The Delhi High Court on November 2, 2020, in the case of Kiran Gupta (“Appellant/Petitioner") v. State Bank of India (“Respondent or “Bank”), decided whether a bank/ financial institution can institute or continue with the proceedings against a guarantor under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”), when proceedings under the Insolvency and Bankruptcy Code, 2016 (“IBC”) have been initiated against the principal borrower and the same is pending adjudication.
The principal borrower i.e., Metenere Limited had obtained loans from the Respondent. The Appellant who is the wife of the promoter of the principal borrower, stood as a guarantor for repayment of the loans. The Bank filed an insolvency petition against the principal borrower before the National Company Law Tribunal, New Delhi (“NCLT”). During the pendency of the insolvency proceedings against the principal borrower, the Bank issued a notice dated September 6, 2018 under Section 13(2) of the SARFAESI Act to the petitioner, who had stood as a guarantor to the principal borrower. This was followed by issuance of a possession notice dated July 16, 2019, under the provisions of Section 13(4) of the SARFAESI Act. Both the aforesaid notices i.e., one under Section 13(2) and the other under Section 13(4) of the SARFAESI Act were challenged by the petitioner before the Debts Recovery Tribunal-II, Delhi (“'DRT”). The writ petition before the Delhi High Court was confined to the action of the Bank for initiating proceedings against the petitioner under the SARFAESI Act when insolvency proceedings have been initiated against the principal borrower under the ambit of IBC and that the same is pending before the NCLT.
Appellant’s submissions/ contentions:
The Appellant contended:
Respondent’s submissions/ contentions:
Findings of the Court:
The Delhi High Court dismissed the petition on the following grounds:
It is also pertinent to mention that more recently, the Supreme Court of India in the case of Lalit Kumar Jain v. Union of India, [Transferred Civil Case (Civil) No. 245, 2020, decided on May 21, 2021], has held that:
“111. In view of the above discussion, it is held that approval of a resolution plan does not ipso facto discharge a personal guarantor (of a corporate debtor) of her or his liabilities under the contract of guarantee. As held by this court, the release or discharge of a principal borrower from the debt owed by it to its creditor, by an involuntary process, i.e. by operation of law, or due to liquidation or insolvency proceeding, does not absolve the surety/guarantor of his or her liability, which arises out of an independent contract.” (emphasis in original)
Please find attached a copy of the judgment passed by the Delhi High Court.
This update has been contributed by Pooja Chakrabarti (Partner) and Kiran Sharma (Associate).
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