The Supreme Court gave clear guidance regarding the application of a moratorium period to a corporate surety.
In the instant case titled State Bank of India v. Ramakrishnan and Ors. the issue that was raised before the Supreme Court for clarification was:
Whether the period of moratorium under section 14 of the Insolvency and Bankruptcy Code applicable to Personal Guarantor?
The Supreme Court held that Section 14 of the IBC, which provides for a moratorium for the limited period mentioned in the IBC, on the admission of an insolvency petition, would not apply to a personal guarantor of a corporate debtor.
It also observed that Section 14(3) of the IBC (introduced vide 2018 amendment) which states that provisions of Section 14(1) shall not apply to a surety in a contract of guarantee for the corporate debtor, is retrospective.
The Supreme Court decided that the surety's and principal debtor's liabilities are coextensive in a guaranteed contract and that the creditor can pursue assets of either the principal debtor or the surety, or both, in any order.
The court categorically held that:
“ Section 14 of the Code authorizes adjudicating authority to pass an order of moratorium during which there is prohibition on institution of suits or continuation of pending suits against corporate debtor, transfer of property of corporate debtor or any action to foreclose or enforce any security interest. Section 96 and 101 of the Code provide for separate provision for moratorium for personal guarantor, however, these provisions have not been brought into force”.
The Supreme Court has provided much-needed clarity on the application of a moratorium period to the surety of a corporate debtor. If the assets of a personal guarantor are frozen during a corporate insolvency resolution action, the surety may make a frivolous application to protect their assets. The apex court has rectified the problem by stating that Section 14 does not seek to prohibit actions against guarantors' assets and that the revision in this regard is effective as of June 6, 2018.