theprevious year, but, even then, the amounts recovered under thesaid Act constituted 70% of the total amount recovered. Theamounts recovered under the Recovery of Debts Due to Banksand Financial Institutions Act, 1993 constituted only 28%. Allthis would go to show that the amounts that public sector banksand financial institutions have to recover are in staggering figuresand at long last at least one statutory measure has proved to beof some efficacy. This Court would be loathe to give such aninterpretation as would thwart the recovery process under theSecuritisation and Reconstruction of Financial Assets andEnforcement of Security Interest Act, 2002 which Act aloneseems to have worked to some extent at least.

44. It will, thus, be seen that notwithstanding the non obstanteclauses in Sections 22(1) and (4), read with Section 32, Section22 of the Sick Industrial Companies (Special Provisions) Act,1985 will have to give way to the measures taken under theSecuritisation and Reconstruction of Financial Assets andEnforcement of Security Interest Act, 2002, more particularlyreferred to in Section 13 of the said Act, and that this being thecase, the sale notices issued both in 2003 and 2013 could continuewithout in any manner being thwarted by Section 22 of the SickIndustrial Companies (Special Provisions) Act, 1985.”

(emphasis supplied)

It is thus clear that for this reason also, it is obvious that Parliament,when it enacted Section 14, had this history in mind and specifically didnot provide for any moratorium along the lines of Section 22 of the SickIndustrial Companies (Special Provisions) Act, 1985 in Section 14 of theCode.

26. The reasoning of the Bombay High Court in the judgment ofM/s. Sicom Investments and Finance Ltd. (supra) commends itselfto us. The reasoning of the Allahabad High Court, on the other hand,does not.

27. We now come to the argument that the amendment of 2018,which makes it clear that Section 14(3), is now substituted to read thatthe provisions of sub-section (1) of Section 14 shall not apply to suretyin contract of guarantee for corporate debtor. The amended Sectionreads as follows:

“14. Moratorium.—

xxx xxx xxx

(3) The provisions of sub-section (1) shall not apply to—

(a) such transactions as may be notified by the CentralGovernment in consultation with any financial sector regulator;

(b) surety in contract of guarantee to corporate debtor.”

28. The Insolvency Law Committee, appointed by the Ministry ofCorporate Affairs, by its Report dated 26.03.2018, made certain keyrecommendations, one of which was:

“(iv) to clear the confusion regarding treatment of assets ofguarantors of the corporate debtor vis-à-vis the moratoriumon the assets of the corporate debtor, it has been recommendedto clarify by way of an explanation that all assets of suchguarantors to the corporate debtor shall be outside scope ofmoratorium imposed under the Code;”

The Committee insofar as the moratorium under Section 14 is concerned,went on to find:

“5.5 Section 14 provides for moratorium or stay on institutionor continuation of proceeding, suits, etc. against the corporatedebtor and its assets. There have been contradicting views onthe scope of moratorium regarding its application to third partiesaffected by the debt of the corporate debtor, like guarantors orsureties. While some courts have taken the view that Section 14may be interpreted literally to mean that it only restricts actionsagainst the assets of the corporate debtor, few others havetaken an interpretation that the stay applies on enforcement ofguarantee as well, if CIRP is going on against the corporatedebtor.”

xxx xxx xxx

“5.7 The Allahabad High Court subsequently took differingview in Sanjeev Shriya v. State Bank of India, 2017 (9) ADJ723, by applying moratorium to enforcement of guarantee againstpersonal guarantor to the debt. The rationale being that if CRIPis going on against the corporate debtor, then the debt owed bythe corporate debtor is not final till the resolution plan is approved,and thus the liability of the surety would also be unclear. TheCourt took the view that until debt of the corporate debtor iscrystallised, the guarantor’s liability may not be triggered. TheCommittee deliberated and noted that this would meant thatsurety’s liabilities are put on hold if CIRP is going on againstthe corporate debtor, and such an interpretation may lead to thecontracts of guarantee being infructuous, and not serving thepurpose for which they have been entered into.

