By Prabhan Patel ~ Symbiosis Law School, Hyderabad

COMPANY APPEAL (AT) INSOLVENCY NO. 993 OF 2019.

ADJUDICATING AUTHORITY- NCLAT, NEW DELHI.

DECIDED ON: 23.01.2020.

FACTS OF THE CASE

The appellant Ex-Director of M/s. Genegrow Commercial Pvt. Ltd. had initiated the instant appeal as an “Aggrieved Person” in respect to the order passed by the NCLT, Kolkata Bench in August,2018 wherein the application was filed by the 1st Respondent/Financial Creditor/ Bank. A deed of guarantee was issued between the M/s Genegrow Commercial Pvt. Ltd. acting as the ‘Corporate Guarantor’ for the ‘Principal Borrower’ ‘Gee Pee Infotech Pvt. Ltd.’ against the bank for a loan of Rs. 162 Crores (Amount plus Interest). In January 2014, it was issued that the account of the Corporate Debtor’ was declared ‘Non-Performing Asset’ and so the 1st Respondent/Bank filed an application against ‘Gee Pee Infotech Pvt. Ltd.’ before the Debt Recovery Tribunal-1, Kolkata filing for a recovery of the balance sum of Rs. 84.5 lakhs. The first Respondent had filed an application under Section 7 of the IBC,2016 to initiate CIRP before the Adjudicating Authority (NCLT) against the Principal Borrower (Gee Pee Infotech Pvt. Ltd.) as well as the Appellant for Claim and Default primarily committed by the Principal Borrower. The NCLT Kolkata bench took help from the case of Dharam Sugars and Chemicals limited V. Union of India[1], and admitted the Claim based on acceptance from the Principal Borrower of the claim made and had no defense and so Corporate Insolvency Resolution Process was initiated against both the Principal Borrower and Corporate Guarantor. The Corporate Guarantor hence, filed an appeal to the NCLAT, New Delhi against the order passed by NCLT Kolkata Bench claiming that the later had failed to appreciate that the liability of the Principal Borrower and Guarantor is co-extensive for recovery.

ISSUES OF THE CASE

  • Whether a financial creditor is permitted to initiate CIRP proceedings under Section 7 of the IBC against the principal debtor as well as the guarantor, for the same set of claims?

CONTENTION

It was the pleaded of the Appellants that Insolvency proceedings is not a recovery proceeding and rely upon the decision made in Binani Industries Limited v. Bank of Baroda & Anr. [2] The Appellant further cites Dr. Vishnu Kumar Agarwal V. M/s. Piramal Enterprises Ltd. [3], wherein the court held that “there is no bar in the IBC for simultaneously filing two applications under Section 7 against the Principal Borrower as well as Corporate Guarantor. However, for the same claims, if an application filed by the financial creditor is admitted against one of the corporate debtors (i.e., principal borrower or corporate guarantor), a second application filed by the same financial creditor for the same set of claims and default is not to be admitted against the remaining corporate debtor unless it is shown that the Corporate Debtors combinedly are a joint venture company”. Another contention from the appellant was that the Adjudicating Authority (NCLT had failed to take into account that the application filed under Section 7 of the IBC against corporate Debtor was barred by limitation as the Hon’ble Supreme Court held it in B.K. Educational Services Pvt. Ltd. V. Parag Gupta and Associates[4], which reads that an application under Section 7 and 9 of the IBC attracts Article 137 of the Limitation Act. The Corporate Debtor also took a stand that the application filed by the bank before the NCLT was incomplete non-compliance of the provisions of the IBC and provisions of the Banking Regulations Act,1949 and the amendments thereof and the guidelines and/or Circulars issued by the RBI to which the NCLT bench held that this issue was devoid of any merit.

