Banking Law & Incidental matters part 3
Summary of Question- Refusal of withdrawal of OA by DRT even if there is compromise between Bank and Borrower
Question – Whether it is in accordance with Law for DRT to refuse to grant permission to Bank to withdraw a pending application under section 19 of the Recovery of Debts Due to Bank and Financial Institution Act , 1993 (Now Recovery of Debts and Bankruptcy Insolvency resolution and bankruptcy of Individuals and partnership firms Act, 1993) when both debtor and Bank entered into out of court settlement.
1. A Division Bench decision of the Hon’ble Delhi High Court in the case of Satinder Kapur vs. Punjab National Bank decided on 21.12.2009 is relevant.
2. Short fact of the case was that an application was filed by the Bank for withdrawal of the OA . In the said application, it was stated that during the pendency of the OA, the borrower approached the Bank for a compromise and the compromise proposal was accepted by the Bank and in terms of the same, the borrower deposited a sum of Rs. 125 lakhs along with interest of approximately Rs. 13.71 lakhs with the Bank. The said amount was accepted by the Bank as full and final settlement of the dues. Consequently, it was stated in the application that the Bank, having received the total amount of Rs. 1,38,71,661/- inclusive of delayed period interest from the debtors, had issued a No Dues Certificate in favour of the latter.
3. When the said application for withdrawal of the O.A. came up for hearing, the learned DRT took a different view of the matter and felt for the examination of compromise . The order passed by the DRT was as under:
" This OA was filed by the bank for recovery of a sum of Rs. . 5,66,39,886.16 (rupees five crores sixty six lakhs thirty nine thousand eight hundred eighty six and paise sixteen only) plus future interest in the year 2000. In the I.A., it is stated that the parties have arrived at one time settlement for a sum of Rs. 1,38,71,661.00 (rupees one crore thirty eight lacs seventy one thousand six hundred and sixty one only).
In the application, no grounds have been mentioned that for what reason the bank has sacrificed such a huge amount. The acceptance of such a compromise therefore needs examination. I, therefore direct the bank to file an affidavit on the following facts:
1) What are the securities available with the bank? Details of securities, values thereof.
2) Whether the defendants own and possess any other personal properties apart securities in favour with the bank.
The defendants shall also file their affidavits disclosing their personal assets, if any including their source of income.”
4. Being aggrieved by the said order of DRT , Miscellaneous Appeal was filed before the Hon’ble DRAT . The DRAT upheld the order of DRT . The operative portion of the order of the DRAT was as under:
In my view, the impugned order dated 11.5.2009 passed by the Tribunal below cannot be flawed at all. Even going by the principle enshrined in Order 23 Rule 3 CPC, it is to be proved to the satisfaction of the court that a suit has been adjusted wholly or in part by any lawful agreement or compromise.
The Tribunal below has not rejected the OTS. Instead, it has only ordered for the filing of certain affidavits by both the sides so as to verify that the OTS has been arrived at for bona fide and valid reasons and there is no foul-play. None of the parties should be shy to come up with the true facts. Needless to say, the Banks and Financial Institutions deal in public money and the issue of larger public interest is involved to ensure that maximum recovery is made against the money lent by them and there is transparency in the system. The court's power to ensure and oversee the same cannot be challenged. The ruling cited by the learned Counsel for the appellant does not justify the with-holding of the affidavits containing the information desired by the Tribunal below to be placed before it.
5. The Hon’ble High Court observed and held as under:
This is one of those curious cases in which both the sides support each other but the authorities below have disagreed with them. The question that arises is whether the Tribunal could, at all, have required examination of the settlement terms when no approval or satisfaction of the Tribunal was asked for? If we examine the operative portion of the impugned order, we find that the Appellate Tribunal was perhaps examining the principles akin to that of Order 23 Rule 3 of the Code of Civil Procedure, 1908 which pertain to recording of compromise and, consequently, passing a compromise decree in a suit. However, in the present case, the principles which are required to be examined are those which are more in the nature of the provisions of Order 23 Rule 1 CPC which deal with withdrawal of suit simpliciter. In fact, the learned Counsel for the parties submitted that since no leave of the court was necessary as stipulated in the proviso to Order 23 Rule 1, the elaborate procedure set out in Sub-rules (2) and (3), etc. was also not required to be followed in this case.
