Axis Trustee Services Ltd. v. Brij Bhushan Singhal (2022)

Section 96 is the most practically disruptive provision in Part III: it stops proceedings without anyone deciding anything. The question that decides most disputes about it is one of scope, and it has two dimensions — which proceedings are caught, and which persons are protected. This case settles the second dimension. Where several people have guaranteed the same debt and one of them is taken into the individual insolvency process, the others do not get the benefit of his moratorium.

Proceedings were on foot against guarantors of a debt. An interim moratorium under s. 96 had come into effect in respect of one guarantor. The co-guarantors contended that the proceedings against them were also stayed by that moratorium.

The interim moratorium applies in respect of the guarantor only, and not in respect of any co-guarantors.

The reasoning is structural, and it follows from what an interim moratorium is for. The protection under s. 96 attaches to the debtor in respect of whom an application has been made. It is a personal protection, triggered by that person's entry into the process, and designed to hold his position steady while the application is examined. A co-guarantor has not entered the process, and nothing about him needs to be held steady.

The contrary reading would produce a result the Code cannot have intended. A creditor holding several independent guarantees would lose the benefit of all of them the moment any one guarantor filed or had filed against him, and the guarantors could relieve each other in turn. A guarantee is a separate contract with each surety; the liability is several as well as joint, and the Code does not merge them.

Two related propositions complete the picture. The interim moratorium under s. 96(1)(b) operates in respect of any debt and not merely for recovery of a debt, so it reaches proceedings in which the liability of the borrower and the guarantor is determined in relation to the credit facility, and not only execution or recovery steps; on that reading an arbitral tribunal cannot be constituted while an interim moratorium is in existence. And an interim moratorium operates on proceedings relating to a liability or obligation due on the date when it was declared; s. 96(1)(b) cannot be read to stay a future liability or obligation.

1. On a multi-guarantor problem, state the rule flatly: the moratorium is personal to the guarantor against whom the application is made.
2. On scope, pair it with the in respect of any debt reading, which is wider than it first appears, and with the limitation to liabilities due at the date of declaration, which is narrower. Together these three propositions answer almost any s. 96 problem.
3. Note the limits from the other direction. A moratorium is not an amnesty: proceedings to declare a borrower a wilful defaulter, and criminal or quasi-criminal proceedings, have been held not to be within the object and purpose of Part III's moratorium, and the principles applied in corporate insolvency are not simply transplanted into personal insolvency.
4. What it does not decide. It does not decide anything about the moratorium under s. 14, which operates on the corporate debtor and is differently worded.

This decision must now be read with the amendment to s. 96, which inserts a sub-section providing that the section shall not apply where an application is filed for initiating an insolvency resolution process in respect of a personal guarantor to a corporate debtor. In that class of case there is no interim moratorium at all, so the question of its reach to co-guarantors does not arise. The decision continues to govern applications under Part III that fall outside that exclusion. Note also that the corporate moratorium has moved in the opposite direction: s. 14 now carries an Explanation clarifying that sub-section (1) applies where a surety seeks to initiate or continue action or proceedings against the corporate debtor under a contract of guarantee.