Kiran Gupta vs. State Bank of India Another
Kiran Gupta vs. State Bank of India Another
Kiran Gupta vs. State Bank of India Another
2020 SCC OnLine Del 1390 : (2021) 276 DLT 148 (DB)
6. Though, the petitioner had initially challenged various Notifications issued by the
Union of India in the writ petition but, when the said petition came up for hearing
before this court on 30.09.2020, Mr. Amit Singh Chadha, learned Senior Counsel
appearing for the petitioner had stated on instructions that he would not be pressing
prayer clauses (A) to (F) and had confined the relief in the petition to prayer clauses
(G) to (M). The writ petition is now being confined to the action of the Bank of
initiating proceedings against the petitioner under the SARFAESI Act when insolvency
proceedings have been initiated against the Principal Borrower under the IB Code and
the same are pending before the NCLT.
7. It is the contention of the petitioner that proceedings against the Principal
Borrower under the IB Code and against the Guarantor under the SARFAESI Act
cannot be instituted and continued simultaneously; unless the proceedings under the
IB Code do not come to an end and it is decided that the company cannot be revived,
proceedings against the Guarantor alone cannot go on; that if the Resolution Plan is
accepted, then under Section 31 of the IB Code, all the Guarantees become ineffective
as the Resolution Plan is binding on the Guarantors. A plea has been taken that after
approval of the Resolution Plan under the IB Code, the liability of the Guarantor also
comes to an end. It has also been stated that during the COVID-19 pandemic, the
Bank would not be in a position to fetch a good value of the property and therefore, it
will not be prudent to go ahead with the sale of the property.
8. Mr. Sandeep Sethi, learned Senior Advocate appearing for the petitioner
contended that from the date of admission of an application for initiating Corporate
Insolvency Process by the Adjudicating Authority, the Adjudicating Authority by order
declares a moratorium prohibiting institution or continuation of suits, arbitrations and
other proceedings against the entity against which the insolvency proceedings have
commenced. He submitted that Section 12 of the IB Code stipulates that the
Insolvency Resolution Process has to be completed within a period of 180 days from
the date of admission of the application and this period can be extended only by a
maximum period of 90 days. Under Section 31 of the IB Code, once a Resolution Plan
is submitted by the Resolution Professional and is approved by the Adjudicating
Authority, then the same is binding on the guarantor and the guarantor is discharged
from all his liabilities. It was therefore, the submission of Mr. Sethi that proceedings
against the guarantor under SARFAESI Act should await the final decision under the
IB Code. If the resolution process is accepted, then the guarantor is discharged of all
his liabilities, but on the other hand, if the resolution process fails, then the Bank
would be free to proceed against the principal borrower and the guarantor. He
concluded by arguing that a reading of Sections 14 and 31 of the IB Code would
warrant a stay on all proceedings against the Guarantor under the SARFAESI Act
during the continuation of the Insolvency Resolution Process.
9. Per contra, Mr. Kapur, learned counsel appearing for the respondent/Bank
submitted that the liability of a Guarantor is co-extensive with the Principal Debtor. He
stated that the issue raised by the petitioner is no longer res integra and is covered by
the judgment of the Supreme Court in State Bank of India v. V. Ramakrishan, reported
as (2018) 17 SCC 394, which holds in so many words that Sections 14 and Section 31
of the IB Code do not bar initiation and continuation of the SARFAESI proceedings
against the Guarantor.
10. Coming first to the relevant provisions, Sections 14 and 31 of the IB Code and
Section 128 of the Contract Act, read as under:—
“Section 14 of IB Code.
Moratorium.-(1) Subject to provisions of sub-section (2) and (3), on the
insolvency commencement date, the Adjudicating Authority shall by order declare
moratorium for prohibiting all of the following, namely:—
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time being in force within a period of one year from the date of approval of the
resolution plan by the Adjudicating Authority under subsection (1) or within such
period as provided for in such law, whichever is later:
Provided that where the resolution plan contains a provision for combination as
referred to in section 5 of the Completion Act, 2002(12 of 2003), the resolution
applicant shall obtain the approval of the Competition Commission of India under
that Act prior to the approval of such resolution plan by the committee of creditors.]
Section 128 of Contract Act.
Surety's liability.— The liability of the surety is co-extensive with that of the
principal debtor, unless it is otherwise provided by the contract.
11. Section 128 of the Contract Act provides that the liability of a Guarantor is
coextensive with that of the Principal Debtor. In Industrial Investment Bank of India
Limited v. Biswanath Jhunjhunwala, reported as (2009) 9 SCC 478, the Supreme
Court has observed as under:—
“14. Mr. Gupta, in support of his submission, placed reliance on a judgment of
this Court in Bank of Bihar Ltd. v. Dr. Damodar Prasad [AIR 1969 SC 297 : (1969) 1
SCR 620], AIR p. 298, para 5. In that case, the Court referred to a judgment in
Lachhman Joharmal v. Bapu Khandu [(1869) 6 Bom HCR 241] in which the Division
Bench of the Bombay High Court held as under: (Lachhman case [(1869) 6 Bom
HCR 241], Bom HCR p. 242)
“The court is of opinion that a creditor is not bound to exhaust his
remedy against the principal debtor before suing the surety and that
when a decree is obtained against a surety, it may be enforced in the
same manner as a decree for any other debt.”
15. This Court, while approving the said judgment, observed that: (Damodar
Prasad case [AIR 1969 SC 297 : (1969) 1 SCR 620], AIR p. 299, para 6)
“6. … The very object of the guarantee is defeated if the creditor is
asked to postpone his remedies against the surety. In the present case
the creditor is a banking company. A guarantee is a collateral security
usually taken by a banker. The security will become useless if his rights
against the surety can be so easily cut down.”
16. In SBI v. Indexport Registered [(1992) 3 SCC 159 : AIR 1992 SC 1740] this
Court held that the decree-holder bank can execute the decree against the
guarantor without proceeding against the principal borrower. The guarantor's
liability is coextensive with that of the principal debtor.
17. In that case, this Court further observed that: (Indexport case [(1992) 3
SCC 159 : AIR 1992 SC 1740], SCC p. 164, para 10)
“10. … The execution of the money decree is not made dependent on first
applying for execution of the mortgage decree. The choice is left entirely with the
decree-holder. The question arises whether a decree which is framed as a
composite decree, as a matter of law, must be executed against the mortgage
property first or can a money decree, which covers whole or part of decretal
amount covering mortgage decree can be executed earlier. There is nothing in
law which provides such a composite decree to be first executed only
against the [principal debtor] [Ed. : The word in the original is “property”—
however the import is the same : that a composite decree can be executed both
against the principal debtor or the sureties.].”
The Court further observed that (Indexport case [(1992) 3 SCC 159 : AIR
1992 SC 1740], SCC p. 165, para 13) “the liability of the surety is
coextensive with that of the principal debtor, unless it is otherwise
provided by the contract”. [Ed. : This is the verbatim text of Section 128 of
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