In this background, reference to a decision of the Supreme Court in the case of Hulas Rai Baij Nath v. K.B. Bass and Co. AIR 1968 SC 111 would be instructive. The Supreme Court was interpreting the provisions of Order 23 Rule 1 of the Code of Civil Procedure. While doing so, the Supreme Court observed that the said provision gives an unqualified right to a plaintiff to withdraw from a suit and if no permission to file a fresh suit is sought under Sub-rule (2) of that Rule, the plaintiff becomes liable for such costs as the Court may award and becomes precluded from instituting any fresh suit in respect of the subject matter under Sub-rule (3) of that Rule. More importantly, the Supreme Court held:
There is no provision in the Code of Civil Procedure which requires the Court to refuse permission to withdraw the suit in such circumstances and to compel the plaintiff to proceed with it.
In the present case, there is no set-off or counter-claim involved and, therefore, the principles indicated by the Supreme Court would be clearly applicable. Although, the Code of Civil Procedure is not strictly applicable to or binding in proceedings under the said Act because of the provisions of Section 22 thereof, principles akin to those of the Code of Civil Procedure have been applied from time to time. Keeping in mind the observations made by the Supreme Court with regard to the unfettered right of a plaintiff to withdraw a suit, we feel that the Tribunal ought not to have refused permission to withdraw the original application No. 110/1996.
Summary of Question- Inherent power of DRT
Question – Whether DRT have inherent powers.
The Hon’ble Supreme Court observed and held in a case reported in 2013 (15) SCC 341 as under :
The aforesaid provision makes it quite clear that the tribunal has been given power under the statute to pass such other orders and give such directions to give effect to its orders or to prevent abuse of its process or to secure the ends of justice. Thus, the tribunal is required to function within the statutory parameters. The tribunal does not have any inherent powers and it is limpid that Section 19(25) confers limited powers. In this context, we may refer to a three-Judge Bench decision in Upper Doab Sugar Mills Ltd. v. Shahdara (Delhi) Saharanpur Light Rly. wherein it has been held that when the tribunal has not been conferred with the jurisdiction to direct for refund, it cannot do so. The said principle has been followed in Union of India v. Orient Paper and Industries Limited .
Summary of Question- Bank’s obligation to make payment to Nominee
Question – Whether bank is under legal obligation to make payment to the nominee if there is no contrary decree, certificate or other authority from the court of competent jurisdiction relating to such deposit.
A Division Bench of the Hon’ble Calcutta High Court Observed and held in a reported in AIR 2007 Cal 79 observed as under:
“ The bank may be liable if the deposit is not returned to the nominee. It is the bank's obligation to ensure that, the person claiming to be the nominee is, in fact, the nominee. Upon this return and receipt, the bank is discharged. Sub-section (4) confirms such discharge.
The "right of claim" referred to in the proviso, necessarily has to be in relation to the money received by a nominee in respect of a bank deposit. The plaintiff in this case could not have sued the bank or sought payment from the bank directly. Section 45ZA would not permit the bank to hand over the payment to persons other than the nominee , unless the nominee so required or unless the claimant produced the requisite document recognized in the proviso to Section 45ZB.”
Summary of Question- Ex-Parte Interim Order under Consumer Protection Act
Question – Whether District Forum is empowered to pass Ex-Parte Interim order during pendency of proceeding.
