Liquidation under IBC 2016: Proceeding against Guarantor’s Assets?

The emanation of new precedents on Insolvency and Bankruptcy Code, 2016 (IBC) gives us a clear and lucid picture of what the code aims to achieve. However, it is incumbent to interpret the devised principles in the context they were delivered. One such ruling was given by National Company Law Tribunal, Mumbai (NCLT) in the case of Punjab National Bank v. Vindhya Vasini Industries Limited.[1] The issue which precisely dealt with was that whether the assets of guarantor of a corporate debtor against whom an insolvency proceeding has been initiated can be attached and liquidated.

NCLT by virtue of Section 60(2) of the IBC came to the conclusion that assets of a guarantor can be liquated as the assets are closely connected to the debt which was sought to be recovered. However, if one tracks the legislative intent behind Section 60(2) it was made to provide a common arena for insolvency proceedings.

In the instant case, the loan agreement by virtue of which the assets of the guarantor were mortgaged to avail the financial debt was used as a basis to proceed against the assets of the guarantor. The insolvency committee report has paid heed to such situations and pointed out to Section 128 of the Indian Contract Act, 1872 which stipulates that a creditor can proceed against a borrower or surety and that too in no particular order. This is the reason the committee recommended that the assets of the guarantor be seen differently from that of the assets of the corporate debtor, so that those assets do not come under the scope of Moratorium under Section 14 of IBC which basically bars other proceedings for recovery of debt against a debtor.

To that effect, on examination of Section 36 sub-section (3) and Section 36 sub-section (4) which stipulates for assets of a corporate debtor which can be used for liquidation, it nowhere includes the assets of a guarantor.

Even under the inherent power granted to the National Company Law Tribunals[2] which allows them to make such orders for meeting the ends of justice, the scope of the power conferred cannot go to the extent of giving it unbridled powers. The Hon’ble Supreme Court has already established the principle that inherent powers granted to a court or a tribunal cannot be exercised as against the powers given to it by other provisions of a code. There has to be consistency and harmony while exercising inherent powers and other powers conferred to a judicial authority under other codes as well.[3]

Thus, on an inspection of the above discussion, it is clear that the appointed liquidator cannot be allowed to liquidate the assets of a guarantor of a corporate debtor. The case of Vindhya Vasini Industries has to be seen in a different light as in this case the creditors under the guarantee contract and liquidation proceedings were one and the same. Therefore, the position of directly liquidating a guarantor’s assets must not be applied directly to each and every case as a matter of precedent but heed must be paid to peculiar facts and circumstances of each case.

[1]Punjab National Bank v. Vindhya Vasini Industries Limited, C.P. (IB)-1170(MB).

[2] Rule 11 of the National Company Law Tribunal Rules, 2016 .

[3] Ram Chand and Sons Sugar Mills v. Kanhayalal, (1961) 1 S.C.R. 884.


ABOUT THE AUTHOR

Jai Bajpai

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Jai Bajpai is currently a student in the five-year BBA LLB (Hons) course at University of Petroleum and Energy Studies, Dehradun.

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