Creditors set sights on corporate guarantors

NCLT upholds moratorium on claims against companies undergoing insolvency proceedings

Creditors are seeking to recover dues by invoking corporate guarantees even as defaulters undergo insolvency proceedings in the National Company Law Tribunal (NCLT).

The principal Bench of the NCLT in Delhi observed in one such case that corporate guarantees could not be invoked as that would violate the moratorium provided to a firm undergoing insolvency resolution. After a case of insolvency is admitted by the NCLT, the insolvency and bankruptcy code provides a firm 180 days to restructure itself. It also imposes a moratorium on anybody claiming dues from the firm during this period.

A Bench of the NCLT rejected Axis Bank’s plea to include its claims against Educomp Solutions in insolvency proceedings against Edusmart Services, a sister concern and corporate guarantor for Educomp Solutions.

The resolution professional in this case objected to invocation of the corporate guarantee. It was submitted that the claim submitted by Axis Bank was a “mala fide attempt to create hurdles in the resolution process of the corporate debtor”.

The total claim on Edusmart Services by secured creditors was ~112 crore and the liquidation figure was ~25 crore but the guarantee was for ~2,048 crore.

The tribunal observed that the claim was not due at the time of commencement of the resolution process and invoking the corporate guarantee would result in enforcing of security interest amounting to violation of the moratorium provided in the insolvency and bankruptcy code.

In Lohia Machines Ltd (LML) versus State Bank of India, former directors of the firm were corporate guarantors for LML, which had taken a loan of ~72.75 crore from SBI. A case was filed against the firm in the debt recovery tribunal under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, before the insolvency and bankruptcy code came into being.

The DRT continued the case against the corporate guarantors but the Allahabad High Court ruled both proceedings could not go on simultaneously.

In V Ramakrishnan versus Veesons Energy Systems Private Ltd and others, including SBI, the NCLT’s Chennai Bench ruled that SBI could not proceed against Ramakrishnan, the corporate guarantor.

“Allowing invocation of the corporate guarantor would mean that the interest would be shifted to the guarantor, violating Section 14 (1) of the IBC,” the Bench observed. The section deals with the 180-day moratorium. Another judgment affirming the moratorium was delivered by the NCLT, Mumbai, in the case of Schweitzer Systemtek. This ruling was upheld by the appellate tribunal. The judgments have broadened the scope of Section 14 of the code which provides the moratorium only to the corporate debtor. But, a contradictory view has been taken by the NCLAT in Alpha & Omega Diagnostics (India) Ltd versus Asset Reconstruction Company of India Ltd, wherein it held the moratorium would not be applicable to any assets, movable or immovable, that did not belong to the corporate debtor.

Insolvency professionals are of the view that though the orders can become precedents for other cases, a lot depends on the interpretation of the law in such cases. Nilesh Sharma, Senior Partner at Dhir and Dhir Associates, said the code only granted the moratorium to a firm under resolution and not to a corporate guarantor.