Neither Section 14 nor Section 31 of the IB Code place any fetters on Banks/Financial Institutions from initiation and continuation of the proceedings against the guarantor for recovering their dues

A Division Bench of the Delhi High Court on 02.11.2020 in the matter of Kiran Gupta Vs. State Bank of India & Anr., referred to the judgment of Hon’ble Apex Court in the matter of State Bank of India v. V.Ramakrishan and Another, reported as (2018) 17 SCC 394, to reiterate the view that “neither Section 14 nor Section 31 of the IB Code place any fetters on Banks/Financial Institutions from initiation and continuation of the proceedings against the guarantor for recovering their dues.”
Facts of the case-
Respondent No. 4 is the Principal Borrower in the present matter who has obtained loans from the Respondent No.1 (SBI). The Petitioner herein is the wife of the promoter of the Respondent No. 4, stood as guarantor for repayment of loans. The Bank filed an insolvency petition against Respondent No. 4 under the provisions of IB code before the NCLT, Delhi.
During the pendency of the insolvency proceedings, the Bank issued a Notice dated 06.09.2018 u/s 13(2) of SARFAESI Act to the petitioner followed by a Possession Notice dated 16.07.2019 u/s 13(4) of the said Act and both the notices were challenged by the Petitioner before the Debt Recovery Tribunal- II, Delhi. The said proceedings before the DRT-II was withdrawn due to settlement talks between parties. Thereafter, a fresh notice u/s 13(2) was issued by the Bank on 11.06.2020.
It is alleged by the petitioner that without issuing a Notice under Section 13(4) of the SARFAESI Act, the Bank has issued a Sale Notice dated 27.08.2020, under Rule 8(6) of Security Interest (Enforcement) Rules for sale of her residential house, by public e-auction to be held on 14.10.2020. The Petitioner therefore filed this writ petition in respect of the action of the Bank of initiating proceedings against the petitioner under the SARFAESI Act when insolvency proceedings have been initiated against the Principal Borrower under the IB Code and the same are pending before the NCLT.
It is the contention of the petitioner that proceedings against the Principal Borrower under the IB Code and against the Guarantor under the SARFAESI Act cannot be instituted and continued simultaneously; unless the proceedings under the IB Code do not come to an end and it is decided that the company cannot be revived, proceedings against the Guarantor alone cannot go on; that if the Resolution Plan is accepted, then under Section 31 of the IB Code, all the Guarantees become ineffective as the Resolution Plan is binding on the Guarantors.
On the other hand, Ld. Counsel for the Respondent/Bank contended that the liability of a Guarantor is co-extensive with the Principal Debtor. He stated that the issue raised by the petitioner is no longer res integra and is covered by the judgment of the Supreme Court in State Bank of India v. V.Ramakrishan and Another, reported as (2018) 17 SCC 394, which holds in so many words that Sections 14 and Section 31 of the IB Code do not bar initiation and continuation of the SARFAESI proceedings against the Guarantor.

Ratio:
The Hon’ble High Court referred to sections 14 and 31 of IB Code and Sec 128 of the Indian Contract Act and noted that “Section 128 of the Contract Act provides that the liability of a Guarantor is coextensive with that of the Principal Debtor.”
To explain it further, the Court referred to a judgment of the Apex Court in Industrial Investment Bank of India Limited v. Biswanath Jhunjhunwala, (2009) 9 SCC 478 wherein it was held that-
“The court is of opinion that a creditor is not bound to exhaust his remedy against the principal debtor before suing the surety and that when a decree is obtained against a surety, it may be enforced in the same manner as a decree for any other debt.”
…The term “coextensive” has been defined in the celebrated book of Pollock & Mulla on Indian Contract and Specific Relief Act, 10th Edn., at p. 728 as under: “Coextensive.—Surety’s liability is coextensive with that of the principal debtor. A surety’s liability to pay the debt is not removed by reason of the creditor’s omission to sue the principal debtor. The creditor is not bound to exhaust his remedy against the principal before suing the surety, and a suit may be maintained against the surety though the principal has not been sued… The legal position as crystallised by a series of cases of this Court is clear that the liability of the guarantor and principal debtors is coextensive and not in alternative.”
The Hon’ble Court thus held that “Since the liability of a guarantor is co-extensive with that of the principal debtor and not in the alternative, it cannot be said that proceedings in the NCLT against the principal debtor can be a bar to institution or continuation of proceedings against the guarantor under the SARFAESI Act.”
The question as to whether the respondent/Bank can proceed against a guarantor even after initiation of proceedings under the IB Code also stands settled. As correctly pointed out by the Ld. Counsel for the Bank, the said issue is squarely covered by the judgment of the Supreme Court in State Bank of India (supra) wherein, the Hon’ble Supreme Court had pointed out that-
“A plain reading of section 14 of IB Code, therefore, leads to the conclusion that the moratorium referred to in Section 14 can have no manner of application to personal guarantors of a corporate debtor”.
The Hon’ble Court concluded that “the view expressed by the Supreme Court amply demonstrates that neither Section 14 nor Section 31 of the IB Code place any fetters on Banks/Financial Institutions from initiation and continuation of the proceedings against the guarantor for recovering their dues. That being the position, the plea taken by the counsel for the petitioner that all proceedings against the petitioner, who is only a guarantor, ought to be stayed under the SARFESI Act during the continuation of the Insolvency Resolution process qua the Principal Borrower, is rejected as meritless. The petitioner cannot escape her liability qua the respondent/Bank in such a manner. The liability of the principal borrower and the Guarantor remain co-extensive and the respondent/Bank is well entitled to initiate proceedings against the petitioner under the SARFESI Act during the continuation of the Insolvency Resolution Process against the Principal Borrower.”