1. In the case of CESC LIMITED v. M/S. FOTO ART, decided on May 30, 2008, by Hon’ble STATE CONSUMER DISPUTES REDRESSAL COMMISSION, WEST BENGAL, relative short fact was that immediately upon filing the complaint, the complainant moved a put-up petition whereupon the matter was taken up ex parte immediately by the learned Dist. Forum and thereafter ex parte interim order was granted in the facts and circumstances of the case. Grievance before the State Commission in the Revision against the said Ex-Parte Interim Order was that the Forum is not entitled to pass interim order under the Consumer Protection Act. Hon’ble State Commission observed and held as quoted below:
‘ While considering the contentions of the parties, it is found that the power of the District Forum to grant interim order was not there in the statute book as it stood originally. But by an amendment such power was created by introduction of Sub-Section (3B) in Section 13 of the Act. The language of the said Sub-Section newly introduced is as follows :-
"Where during the pendency of any proceeding before the District Forum, it appears to it necessary, it may pass such interim order as is just and proper in the facts and circumstances of the case."
On the question as to whether the District Forum was having power to pass ex parte interim order, reliance was placed on the provisions of law contained in Sub-section (3B) of Section 13 for contending that it does not show any power to pass interim order ex parte. It is true that the said Sub-section itself does not indicate either existence or absence of power to grant interim order, but the intention of the law makers is apparent from Regulation 17 of the Consumer Protection Regulations 2005 which runs as follows :-
"Any ex parte interim order issued by the Consumer Forum shall stand vacated after 45 days if in the meanwhile the objections to the interim order are not heard and disposed of."
This Regulation 17 when read with Sub-section (3B) of Section 13, the only conclusion one can reach is that Sub-section (3B) provides for power to pass ex parte interim order. Therefore, this contention of the Appellant against the impugned order cannot be accepted. ’
2. In the case of Punjab National Bank Vs. Gauri Shankar Singh, decided on 04.5.2012 by the Hon’ble STATE CONSUMER DISPUTES REDRESSAL COMMISSION UTTARAKHAND, short fact was that Consumer complaint was filed against the revisionist (bank) alleging deficiency in service on the part of the bank and sought the relief that the bank be directed to pay the cost of the stolen goods to the complainant after adjusting the amount due against the complainant. The complainant has also prayed that the proceedings for auction of the mortgaged property be stayed. The Learned District Forum vide order dated 18.04.2011 admitted the consumer complaint and issued notice to the opposite party (bank), fixing 19.05.2011 for the written statement and also passed the order that, "meanwhile stay auction". On 19.05.2011, the opposite party took appearance and 16.06.2011 was fixed for further orders and it was also ordered that, "meanwhile stay recovery". On 16.06.2011, the opposite party filed written statement and objection and 15.07.2011 was fixed for disposal of opposite party's objection and complainant's evidence. It was also ordered that, "stay remain continue". On 15.07.2011, the Coram was not complete and 17.08.2011 was fixed for disposal. On 17.08.2011, 06.09.2011 and 04.10.2011, the case could not be taken up on account of the strike of the lawyers. On 03.11.2011, the complainant moved an application before the District Forum that in spite of stay, the bank has issued notice for auction of the mortgaged property and it was prayed that contempt proceedings be initiated against the bank. The District Forum observed that no case of contempt is made out against the bank and fixed 12.12.2011 for disposal. On 12.12.2011, the District Forum passed the order that on perusal of the order dated 19.05.2011, it is clear that recovery proceedings against the complainant were stayed and, therefore, the District Forum directed the bank not to proceed with recovery proceedings against the complainant in view of the order dated 19.05.2011 till further orders. The Bank being aggrieved, preferred revision petition.
2.1. learned Counsel for the bank argued before the State Commission that the District Forum abruptly and without giving any opportunity of hearing to the revisionist, passed the order dated 12.12.2011 referring to its order dated 19.05.2011 and restrained the revisionist from recovering the loan amount from the complainant. Learned counsel for the revisionist also drew attention of the Hon’ble State Commission to Regulation No. 17 of The Consumer Protection Regulations, 2005 which provides - "any ex-parte interim order issued by the Consumer Forum shall stand vacated after 45 days if in the meanwhile the objections to the interim order are not heard and disposed of" and submitted that in view of the above Regulation, the ex-parte interim orders dated 18.04.2011 and 19.05.2011 passed in the consumer complaint, stand vacated and, as such, the District Forum should not have restrained the bank from recovering the loan amount from the complainant.