5.8 In State Bank of India v. V. Ramakrishnan and VeesonEnergy Systems, NCLAT, New Delhi, Company Appeal (AT)(Insolvency) No. 213/2017 [Date of decision – 28 February, 2018],

the NCLAT took broad interpretation of Section 14 and heldthat it would bar proceedings or actions against sureties. Whiledoing so, it did not refer to any of the above judgments but insteadheld that proceedings against guarantors would affect the CIRPand may thus be barred by moratorium. The Committee felt thatsuch broad interpretation of the moratorium may curtailsignificant rights of the creditor which are intrinsic to contractof guarantee.”

5.9 contract of guarantee is between the creditor, the principaldebtor and the surety, where under the creditor has remedy inrelation to his debt against both the principal debtor and the surety[National Project Construction Corporation Limited v.Sandhu and Co., AIR 1990 P&H 300]. The surety here maybe corporate or natural person and the liability of such persongoes as far the liability of the principal debtor. As per section 128of the Indian Contract Act, 1872, the liability of the surety is co-extensive with that of the principal debtor and the creditor maygo against either the principal debtor, or the surety, or both, in noparticular sequence [Chokalinga Chettiar v.Dandayunthapani Chattiar, AIR 1928 Mad 1262]. Though thismay be limited by the terms of the contract of guarantee, thegeneral principle of such contracts is that the liability of theprincipal debtor and the surety is co-extensive and is joint andseveral [Bank of Bihar v. Damodar Prasad, AIR 1969 SC297]. The Committee noted that this characteristic of suchcontracts i.e. of having remedy against both the surety and thecorporate debtor, without the obligation to exhaust the remedyagainst one of the parties before proceeding against the other, isof utmost important for the creditor and is the hallmark of aguarantee contract, and the availability of such remedy is in mostcases the basis on which the loan may have been extended.

5.10 The Committee further noted that literal interpretation ofSection 14 is prudent, and broader interpretation may not benecessary in the above context. The assets of the surety areseparate from those of the corporate debtor, and proceedingsagainst the corporate debtor may not be seriously impacted bythe actions against assets of third parties like sureties. Additionally,enforcement of guarantee may not have significant impact on

the debt of the corporate debtor as the right of the creditor againstthe principal debtor is merely shifted to the surety, to the extentof payment by the surety. Thus, contractual principles ofguarantee require being respected even during moratorium andan alternate interpretation may not have been the intention ofthe Code, as is clear from plain reading of Section 14.

5.11 Further, since many guarantees for loans of corporates aregiven by its promoters in the form of personal guarantees, ifthere is stay on actions against their assets during CIRP,such promoters (who are also corporate applicants) may filefrivolous applications to merely take advantage of the stay andCguard their assets. In the judgments analysed in this relation,many have been filed by the corporate applicant under Section10 of the Code and this may corroborate the above apprehensionof abuse of the moratorium provision. The Committee concludedthat Section 14 does not intend to bar actions against assets ofDguarantors to the debts of the corporate debtor and recommendedthat an explanation to clarify this may be inserted in Section 14of the Code. The scope of the moratorium may be restricted tothe assets of the corporate debtor only.”

29. The Report of the said Committee makes it clear that theEobject of the amendment was to clarify and set at rest what the Committeethought was an overbroad interpretation of Section 14. That suchclarificatory amendment is retrospective in nature, would be clear fromthe following judgments:

(i) CIT v. Shelly Products, (2003) 5 SCC 461:F“38.

