Exploring the interplay of Section 96 of the Insolvency and Bankruptcy Code, 2016 and Section 68 of the Transfer of Property Act, 1882

Introduction

This article examines the recent judgment delivered by the National Company Law Tribunal (NCLT), Mumbai Bench, in the case of YES Bank Ltd. v. Mr. Kunal Jiwarajka. This case, decided on 7 October 2024, provides a valuable insight into the operation of the interim moratorium under Section 96 of the Insolvency and Bankruptcy Code, 2016 (“the Code”) in relation to insolvency proceedings against personal guarantors.

The case involved YES Bank Ltd. (“the Petitioner”) seeking to initiate insolvency proceedings against Mr. Kunal Jiwarajka (“the Respondent”), who stood as a personal guarantor for the debts of JSK Marketing Ltd. (“the Corporate Debtor”). When the Corporate Debtor defaulted on a loan from YES Bank, the bank invoked Mr. Jiwarajka’s guarantee. Despite a notice demanding repayment, Mr. Jiwarajka failed to meet his obligations, leading YES Bank to file an application under Section 95 of the Code to initiate the Personal Guarantor’s Insolvency Resolution Process (“PGIRP”).

The Respondent’s Defence

Mr. Jiwarajka opposed the application, raising two key arguments:

• Prior Enforcement of Security: He argued that YES Bank had already initiated proceedings to enforce its security interest in two properties he owned. These properties, according to him, had a market value exceeding the outstanding debt, thereby barring YES Bank from pursuing further action against him under Section 68 of the Transfer of Property Act, 1882 (“TOPA”). Section 68 of TOPA states:

“68. Right to sue for mortgage-money.— (1)The mortgagee has a right to sue for the mortgage-money in the following cases and no others, namely:— (a)where the mortgagor binds himself to repay the same; (b)where, by any cause other than the wrongful act or default of the mortgagor or mortgagee, the mortgaged property is wholly or partially destroyed or the security is rendered insufficient within the meaning of section 66, and the mortgagee has given the mortgagor a reasonable opportunity of providing further security enough to render the whole security sufficient, and the mortgagor has failed to do so; (c)where the mortgagee is deprived of the whole or part of his security by or in consequence of the wrongful act or default of the mortgagor; (d)where, the mortgagee being entitled to possession of the mortgaged property, the mortgagor fails to deliver the same to him, or to secure the possession thereof to him without disturbance by the mortgagor or any person claiming under a title superior to that of the mortgagor: Provided that, in the case referred to in clause (a), a transferee from the mortgagor or from his legal representative shall not be liable to be sued for the mortgage-money. (2)Where a suit is brought under clause (a) or clause (b) of sub-section (1), the Court may, at its discretion, stay the suit and all proceedings therein, notwithstanding any contract to the contrary, until the mortgagee has exhausted all his available remedies against the mortgaged property or what remains of it, unless the mortgagee abandons his security and, if necessary, re-transfers the mortgaged property.”

• Existing Interim Moratorium: He contended that another creditor, M/s. Orix Leasing & Finance India Ltd., had already filed an application under Section 95 of the Code against him in a separate case (CP(IB) No. 210(MB)/2021). This prior application triggered an interim moratorium under Section 96(1)(b) of the Code, which he argued barred YES Bank’s application.

YES Bank’s Counterarguments

YES Bank responded to these points by arguing:

• Unsuccessful Auction: While they acknowledged attempting to enforce their security interest, they stated that the auction was unsuccessful, yielding no recovery.
• Inapplicability of Section 68 TOPA: They argued that Section 68 of TOPA applies to debt recovery proceedings and not insolvency resolution processes under the Code. They further contended that the provisions of the Code, particularly Section 238, prevail over those of TOPA.
• Limited Scope of Moratorium: They asserted that the interim moratorium under Section 96(1) only restrains other creditors from pursuing debt recovery proceedings, not applications for insolvency resolution against the personal guarantor.

The NCLT’s Ruling in Case of YES Bank Ltd. v. Mr. Kunal Jiwarajka

The NCLT carefully considered all arguments and delivered its judgment, dismissing YES Bank’s petition. Several aspects of the judgment are noteworthy:

Jurisdictional Clarity

The NCLT asserted its jurisdiction under Section 60(2) of the Code to adjudicate the matter because the Corporate Debtor, JSK Marketing Ltd., was already undergoing liquidation proceedings before the same Tribunal.

