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“section 96(1) Of The Ibc Can Not Be Stretched To Include All Co-guarantors Within The Ambit Of The Interim”- Delhi High Court In The Case Of Axis Trustee Services Limited Vs Brij Bhushan Singal & Anr

Diya Pradeep ,
  26 May 2023       Share Bookmark

Court :
Delhi High Court
Brief :

Citation :
2022/DHC/004655

Case title:

Axis Trustee Services Limited vs Brij Bhushan Singal & Anr

Date of Order:

4 November 2022

Bench:

Justice Amit Bansal

Parties:

Plaintiff - Axis Trustee Services Limited

Defendants- Brij Bhushan Singal & Anr

SUBJECT

The Insolvency and Bankruptcy Code (IBC) was introduced in 2016 to consolidate and amend laws relating to insolvency proceedings in India. Chapter III of the Code deals with insolvency resolution. The case at hand mainly deals with the mandate and applicability of section 96 of the IBC. Section 96 of the IBC provides for an interim moratorium. The interim moratorium under section 96 of the Insolvency and Bankruptcy Code (IBC) is a crucial measure taken by the Indian Government to help debtors facing financial stress. The moratorium provides debtors with a period of relief from their creditors and other lenders, allowing them to focus on restructuring their debt and managing their financial situation. Under the moratorium, debtors have the right to seek 180 days from the date of the moratorium commencement. During this time, their creditors or lenders cannot initiate insolvency proceedings against them. This period can be extended up to one year after the approval of the National Company Law Tribunal (NCLT). During the moratorium period, debtors are allowed to enter into schemes of arrangement with their creditors, allowing them to restructure their debt and manage their finances without fearing any legal implications.

IMPORTANT PROVISIONS

Insolvency and Bankruptcy Code, 2016

  • Section 95
  • Section 96

OVERVIEW

  • Defendants No. 1 and 2 are ex-promoters of Bhushan Steel Limited.
  • A civil suit was initiated against Axis Trustee Services Ltd for the recovery of a hefty amount from defendants no.1 and 2.
  • The plaintiff was appointed as the security agent by an agreement to guard the lenders' beneficial interests.
  • A Facility Agreement was entered into between Bhushan Steel and various financial creditors. To secure the repayment obligations of Bhushan Steel, the guarantors, defendants 1 and 2, jointly provided a personal guarantee.
  • However, a default was made in the payment of principal installments as well as the interest amount by Bhushan Steel.
  • Subsequently, insolvency proceedings commenced before the NCLT against Bhushan Steel.
  • Financial Creditors of Bhushan Steel were given the right to recover any unresolved financial debt by the approval of NCLT.
  • Despite a demand notice being sent to Bhushan Steel for the payment of EUR 64,751,108.73/- the financial creditors received no reply or payment of dues.
  • The present suit has been filed before the Hon’ble Delhi High Court for adjudication.

ISSUE RAISED

  • In view of applications filed under Section 95 IBC against defendants No.1 and No.2, is the present suit maintainable?

ARGUMENTS ADVANCED BY THE PLAINTIFF

  • The counsel representing the plaintiffs submitted that the defendants cannot claim any moratorium based on the application filed under section 95 since the appropriate authority to adjudicate insolvency matters is DRT and not NCLT.
  • Counsel urged that the defendants couldn't claim the benefit under section 96 of IBC since the insolvency proceedings against the corporate debtor had been concluded. Hence it was pointed out that the proceedings couldn’t have been filed before the NCLT.
  • It was further stated that both the defendants are jointly and severally liable towards the plaintiff due to the personal guarantee dated 19th May 2011.
  • The counsel cited SSMP Industries Ltd. v. Perkan Food Processors Pvt. Ltd., [(2019) SCC OnLine Delhi 9339] to substantiate that the effect of a moratorium must be determined by the court, and the court cannot take a narrow approach.

ARGUMENTS ADVANCED BY THE DEFENDANTS

  • Counsel for the defendants submitted that the present suit is not maintainable as the interim moratorium would be affected.
  • The case of Embassy Property Development PVT. Ltd. v. State of Karnataka & Ors., [(2020) 13 SCC] points out that NCLT is the appropriate adjudicating authority in matters concerning personal guarantors of a corporate debtor.
  • It was further submitted that since the debt is shared between the defendants, the moratorium under section 96 would apply to both.
  • It was urged that despite the date on which the insolvency application against defendant no.1 was filed, the present suits are still not maintainable since the judgment was yet to be pronounced at that time.

JUDGEMENT ANALYSIS

  • The supreme court of India ordered a stay of the proceedings against the defendants.
  • The court observed that Section 179(1), which provides jurisdiction for the DRT concerning insolvency matters of individuals and firms, is subject to Section 60 of the IBC. 
  • It was noted that subsection (1) of Section 60 of the IBC provides that the adjudicating authority for corporate persons, including corporate debtors and personal guarantors, shall be the NCLT in matters concerning insolvency.
  • As a result of Rule 3(1)(a) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors), Rules, 2019, it was reiterated that the NCLT would be the adjudicating authority for Section 60.
  • The court was also of the view that the moratorium under section 96 would operate against defendant No.2 as the insolvency proceedings against the defendant were filed before the filing of the present suit.
  • Reliance was placed on the case Dinesh Kumar Basia v. State Bank of India [Company Appeal (AT) (Insolvency) No.724/2022] to point out that, the application against the defendant no.1 has been filed under Section 95 of the IBC by State Bank of India on 28th May 2022. As a result, on 28th May 2022, the interim moratorium under Section 96 comes into effect.
  • The case of Stichting Doen-postcode Loterij v. Vin Poly Recyclers Pvt. Ltd. & Ors., [2010 (115) DRJ 708 (DB)] was cited to hold that the proceedings in the present suits are to be stayed and judgment in respect of applications seeking leave to defend cannot be pronounced.
  • In addition, the court ruled that a co-guarantor would not be subject to the interim moratorium under Section 96 in regard to one of the guarantors.

CONCLUSION

The present case recapitulates the mandate of section 96 of the Insolvency and Bankruptcy Code, 2016. The Supreme Court in this case held that section 96 of the IBC is clear and intelligible. The court ruled that an interim moratorium under Section 96 of the IBC would be operable as soon as an application is filed under Section 94/95 of the IBC. A moratorium of this type suspends all pending legal proceedings. This is contrary to the moratorium under Section 14 of the IBC, where the moratorium comes into effect only upon an order passed by the NCLT declaring a moratorium.
 

 
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