NCLAT Interpreted the SARFAESI Act Enforcement and Personal Guarantors' Rights under the Insolvency and Bankruptcy Code.
The National Company Law Appellate Tribunal (NCLAT), New Delhi, in addressing an important question raised in an appeal heard by a three-member Bench comprising Justice Ashok Bhushan (Chairperson), Justice M. Satyanarayana Murthy (Judicial Member), and Barun Mitra (Technical Member), observed that SARFAESI Act proceedings against a personal guarantor are not barred by the IBC moratorium, and personal guarantors cannot be classified as secured creditors under the IBC unless they hold a security interest created in their favour by the corporate debtor.
In the appeal under Section 61(1) of the Insolvency and Bankruptcy Code, 2016 (IBC), K.V. Jayaprakash, a personal guarantor for Coastal Projects Limited, contested the NCLT Cuttack Bench’s order dated February 3, 2022. The NCLT had dismissed Jayaprakash's Interlocutory Application (IA) which sought to prevent the public auction of his property initiated by the respondent bank, despite the ongoing liquidation of the corporate debtor.
The appellant’s IA argued that the respondent bank’s action to auction his property under the SARFAESI Act, while a liquidation order was in place, violated the moratorium stipulated under Section 33(5) of the IBC. This moratorium prohibits proceedings against the corporate debtor's assets. Jayaprakash contended that the NCLT should have jurisdiction over matters involving personal guarantors under Section 60(2) of the IBC and asserted that the SARFAESI Act should not supersede the IBC provisions. He also argued that the dismissal of his IA was erroneous, given that the Supreme Court's ruling in State Bank of India v. V. Ramakrishnan was based on an outdated legal framework, as the 2019 amendments to the IBC were applicable to his case.
The NCLT dismissed the IA, ruling that SARFAESI proceedings against Jayaprakash, despite the IBC's liquidation process, were valid and did not contravene the IBC moratorium. The tribunal found that SARFAESI Act actions could proceed independently of the IBC’s liquidation framework and that Jayaprakash was not entitled to the relief sought under Section 60(5)(c) of the IBC. It was noted that the 2019 amendments requiring insolvency proceedings against personal guarantors to follow the IBC did not retroactively affect the SARFAESI Act’s applicability.
On appeal, the NCLAT reviewed whether Section 60(5) of the IBC permitted a third party like Jayaprakash to seek remedies, whether the moratorium under the IBC prevented SARFAESI Act proceedings against him, and if the IBC provisions took precedence over the Indian Contract Act. The NCLAT upheld the NCLT’s decision, determining that Section 60(5) did not support Jayaprakash’s claims and that the SARFAESI Act proceedings could continue irrespective of the IBC moratorium. The Tribunal also concluded that Jayaprakash could not be deemed a secured creditor under the IBC since there was no security interest created in his favour by the corporate debtor.
Ultimately, the NCLAT reaffirmed that while Jayaprakash could claim recovery under the Indian Contract Act, he did not qualify as a secured creditor under the IBC due to the absence of a security interest. The appeal was dismissed, affirming the NCLT's decision and upholding the legal precedence that the IBC provisions govern the status and rights of personal guarantors.
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