Supreme Court on IBC Moratorium: Recovery Suit Maintainable Against Principal Borrower Despite Insolvency of Guarantors

Background of the Dispute

The matter in IL & FS Financial Services Limited Vs Serveall Constructions Private Limited came before the Supreme Court in the context of a summary suit for recovery of Rs. 203,66,31,506/-. The claim arose from term loan facilities sanctioned to the principal borrower (defendant no. 1), backed by guarantees from:

  • Defendant no. 2 – a corporate guarantor; and
  • Defendant nos. 3 and 4 – personal guarantors.

During the proceedings, the plaintiff placed on record:

  • An order dated 20th August 2019 passed by the NCLT, Mumbai Bench under Section 7 read with Section 14 of the Insolvency and Bankruptcy Code, 2016 against defendant no. 2, and
  • Case details of insolvency proceedings under Section 95 against defendant nos. 3 and 4, resulting in an interim moratorium under Section 96.

The plaintiff clarified through an additional affidavit that, for the present, it would pursue the suit only against the principal borrower (defendant no. 1) and would not press interim reliefs against the guarantors while moratoriums under the IBC were in force, though it expressly reserved the right to proceed against them once those moratoriums ended.

The core legal question that emerged was whether the moratoriums operating in favour of the corporate guarantor under Section 14 and in favour of the personal guarantors under Section 96 could also bar continuation of the civil recovery suit against the principal borrower, against whom no insolvency proceedings had been initiated.

Parties and Contractual Structure

Role of Each Defendant

  1. Defendant no. 1 – Principal Borrower

    • A company incorporated under the Companies Act, 1956.
    • Borrowed funds from the plaintiff under term loan facilities.

  2. Defendant no. 2 – Corporate Guarantor

    • Also a company under the Companies Act, 1956.
    • Furnished a corporate guarantee in favour of the plaintiff securing the borrowings of defendant no. 1.
    • Subject to a CIRP under Section 7 of the IBC, with a moratorium under Section 14 in operation.

  3. Defendant nos. 3 and 4 – Personal Guarantors

    • Individuals who executed personal guarantees in favour of the plaintiff.
    • Insolvency resolution proceedings were initiated against them under Section 95, triggering an interim moratorium under Section 96`.

The plaintiff is a non-banking financial company engaged in lending and advisory services.

Operation of IBC Proceedings Against Guarantors

Corporate Guarantor – Section 14 Moratorium

  • In a separate proceeding initiated by Bank of India under Section 7, Housing Development and Infrastructure Ltd. (defendant no. 2 in the suit) was admitted to CIRP and declared a corporate debtor, with the NCLT imposing a moratorium under Section 14.
  • That moratorium prohibits institution or continuation of proceedings against the corporate debtor, including execution of decrees or orders.

Personal Guarantors – Section 96 Interim Moratorium

  • Another creditor, Unity Small Finance Bank Ltd., filed applications under Section 95 against defendant nos. 3 and 4.
  • Upon filing of these applications, Section 96 automatically triggered an interim moratorium in respect of their debts until admission or rejection of those applications.

These proceedings, however, were not initiated against the principal borrower (defendant no. 1).

The Supreme Court distilled the controversy into a focused question:

Does the moratorium under Section 14 (in favour of a corporate guarantor) and the interim moratorium under Section 96 (in favour of personal guarantors) extend to bar a recovery suit against the principal borrower when no IBC proceeding has been initiated against such principal borrower?

The Court examined this issue separately in relation to:

  • The Section 14 moratorium applicable to the corporate guarantor, and
  • The Section 96 interim moratorium applicable to the personal guarantors.

Statutory Framework Analysed

Relevant IBC Provisions

The Court considered the following provisions of the Insolvency and Bankruptcy Code, 2016:

  • Section 7 – Application by a financial creditor for initiation of CIRP.
  • Section 14 – Moratorium on suits and proceedings against the corporate debtor during CIRP.
  • Sections 94 and 95 – Applications by debtors and creditors respectively for initiation of insolvency resolution process for individuals and partnership firms (Part III).
  • Section 96 – Interim moratorium upon filing of an application under Section 94 or Section 95.