2.3. Hon’ble State Commission observed and held as quoted below:
“The perusal of the order-sheet of the District Forum reveals that the bank has filed the written statement and objections on 16.06.2011 and on 15.07.2011, the case could not be taken up for want of Coram and thereafter on three dates, the case could not be taken up on account of the strike of the lawyers. From the perusal of the order-sheet, it appears that the bank did not press for disposal of the objections filed by it and the objections were not decided by the District Forum. It is true that as per Regulation No. 17 of The Consumer Protection Regulations, 2005, the ex-parte interim order issued by the Consumer Forum shall stand vacated after 45 days if in the meanwhile the objections to the interim order are not heard and disposed of, but in the peculiar facts and circumstances of the case and also in view of the fact that on one occasion, the case could not be taken up for want of Coram and thereafter on three dates on account of strike of the lawyers and also keeping in view that it does not appear from the record that the bank has pressed for disposal of the objections filed by it before the District Forum, we are not inclined to interfere in the impugned order passed by the District Forum. However, we are of the view that in the present facts and circumstances, the District Forum should be directed to decide the objections filed by the revisionist as early as possible and preferably within a period of one month from the date of this order, but we do not find any illegality, infirmity or jurisdictional error in the impugned order passed by the District Forum.”
“ On a careful perusal of the facts and circumstances of the case in hand, we are of the definite view that there is no infirmity or illegality or jurisdictional error in the impugned order passed by the District Forum and the order passed by the District Forum does not call for any interference by this Commission. Consequently, the revision petition being lack of merit, is liable to be dismissed.”
Summary of Question- Cancellation of Sale Deed
Question – Can a Sale Deed be cancelled with consent of parties to the sale deed by execution of Deed of Cancellation.
Answer- No ; instead of Deed of cancellation, parties to the sale deed have to enter into a Deed of re-conveyance to transfer the property to the original owner.
A Full Bench of the Hon’ble Madras High Court in the case reported in AIR 2011 Mad 66 held as quoted below:
“Once title to the property is vested in the transferee by the sale of the property, it cannot be divested unto the transferor by execution and registration of a deed of cancellation even with the consent of the parties. The proper course would be to re-convey the property by a deed of conveyance by the transferee in favor of the transferor.”
Summary of Question- Agricultural land for exemption under Clause (i) of Section 31 of SARFAESI Act.
Question – Whether Revenue Records is conclusive to establish that a particular land is Agricultural for being exempt under Clause (i) of Section 31 of SARFAESI Act.
A Three Judges Bench of the Hon’ble Supreme Court,in the case reported in AIR 2018 SC 410 observed and held as quoted below:
“The classification of land in the revenue records as agricultural is not dispositive or conclusive of the question whether the SARFAESI Act does or does not apply. Whether a parcel of land is agricultural must be deduced as a matter of fact from the nature of the land, the use to which it was being put on the date of the creation of the security interest and the purpose for which it was set apart.”
Summary of Question- Presumption under section 139 of the N.I. Act.
Question – Whether section 139 of the N.I. Act merely raises a presumption in favour of a holder of the cheque that the same has been issued for discharge of any debt or other liability ; Existence of legally recoverable debt is not a matter of presumption under Section 139 of the Act.
1. A two Judges bench of the Hon'ble Supreme Court in the case reported in 2008 (4) SCC 54 held that the existence of legally enforceable debt was not a matter of presumption under Section 139 of the N.I. Act. However, the above observation has been overruled by a three judge Bench of the Supreme Court in the case reported in AIR 2010 SC 1898.
