NCLT Chandigarh Clarifies Section 14 Moratorium Does Not Extend To Personal Guarantors, Admits SBI’s Section 95 Pleas
Introduction
The Chandigarh Bench of the National Company Law Tribunal (NCLT), comprising Judicial Member Shri Khetrabasi Biswal and Technical Member Shri Shishir Agarwal, held that the moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 is confined to the corporate debtor and does not extend protection to personal guarantors. On this basis, the Tribunal admitted petitions filed by State Bank of India under Section 95 of the Code against personal guarantors Jitendra Singh and Gurmeet Sodhi, notwithstanding the pendency of CIRP against the principal borrower, Kudos Chemie Ltd.
Factual Background
State Bank of India, acting as part of a consortium of lenders, had extended substantial credit facilities to Kudos Chemie Ltd. The facilities were subsequently restructured under the Corporate Debt Restructuring mechanism. To secure repayment obligations, Jitendra Singh and Gurmeet Sodhi executed personal guarantee deeds in favour of the lenders in 2014.
Upon default by the borrower, the account was classified as a Non-Performing Asset. SBI thereafter issued a demand notice dated 5 November 2016 under Section 13(2) of the SARFAESI Act, addressed to both the corporate debtor and the guarantors, demanding repayment and invoking the security and guarantee obligations. Subsequent recovery proceedings before the Debt Recovery Tribunal culminated in issuance of a Recovery Certificate on 6 January 2020.
Procedural Background
After obtaining the Recovery Certificate, SBI instituted petitions under Section 95 of the IBC seeking initiation of insolvency resolution proceedings against the personal guarantors. The guarantors resisted the petitions on multiple grounds, including limitation, invalid invocation of guarantees, and the subsistence of Section 14 moratorium owing to the CIRP already admitted against the corporate debtor on 5 July 2019.
The matter thus came before the NCLT Chandigarh for determination of maintainability and admission.
Issues
1. Whether the moratorium under Section 14 IBC applicable to the corporate debtor extends protection to personal guarantors.
2. Whether the petitions under Section 95 were barred by limitation.
3. Whether the SARFAESI notice constituted valid invocation of the personal guarantees.
4. Whether the Recovery Certificate issued by the DRT created a fresh cause of action.
Contentions of Parties
The guarantors argued that the petitions were hopelessly time-barred, contending that the date of default was 31 May 2015, when the borrower’s account was first declared NPA. According to them, acknowledgements made in the corporate debtor’s balance sheets could not operate to extend limitation against guarantors in their personal capacity.
It was further contended that the SARFAESI notice dated 5 November 2016 was merely an enforcement step against secured assets and did not amount to a legally valid invocation of the guarantees for the purpose of insolvency proceedings under the Code.
The guarantors also argued that once CIRP had commenced against the corporate debtor on 5 July 2019, the Section 14 moratorium barred continuation of any proceedings arising from the same debt, including proceedings against them as guarantors.
SBI, on the other hand, submitted that the Recovery Certificate dated 6 January 2020 gave rise to a fresh and independent cause of action in terms of the law laid down by the Supreme Court in Dena Bank v. C. Shivakumar Reddy. It was argued that the Section 95 petitions filed on 10 August 2021 were therefore well within the prescribed three-year limitation period. SBI also maintained that the guarantee deed required only a demand notice, which stood satisfied by the SARFAESI notice addressed to the guarantors.
Reasoning and Analysis
The Tribunal first dealt with the objection on limitation and relied squarely on the Supreme Court’s decision in Dena Bank v. C. Shivakumar Reddy, which recognises that a Recovery Certificate issued by the DRT constitutes a fresh cause of action for initiating proceedings under the IBC. Since the Recovery Certificate was issued on 6 January 2020 and the petitions were filed on 10 August 2021, the Tribunal held that the petitions were clearly within limitation.
On the issue of guarantee invocation, the NCLT examined Clause 20 of the guarantee deed, which required only a notice demanding payment. The Tribunal found that the SARFAESI notice dated 5 November 2016, having been specifically addressed to the guarantors and demanding payment, fully satisfied this contractual requirement. The invocation of the guarantees was therefore held to be legally valid.
The principal objection related to the effect of the Section 14 moratorium. The Bench comprising Judicial Member Khetrabasi Biswal and Technical Member Shishir Agarwal reiterated the settled statutory position that the moratorium under Section 14(1) applies only to the corporate debtor and does not extend to a surety under a contract of guarantee. It held that creditors remain legally entitled to pursue remedies against personal guarantors even while CIRP against the corporate debtor is pending.
Decision
The NCLT Chandigarh admitted the Section 95 petitions against Jitendra Singh and Gurmeet Sodhi, initiated insolvency resolution proceedings against them as personal guarantors, and declared the statutory moratorium for 180 days in terms of the personal guarantor insolvency framework.
In this case the appellant was represented by Advocates Harsh Garg and Pulkit Goyal.