IBC Overrides SARFAESI: NCLAT Upholds Personal Guarantor Insolvency Despite Parallel Recovery Proceedings

IBC Overrides SARFAESI: NCLAT Upholds Personal Guarantor Insolvency Despite Parallel Recovery Proceedings

Introduction

The National Company Law Appellate Tribunal (NCLAT) has reiterated that proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) do not prevent initiation of personal insolvency proceedings under the Insolvency and Bankruptcy Code, 2016.

A Bench comprising Judicial Member Justice Mohammad Faiz Alam Khan and Technical Member Ajai Das Mehrotra held that by virtue of Section 238 of the IBC, the Code has an overriding effect over other laws. Accordingly, insolvency proceedings against a personal guarantor can continue even if recovery actions under SARFAESI or other statutes are pending.

Factual Background

The dispute arose from loan facilities extended by State Bank of India to Global Infonet Distribution Private Ltd. under a sanction letter dated July 31, 2012 for an amount of ₹42 crore. Various loan and security documents were executed on September 25, 2012. On the same date, Vibu Venkatsubramanian executed a deed of personal guarantee securing the credit facilities granted to the corporate debtor. The loan facilities were subsequently renewed and modified through sanction letters issued in December 2016, February 2017 and April 2018. When the borrower defaulted, the bank initiated recovery proceedings, including action under the SARFAESI Act.

Procedural Background

The bank eventually initiated insolvency proceedings against the personal guarantor by filing an application under Section 95 of the Insolvency and Bankruptcy Code before the National Company Law Tribunal (NCLT), New Delhi. On March 22, 2024, the NCLT accepted the report of the Resolution Professional and commenced the personal insolvency resolution process against the guarantor. Aggrieved by the order, Venkatsubramanian filed an appeal before the NCLAT challenging the initiation of insolvency proceedings.

Issues

1. Whether insolvency proceedings against a personal guarantor under Section 95 of the IBC are barred when recovery proceedings under the SARFAESI Act are pending.

2. Whether the personal guarantee executed in 2012 extended to subsequent renewals or modifications of the loan facilities.

3. Whether the insolvency proceedings were barred by limitation.

Contentions of the Parties

The appellant guarantor argued that the personal guarantee executed in 2012 was limited to the original loan facility of ₹42 crore and did not extend to subsequent renewals or enhanced facilities granted by the bank in later years. He also contended that the claim was barred by limitation as the guarantee had not been renewed. The appellant further submitted that the bank had initiated multiple proceedings under the SARFAESI Act, before the Debt Recovery Tribunal, and under the IBC, which according to him amounted to forum shopping. It was also argued that the Resolution Professional exceeded his authority by recommending initiation of insolvency proceedings.

The respondent bank argued that the guarantee deeds executed in 2012 and 2015 constituted continuing guarantees that remained valid unless expressly revoked. According to the bank, the guarantor’s liability was co-extensive with that of the principal borrower and extended to all renewals and modifications of the loan facilities.

The bank further contended that the default occurred upon issuance of a SARFAESI notice dated November 9, 2018 and that the insolvency petition filed on August 11, 2021 was well within the limitation period, particularly considering the COVID-related extensions of limitation.

Reasoning and Analysis

The Appellate Tribunal examined the clauses of the guarantee deed and observed that the guarantor had expressly agreed that variations or modifications in the loan terms would not discharge his liability. The Tribunal noted that the guarantee was a continuing guarantee and had never been revoked by the appellant. It relied on the decision of the Supreme Court in H.R. Basavaraj v Canara Bank to affirm that such guarantees remain enforceable for renewed or varied credit facilities unless specifically revoked.

On the question of limitation, the Tribunal held that the SARFAESI notice issued in November 2018 constituted the relevant trigger for default. Consequently, the insolvency petition filed in August 2021 was within the prescribed limitation period.

The Tribunal also rejected the allegation of forum shopping. It observed that Section 238 of the IBC gives the Code overriding effect over other laws, meaning that proceedings under SARFAESI or before the Debt Recovery Tribunal do not bar the initiation of insolvency proceedings under the IBC.

Decision

The NCLAT dismissed the appeal and upheld the order of the NCLT initiating insolvency proceedings against the personal guarantor. The Tribunal reaffirmed that insolvency proceedings under the IBC can proceed independently of recovery actions under the SARFAESI Act or other statutes.

In this case the appellant was represented by Senior Advocate Pooja Mehra Saigal with Advocates Ankit Mittal & Nivesh Dixit. Meanwhile the respondent was represented by Advocate Bheem Sain Jain.