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Examining the Question of Enforcement of Personal Guarantees Under the Insolvency and Bankruptcy Code, 2016.

Hon'ble Supreme court on 16th April 2018 admitted the matter filed by SBI for examining the invocation of personal guarantees during moratorium under the Insolvency and Bankruptcy Code, 2016 'IBC' in (State Bank of India vs V Ramakrishnan & Anr.) . After several inconsistent views on the issue, the Supreme Court is now examining the question of enforcement of personal guarantee(s) provided to companies facing moratorium under the Insolvency and Bankruptcy Code, 2016 (IBC).

The IBC Committee Report which was published earlier this month suggested that the assets of a such a guarantor should fall outside the scope of the moratorium and be allowed to be proceeded against independently. The Report recommended insertion of an explanation to Section 14, which clarifies that section 14 does not intend to bar actions against assets of guarantors to the debts of the corporate debtor.

The present appeal to the Supreme Court has been filed by the State Bank of India, against an NCLAT judgment in the case of Veesons Energry Private Ltd. The NCLAT ruled that personal guarantees cannot be invoked when the company in favors of whom the guarantee was extended, is under moratorium.

The managing director of Veesons, V. Ramakrishnan had extended personal guarantee and mortgaged his property in favor of SBI. While the company was in moratorium, SBI issued a notice for the sale of assets of the personal guarantor.

An interlocutory application was filed by Ramakrishnan with the Mumbai Bench of the NCLT, where it was held that the protection accorded under moratorium period will extend to the property of the personal guarantor as well. On an appeal by the SBI, the NCLAT upheld the findings of the NCLT.

However, the NCLAT has in the cases of Alpha & Omega Diagnostics v Asset Reconstruction of Company India Limited and Schweitzer Systemic India Private Limited v Phoenix ARC taken a different view that the moratorium will apply only to property of the corporate debtor and no other person.

Both these rulings were made observing the language contained in Section 14 of the IBC, which makes the moratorium applicable only to the assets of the corporate debtor.

Contrary views have also been taken by the Allahabad High Court and Bombay High Court on the subject. While the Allahabad High Court ruled that the moratorium is applicable to a personal guarantor since the liability hasn’t been fructified, the Bombay High Court did not agree with this view and held that moratorium would be applicable only to the corporate debtor alone.

SBI is pursuing the same argument at the Supreme Court, that is, Section 14 applies only to assets of the corporate debtor. It is being further argued that guarantee is an independent contract and that Section 128 of the Indian Contract Act, 1872 which provides that the liability of the surety is co-extensive with that of the principal debtor.

Accordingly, SBI has prayed for setting aside the judgment of the NCLAT and as an interim measure, has sought to restrain Ramakrishnan from alienating the assets under protest.

The petition in the Supreme Court has been filed by AOR Sanjay Kapur.The case is now listed for hearing on May 9, 2018.

Real Estate and its Insolvency Proceedings in India.

Part -III

During a hearing on 16th April,2018 in Supreme Court Jaypee Infratech (JIL) had said that its valuation has been slashed drastically and had put forth an affidavit to the Supreme Court (SC) stating that with the help of interim funds, it can finish the flats. However, this proposal has been rejected by the apex court as the statute bars an ailing company to bid. JIL says that its representation should have been considered given that it had been completing 500 units every month.

Homebuyers are constantly puzzled as complexities of the case keep deepening even after seven months when the National Company Law Tribunal (NCLT) admitted IDBI Bank's plea against Jaypee Infratech under the Section 7 of the Insolvency and Bankruptcy Code, 2016.

Meanwhile, the SC has also given permission to two of the managing directors of the company to travel within a stipulated period of time adding that if the Rs 100 crore is not submitted till May 10, the company runs the risk of losing the personal properties of the directors.

On March 21, the Supreme Court (SC) asked Jaypee Infratech to deposit Rs 100 crore by April 6 and the next Rs 100 crore by May 10.

So far, Jaypee has managed to settle Rs 650 crore.

Earlier, reports suggested that Lakshadweep Pvt Ltd, a joint venture formed between Sudhir Valia-led Suraksha Asset Reconstruction Company and Mumbai-based Dosti Realty, has emerged as the winner among bidders with a whopping Rs 7,350 crore bid.

Now, the task of completing 25,000 flats and villas will be undertaken by the JV. Reports suggest that Lakshadweep will make an upfront payment of Rs 1,200 crore to the banks. It has earmarked Rs 4,000 crore to be paid from the sale of land and another Rs 2,000 crore will be converted into long-term non-convertible debentures. An equity stake is also part of the offer.

For real estate buyers, the real worry is the significant delays that they have to deal with. Meanwhile, banks haven’t spared them either 'threatening' with legal recourses which could mean attaching the property and sale of assets.

In such a case, homebuyers should approach the judiciary. As in Supertech’s case where the developer firm was asked to pay the installments, homebuyers can always seek the judiciary’s intervention if they see that it might be difficult to take possession of the flat they have paid for. Experts also point out that while it may be unfair to expect homebuyers to continue with the EMIs, they should not stop paying the EMIs without permission or consultation.

Affected homebuyers took to social media with pleas put forth to the government to help them get their units. Some others are asking for other developers to join Jaypee and finish the projects. There are also buyers who have been posting images of under-construction projects of Jaypee, wondering about the completion.

5 April 2018
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