Case Note & Summary
The petitioner, a finance company, granted channel finance facility to Sterling Motor Company (SMC), a proprietorship of Tarun Kapoor. Tarun Kapoor, Pavan Kapoor, B.L. Passi, and Rameshwar Sweets and Namkeens Pvt. Ltd. stood as guarantors. Upon default, the loan was recalled and arbitration proceedings were initiated. During arbitration, Volkswagen Finance filed an application under Section 95 of the Insolvency and Bankruptcy Code, 2016 (IBC) against SMC and Tarun Kapoor, leading to an interim moratorium under Section 96 in favour of Tarun Kapoor and later Pavan Kapoor. The arbitrator initially kept proceedings in abeyance only against those two, but later, upon application by the legal heirs of B.L. Passi (who had died), the arbitrator passed orders dated 07.10.2022 and 20.03.2023 keeping the entire arbitration in abeyance as long as the moratorium operated. The petitioner challenged these orders. The court held that the moratorium under Section 96 is personal to the debtor and does not extend to co-guarantors not covered by the NCLT orders. The arbitrator's orders were set aside, and the arbitration was directed to proceed against the legal heirs of B.L. Passi and other respondents not covered by the moratorium.
Headnote
A) Arbitration Law - Moratorium under IBC - Scope of Section 96 - The issue was whether the moratorium under Section 96 of the Insolvency and Bankruptcy Code, 2016, granted in respect of personal guarantors Tarun Kapoor and Pavan Kapoor, extends to other co-guarantors (legal heirs of B.L. Passi) not covered by the NCLT orders. The court held that the moratorium under Section 96 is debt-centric and personal to the debtor, and does not extend to co-guarantors not covered by the NCLT orders. The arbitral proceedings could continue against the other guarantors. (Paras 1-15) B) Insolvency and Bankruptcy Code - Section 96 - Interpretation of 'all the debts' - The court interpreted the expression 'all the debts' in Section 96(1)(a) to mean all debts of the particular debtor in whose favour the moratorium is granted, and not debts of other guarantors. The moratorium does not create a blanket stay on proceedings against all co-guarantors. (Paras 3.2, 3.7) C) Contract Law - Liability of Surety - Co-extensive liability - The court noted that the liability of a surety is co-extensive with that of the principal debtor, and proceedings can be instituted against the guarantor without suing the principal debtor. The moratorium does not absolve the guarantor of liability. (Paras 3.4, 3.5)
Issue of Consideration
Whether the moratorium under Section 96 of the Insolvency and Bankruptcy Code, 2016, granted in respect of certain personal guarantors, extends to other co-guarantors not covered by the NCLT orders, thereby requiring the arbitral proceedings to be kept in abeyance against all respondents.
Final Decision
The court allowed the petition, set aside the arbitrator's orders dated 07.10.2022 and 20.03.2023, and directed the arbitrator to proceed with the arbitration against the legal heirs of B.L. Passi and other respondents not covered by the moratorium.
Law Points
- Moratorium under Section 96 IBC is debt-centric and personal to the debtor
- does not extend to co-guarantors not covered by NCLT orders
- Arbitral proceedings can continue against other guarantors