Analysing Section 96 and the Interim Moratorium

The NCLT meticulously examined the provisions of Section 96 of the Code, particularly Section 96(1)(b) which states that during the interim moratorium period:

“(i) any legal action or proceeding pending in respect of any debt shall be deemed to have been stayed; and (ii) the creditors of the debtor shall not initiate any legal action or proceedings in respect of any debt.”

Based on this, the NCLT clarified that during the interim moratorium period, all legal actions and proceedings concerning any debt are automatically stayed, and creditors are barred from initiating any new legal action or proceedings for debt recovery.

The Rationale for Interim Moratorium

The NCLT emphasised that the Code does not permit multiple insolvency applications against the same personal guarantor. The objective of Section 96 is to prevent this multiplicity and ensure a streamlined and coordinated insolvency resolution process under Chapter III of the Code. “The scheme of Code does not contemplate manifold applications against the same Personal Guarantor by different lenders. Multiplicity of applications against the same Personal Guarantor is not contemplated under Chapter III.”

Protecting Creditors’ Interests

The NCLT addressed the potential concerns of creditors who might be hindered by the interim moratorium from filing their applications. The judgment clarified that such creditors are not prejudiced. They retain the right to file their applications after the moratorium period expires, and the duration of the moratorium is excluded when calculating the limitation period for filing such applications.

Reliance on Bhavesh Gandhi v. Central Bank of India

Crucially, the NCLT relied on the precedent set by the National Company Law Appellate Tribunal (NCLAT) in the case of Bhavesh Gandhi v. Central Bank of India. In that case, the NCLAT definitively held that the interim moratorium under Section 96(1)(b) prevents any creditor from initiating legal proceedings against a personal guarantor when another creditor has already filed an application under Section 95.

The NCLT, referring to the Bhavesh Gandhi case, quoted the NCLAT’s interpretation of Section 96:

“14. As noted above, by order dated 21.06.2021, interim moratorium was commenced from the date of application. Section 96(1)(a) provides that an interim-moratorium shall commence on the date of the application in relation to all the debts. Further, Section 96(1)(b) provides that during the moratorium period (i) any legal action or proceeding pending in respect of any debt shall be deemed to have been stayed; and (ii) the creditors of the debtor shall not initiate any legal action or proceedings in respect of any debt. The use of expression ‘creditors of the debtor’ obviously refers to other creditors of the debtor apart from the creditor on whose application interim moratorium has commenced. In the present case, the date on which application was filed by the Central Bank of India under Section 95 is 12.04.2021 i.e. after the commencement of the interim moratorium, as noted in the order dated 21.06.2021. The interim moratorium under Section 96 (1)(b)(ii) creates a prohibition on the creditors of the debtor from initiating any legal action in respect of any debt. The use of expression ‘any debt’ also clearly indicate that debt on basis of which moratorium has commenced is not contemplated by the expression ‘any debt’. With regard to all debts of debtor i.e. Personal Guarantor in the present case, no proceeding can be initiated by virtue of Section 96(1)(b). The application filed by the Central Bank of India on 12.10.2021, thus, was clearly hit by Section 96(1)(b)(ii) and the Adjudicating Authority could not have proceeded with the said application and appointed the Resolution Professional. The order dated 13.06.2022 impugned in this Appeal is clearly unsustainable.”

Dismissal on Procedural Grounds

The NCLT expressly stated that its decision to dismiss YES Bank’s petition was purely due to the procedural bar created by the existing interim moratorium, and did not reflect any opinion on the merits of the case.

Liberty to Revive or Refile

Acknowledging the possibility of a change in circumstances, the NCLT granted YES Bank the liberty to either revive its dismissed petition or file a fresh application against Mr. Jiwarajka under Section 95 of the Code, subject to the law of limitation, if the prior application filed by M/s. Orix Leasing & Finance India Ltd. is dismissed.

Conclusion: YES Bank Ltd. v. Mr. Kunal Jiwarajka Case

The NCLT’s judgment in YES Bank Ltd. v. Mr. Kunal Jiwarajka significantly contributes to the understanding of the interim moratorium provision under Section 96 of the Code as it applies to insolvency proceedings against personal guarantors.

The judgment:

• Reaffirms the NCLAT’s interpretation of Section 96 in Bhavesh Gandhi v. Central Bank of India, establishing a clear legal precedent.
• Emphasises the legislative intent to avoid multiplicity of proceedings against personal guarantors, ensuring a cohesive and efficient resolution process.
• Demonstrates a balanced approach by safeguarding the interests of all creditors while adhering to the principles of fairness and due process.

While the case resulted in the dismissal of YES Bank’s application on procedural grounds, the NCLT’s nuanced approach, including the liberty granted to revive or refile the application, underscores the importance of a just and equitable process under the Code.