2. In the said case of Krishna janardhan Bhat, it was also held that advance of more than 20,000/- was to be made only by way of an account payee cheque. However, in the case of Rangappa, an advance of 45,000/- was made in cash in spite of which the Hon'ble Supreme Court proceeded to uphold the conviction. Thus, the judgment in the case of Krishna janardhan Bhat with regard to the advance of cash amount of more than 20,000/- without showing the same in income tax returns, has been impliedly overruled.
3. Observation of the Supreme Court made in one paragraph of the judgment in the case of Rangappa is quoted below:
“In light of these extracts, we are in agreement with the respondent-claimant that the presumption mandated by Section 139 of the Act does indeed include the existence of a legally enforceable debt or liability. To that extent, the impugned observations in Krishna Janardhan Bhat (supra) may not be correct. However, this does not in any way cast doubt on the correctness of the decision in that case since it was based on the specific facts and circumstances therein. As noted in the citations, this is of course in the nature of a rebuttable presumption and it is open to the accused to raise a defence wherein the existence of a legally enforceable debt or liability can be contested. However, there can be no doubt that there is an initial presumption which favours the complainant. Section 139 of the Act is an example of a reverse onus clause that has been included in furtherance of the legislative objective of improving the credibility of negotiable instruments. While Section 138 of the Act specifies a strong criminal remedy in relation to the dishonour of cheques, the rebuttable presumption under Section 139 is a device to prevent undue delay in the course of litigation. However, it must be remembered that the offence made punishable by Section 138 can be better described as a regulatory offence since the bouncing of a cheque is largely in the nature of a civil wrong whose impact is usually confined to the private parties involved in commercial transactions. In such a scenario, the test of proportionality should guide the construction and interpretation of reverse onus clauses and the accused/defendant cannot be expected to discharge an unduly high standard or proof. In the absence of compelling justifications, reverse onus clauses usually impose an evidentiary burden and not a persuasive burden. Keeping this in view, it is a settled position that when an accused has to rebut the presumption under Section 139, the standard of proof for doing so is that of `preponderance of probabilities'. Therefore, if the accused is able to raise a probable defence which creates doubts about the existence of a legally enforceable debt or liability, the prosecution can fail. As clarified in the citations, the accused can rely on the materials submitted by the complainant in order to raise such a defence and it is conceivable that in some cases the accused may not need to adduce evidence of his/her own.”
Summary of Question- Stopping Payment of cheque
Question – Whether an accused be punished for offence under section 138 N.I. Act if he proves that stop payment instruction was issued for valid causes including that there was no existing debt or liability at the time of presentation of chque.
The Hon’ble Supreme Court in a case reported in AIR 2002 SC 182 observed:
“.. The authority shows that even when the cheque is dishonoured by reason of stop payment instruction by virtue of Section 139 the Court has to presume that the cheque was received by the holder for the discharge in (SIC) or in part, of any debt or liability. Of course this a rebuttable presumption. The accused can thus show that the "stop payment" instructions were not issued because of insufficiency or paucity of funds. If the accused shows that in his account there was sufficient funds to clear the amount of the cheque at the time of presentation of the cheque for encashment at the drawer bank and that the stop payment notice had been issued because of other valid causes including that there was no existing debt or liability at the time of presentation of cheque for encashment, then offence under Section 138 would not be made out. The important thing is that the burden so proving would be on the accused. ……………………………………….”
Summary of Question- Assignment of Bank’s Deposit / Fixed Deposit amount
Question – Can owner assign Bank’s Deposit / Fixed Deposit to another person.
Answer- Yes. A Deposit / Fixed Deposit amount in Bank can be assigned / transferred to another person under section 130 (1) of Transfer of Property Act.
Fixed Deposit is a debt and an actionable claim within the meaning of section 3 of the Transfer of Property Act. It (Fixed Deposit) can be assigned by the owner thereof to another person under section 130 (1) of the Transfer of Property Act by executing a document of Assignment. Such Assignment can, however, not be oral or by endorsement on the Fixed deposit Receipt.
