Guarantors under SARFAESI and the IBC

Guarantors are often where a lender actually recovers, and both SARFAESI and the IBC treat them distinctly. SARFAESI counts a guarantor as a borrower and lets the creditor go after its security first. The IBC moratorium that protects a company in insolvency does not protect its guarantors, though a guarantor's own insolvency application brings its own moratorium. This note sets out the guarantor's position under SARFAESI and under the IBC.

1. The Guarantor under SARFAESI

Figure 1: A borrower for the Act's purposes

• A guarantor is a borrower. s.2(1)(f) includes a guarantor in the definition of borrower, so the creditor can enforce against the guarantor's secured property (Topic 13)
• No order of exhaustion. s.13(11) lets the creditor proceed against the guarantor without first selling the principal borrower's security (Topic 32)
• Coextensive liability. Under s.128 of the Contract Act, the surety's liability is coextensive with the principal debtor's, unless the contract says otherwise.
• Same remedies. A guarantor whose property is enforced may use s.17 and s.18, and is protected by the same notice and sale rules (Topic 69)

2. The Guarantor under the IBC

Figure 2: Outside the company's moratorium

• SBI v V. Ramakrishnan (2018). The Court held that the s.14 moratorium in the corporate debtor's insolvency does not protect a personal guarantor's assets.
• Confirmed by statute. Section 14(3)(b), inserted in 2018, provides that the moratorium does not apply to a surety of the corporate debtor.
• Lalit Kumar Jain (2021). The Court upheld bringing personal guarantors' insolvency into force and held that approval of a resolution plan does not discharge the guarantor.
• Guarantor's own insolvency, s.96. Once an insolvency application is filed against or by the guarantor itself, an interim moratorium under s.96 stays legal action in respect of the debt.

3. Putting It Together

• Company in CIRP. SARFAESI against the company's assets stops under s.14, but enforcement against the guarantor's secured property may continue (Topic 76)
• Guarantor in insolvency. If the guarantor's own insolvency process begins, enforcement against it in respect of the debt is stayed by the IBC moratorium.
• No windfall discharge. A resolution plan for the company does not release the guarantor, so the lender may still recover the unpaid balance from it.

4. Frequently Asked Questions

Can a bank enforce against a guarantor while the company is in insolvency?

Yes. In State Bank of India v V. Ramakrishnan (2018), the Supreme Court held that the moratorium under Section 14 of the IBC in the corporate debtor's insolvency does not protect a personal guarantor's assets, and Section 14(3)(b), inserted in 2018, confirms that the moratorium does not apply to a surety of the corporate debtor. The creditor may therefore continue SARFAESI action against the guarantor's secured property while the company's process is pending, unless the guarantor's own insolvency process has begun.

Does a resolution plan for the company discharge the guarantor?

No. In Lalit Kumar Jain v Union of India (2021), the Supreme Court upheld the notification bringing the insolvency of personal guarantors to corporate debtors into force and held that approval of a resolution plan for the corporate debtor does not by itself discharge the personal guarantor. The guarantor's liability, coextensive with the principal debtor's under Section 128 of the Contract Act, continues for the unpaid balance, which the creditor may recover, including by enforcement under SARFAESI.

5. Related Topics

• Topic 76: SARFAESI and the IBC. The corporate debtor's moratorium.
• Topic 32: Sections 13(11) to 13(13). Proceeding against guarantors first.