“38. It was submitted that after 1-4-1989, in case the assessmentis annulled the assessee is entitled to refund only of the amount,if any, of the tax paid in excess of the tax chargeable on the totalincome returned by the assessee. But before the amendmentcame into effect the position in law was quite different and thatGis why the legislature thought it proper to amend the section andinsert the proviso. On the other hand learned counsel for theRevenue submitted that the proviso is merely declaratory anddoes not change the legal position as it existed before theamendment. It was submitted that this Court in CIT v. ChittorElectric Supply Corpn [(1995) 2 SCC 430 : (1995) 212 ITRH404] has held that proviso (a) to Section 240 is declaratory and,

therefore, proviso (b) should also be held to be declaratory. Inour view that is not the correct position in law. Where the provisoconsists of two parts, one part may be declaratory but the otherpart may not be so. Therefore, merely because one part of theproviso has been held to be declaratory it does not follow thatthe second part of the proviso is also declaratory. However, theview that we have taken supports the stand of the Revenue thatproviso (b) to Section 240 is also declaratory. We have held thateven under the unamended Section 240 of the Act, the assesseewas only entitled to the refund of tax paid in excess of the taxchargeable on the total income returned by the assessee. Wehave held so without taking the aid of the amended provision. It,therefore, follows that proviso (b) to Section 240 is alsodeclaratory. It seeks to clarify the law so as to remove doubtsleading to the courts giving conflicting decisions, and in severalcases directing the Revenue to refund the entire amount of incometax paid by the assessee where the Revenue was not in positionto frame fresh assessment. Being clarificatory in nature it mustbe held to be retrospective, in the facts and circumstances of thecase. It is well settled that the legislature may pass declaratoryAct to set aside what the legislature deems to have been judicialerror in the interpretation of statute. It only seeks to clear themeaning of provision of the principal Act and make explicitthat which was already implicit.”

(ii) CIT v. Vatika Township, (2015) 1 SCC 1:

“32. Let us sharpen the discussion little more. We may notethat under certain circumstances, particular amendment canbe treated as clarificatory or declaratory in nature. Such statutoryprovisions are labelled as “declaratory statutes”. Thecircumstances under which provisions can be termed as“declaratory statutes” are explained by Justice G.P. Singh[Principles of Statutory Interpretation, (13[th] Edn., Lexis NexisButterworths Wadhwa, Nagpur, 2012)] in the following manner:

“Declaratory statutes

The presumption against retrospective operation is not applicableto declaratory statutes. As stated in CRAIES [W.F. Craies, Craieson Statute Law (7th Edn., Sweet and Maxwell Ltd., 1971)] andapproved by the Supreme Court [in Central Bank of India v.

AWorkmen, AIR 1960 SC 12, para 29]: ‘For modern purposes adeclaratory Act may be defined as an Act to remove doubtsexisting as to the common law, or the meaning or effect of anystatute. Such Acts are usually held to be retrospective. The usualreason for passing declaratory Act is to set aside whatParliament deems to have been judicial error, whether in theBstatement of the common law or in the interpretation of statutes.Usually, if not invariably, such an Act contains Preamble, andalso the word “declared” as well as the word “enacted”.’ Butthe use of the words ‘it is declared’ is not conclusive that the Actis declaratory for these words may, at times, be used to introducedCnew rules of law and the Act in the latter case will only beamending the law and will not necessarily be retrospective. Indetermining, therefore, the nature of the Act, regard must behad to the substance rather than to the form. If new Act is ‘toexplain’ an earlier Act, it would be without object unless construedretrospective. An explanatory Act is generally passed to supplyDan obvious omission or to clear up doubts as to the meaning ofthe previous Act. It is well settled that if statute is curative ormerely declaratory of the previous law retrospective operationis generally intended. The language ‘shall be deemed always tohave meant’ is declaratory, and is in plain terms retrospective. InEthe absence of clear words indicating that the amending Act isdeclaratory, it would not be so construed when the pre-amendedprovision was clear and unambiguous. An amending Act may bepurely clarificatory to clear meaning of provision of theprincipal Act which was already implicit. clarificatoryamendment of this nature will have retrospective effect and,Ftherefore, if the principal Act was existing law which theConstitution came into force, the amending Act also will be partof the existing law.”

The above summing up is factually based on the judgments of thisCourt as well as English decisions.”G

30. For all these reasons, we are of the view that the impugnedjudgment of the Tribunal has to be set aside. The appeals are accordinglyallowed.

Devika Gujral Appeals allowed.