When money is deposited in Bank , to the extent of deposit , the bank is debtor and the only difference between the ordinary deposit and fixed deposit is that in case of fixed deposit the person making the deposit undertakes that he would not withdraw the money within certain period.
[A Division Bench Decision of the Hon’ble Allahabad High Court reported in AIR 1945 ALL 409]
Summary of Question- Form of writing for assignment .
Question – Whether any particular form of writing is required for Assignment.
A Division Bench decision of the Hon’ble Gauhati High Court in the case of Mohanlal Malpani vs. Loan company of Assam Ltd. reported in AIR 1960 Gau 191 held that section 130(1) clearly lays down that no particular form of writing is required for an assignment and that the assignment becomes effective as soon as the document is signed.
Summary of Question- Payment by Bank after Assignment.
Question – Whether the Bank gets legal discharge by making payment to the Assignee of Deposit / Fixed Deposit.
Vide Section 130(1) of the Transfer of Property Act, assignment of debt is complete and effectual upon execution of instrument of Assignment signed by the Assignor. After assignment, the Assignor has no right or interest in the debt (proceeds of Fixed Deposit or other Deposit , as the case may be) and all rights and remedies vest in the Assignee. Therefore, it is the Assignee (Not the Assignor) to whom the debtor bank is liable to make payment of the assigned debt, after Notice of Assignment, under section 131 of Transfer of Property Act, has been given to the Bank. In this connection, a Division Bench decision of the Hon’ble Madras High Court reported in (1910) ILR 33 Mad 123 is noteworthy. In this case, the debtor, after receipt of notice of assignment, refused to recognize the assignment and made payment to the transferor (Assignor). Held that the payment was inoperative and that the transferee (Assignee) was entitled to receive from the debtor.
Summary of Question- Suit based on document of Assignment
Question – Can the Assignee under document of Assignment file suit against the Bank in case of Bank’s refusal to make payment of the assigned debt to Assignee, without making the assignor party to the suit.
1. Vide section 130(2) of Transfer of Property Act , the transferee (Assignee) has authority to sue or institute proceedings in his own name without obtaining the transferor's (Assignor’s) consent to such suit or proceedings and without making him a part thereto.
2. The Hon’ble supreme Court observed in the case of Iridium India Telecom Ltd. vs. Motorola Inc. reported in AIR 2005 SC 514 observed as under :
The Code of Civil Procedure, 1908 is an Act to consolidate and amend the laws relating to the procedure of the Courts of Civil Judicature. It would, therefore, govern all actions of civil nature, unless otherwise provided for in the CPC. Some of the provisions of the CPC, however, do make some exceptions, and it is necessary to notice them.
Section 4(1) provides as follows:
3. Savings.-(1) In the absence of any specific provision to the contrary, nothing in this Code shall be deemed to limit or otherwise affect any special or local law now in force or any special jurisdiction or power conferred, or any special form of procedure prescribed, by or under any other law for the time being in force."
4. The Hon’ble supreme Court observed in the case of Reliance Industries Ltd. vs. Pravinbhai Jasbhai Patel and Ors. reported in AIR 1997 SC 3892 as under:
As laid down by Section 4 Sub-section (1), CPC itself in the absence of any specific provision to the contrary, nothing in the Code shall be deemed to limit or otherwise affect any special or local law now in force or any special jurisdiction or power conferred, or any special form of procedure prescribed, by or under any other law for the time being in force. It cannot be disputed that Letters Patent as applicable to High Court of Gujarat is a special law in force which confers special jurisdiction or power and lays down special form of procedure prescribed therein for governing the cases where the two learned Judges forming the Division Bench of the High Court differed on a question of law or fact. Under such circumstances Clause 36 of the Letters Patent laying down the special procedure for meeting such a contingency was required to be followed without in any way being impeded or restricted or being cut across by the procedural requirements laid down by O. XLVII R. 6, CPC.
5. As there is no specific provision in code of civil procedure countermanding the provision contained in section 130(2) of the Transfer of Property Act (Special Law) enabling the transferee to sue the Debtor without making the transferor party to the suit, it is not legally incumbent upon the transferee (assignee) to make the assignor party to the suit filed by the assignee against the Debtor (Bank) .
Summary of Question- Insolvency and Bankruptcy Code Vs. SARFAESI Act
Question – A Bank has taken action under SARFAESI Act against a debtor ; an Operational Creditor initiates action under Insolvency and Bankruptcy Code against the same debtor then whether action taken under Insolvency Code will continue.
Answer- Yes. Insolvency and Bankruptcy Code prevails over SARFASI Act.
In a Company Appeal before the Hon'ble NCLAT , the Appellant Bank's (Financial Creditor) case was that it (Bank) has already taken action under SARFAESI against the Corporate Debtor and taken possession of certain land of the Corporate Debtor so action under Insolvency and Bankruptcy Code (I & B Code) against the Corporate Debtor by one Operational Creditor cannot proceed.
The Hon'ble NCLAT relied on (2018) 1 SCC 407 and observed that if an application under section 9 of the I & B Code is complete and there is "existence of dispute" and there is "debt" and "default" then the Adjudicating Authority (National Company Law Tribunal) is bound to admit the application and held:
"I & B Code will prevail over SARFAESI Act"
Summary of Question- Insolvency and Bankruptcy Code Vs. O A before DRT
Question – Whether a proceeding under Insolvency and Bankruptcy Code would continue even if a OA filed by a creditor Bank is pending.
Answer- Yes. Pendency of OA filed by a Bank against a debtor before DRT is no bar for action under Insolvency and Bankruptcy Code
Before the Hon'ble NCLT, New Delhi Bench in a Company Petition, one of the contentions of a creditor bank was that the corporate applicant has filed the application under Insolvency and Bankruptcy Code to defeat the pending DRT proceedings lodged against the applicant company.
The NCLT observed and held :
"In this regard it is no longer res Integra that pendency of a suit or court proceedings is no bar for initiation of insolvency proceedings under the Code. In view of the overriding effect given by the provisions of Section 238 of the Code, the initiation and pendency of proceedings before DRT is no bar for initiation of resolution and insolvency proceedings under the Code.Hence, the objections raised by the financial creditor cannot sustain."
Summary of Question- Moratorium under section 14 of the Insolvency and Bankruptcy Code
Question – Whether moratorium under section 14 of the Insolvency and Bankruptcy Code applies to a surety / guarantor of corporate debtor.
Answer- No. Section 14 of the Insolvency and Bankruptcy Code provides for a moratorium or a stay on institution or continuation of proceeding, suits, etc. against the corporate debtor and its assets. This Moratorium under section 14 of the Insolvency Code does not apply to a surety to a corporate guarantor as per the amended provision in section 14(3) of the Insolvency and Bankruptcy Code, and this amendment is retrospective.
1. The Hon’ble Supreme Court in the case reported in AIR 2018 SC 3876 examined the amendment made in section 14 (3) of the Insolvency and bankruptcy Code :
“ We now come to the argument that the amendment of 2018, which makes it clear that Section 14(3), is now substituted to read that the provisions of Sub-section (1) of Section 14 shall not apply to a surety in a contract of guarantee for corporate debtor. The amended Section reads as follows:
xxx xxx xxx
(3) The provisions of Sub-section (1) shall not apply to--
(a) such transactions as may be notified by the Central Government in consultation with any financial sector regulator;
(b) a surety in a contract of guarantee to a corporate debtor.”
2. The Apex Court referred to the report dated 26.3.2018 of the Insolvency Law Committee, appointed by the Ministry of Corporate Affairs and observed that such clarificatory amendment is retrospective in nature.