The 1st Respondent/Bank contended that the liability of the Principal Debtor and Guarantor is co-extensive as per Section 128 of the Indian Contract Act,1872 and took guidance from the decision made by the Hon’ble Supreme Court in the matter of Ram Kishun v. State of U.P. [5], wherein the court held that in recovery of public dues must be made following the procedure prescribed by law. The liability of a surety is co-extensive with that of a principal debtor and in case there is more than one surety, the liability is to be divided equally among the sureties for unpaid loan amount. The 1st Respondents took a plea that the Appellant’s argument that the co-extensive liability of the Principal Borrower and the Guarantor is only for recovery is misconceived and in the truth, the Guarantor and Corporate Debtor sail on the same boat, since the loan was granted to the Corporate Debtor on the very basis of Guarantee and if the Respondent had to choose between the Guarantor and the Corporate Debtor, it shall defeat the intent of the IBC. The issue of limitation was not raised either by the Corporate Debtor nor by the Appellant in the NCLT and hence, the appellant was estopped from taking this plea before the Tribunal. Similarly, the Respondents present another order passed in Sanjeev Shaye & Ors. V. State Bank of India & Ors. wherein it was reiterated that the “rights of the surety are co-extensive with that of the Principal Debtor”

JUDGEMENT

The NCLAT held that there is no fetter in the code projecting two applications under Section 8 of the IBC against the Principal Borrower and Corporate Guarantor. However, for the same set of claims, if an application is filed against one of them, a second application filed by the same Financial Creditor for the same set of claims and default is not to be admitted against the remaining party. The question concerning any dispute that the Corporate Debtor(Being Corporate Guarantor of the Principal Borrower Gee Pee Infotech Pvt. Ltd.) had executed the Guarantee deed in October,2011 in respect of all overall limit and sanctioned in favor of the Financial Creditor. A supplementary Guarantee deed was executed as well between the Corporate Guarantor & the Financial Creditor. As the Indian Contract Act,1872 is concerned, Section 145 portrays in every ‘contract of guarantee’, there is an implied promise by the Principal Debtor to indemnify the ‘surety’. The court is of the opinion that Financial Debtor includes Debt owed to the Creditor by both the Principal and the Guarantor. Section 3(11) of the IBC,2016 refers to a sum that it is due from any person including the Corporate Debtor. Failure to do so when the principal sum is demanded by the Financial Creditor will fall within the purview of default under Section 3(12) of the IBC,2016. A Financial Creditor who has a guarantee on the Debt due can commence proceedings under Section 7 of the IBC,2016 against the Guarantor for failure to repay the sum borrowed by the Principal Borrower. If the Contract of Guarantee mentions any such clause where the liability of a Guarantor will be independent and separate than that of the Principal Debtor’s liability, then an application against Guarantor as per Section 7 is maintainable. However, it was clarified that the only rider to this is that a creditor is not permitted to sue the principal debtor and claim the guarantor’s insolvency at the same time. A contract of Guarantee is layman terms is a contract to perform the promise or discharge the liability of a 3rd party, in case of his default. Therefore, the court points out that it is not necessary to start the Corporate Insolvency Resolution process against the Principal Borrower before initiating against the Corporate Debtor. Even without resorting to initiating CIRP against the Principal Borrower, the Financial Creditor can commence CIRP under Section 7 of the IBC,2016 against the Corporate Debtor/ Guarantor. Therefore, the application under Section 7 of the IBC,2016 filed by the 1st Respondent against the Corporate Debtor Genegrow Commercial Pvt. Ltd. is not maintainable in law and was dismissed but without costs. The order passed by the (NCLT) is declared illegal and set aside. All records and assets were ordered to return to the Corporate Debtor immediately. The court reiterates that this application not being maintainable does not mean that the Corporate Debtor is not at fault. It is merely that the Tribunal has not gone into the aspect of limitation since the application was not maintainable. Hence, the appeal was allowed.

Citations:

  • [1] (2019) 5 SCC 480
  • [2](CA)(AT)(Ins.) No. 82/2018
  • [3] Company Appeal (AT)(Ins.) No. 346 and 347 of 2018
  • [4] (MANU/SC/1160/2018)
  • [5] (2012) 11 SCC 511

Bijay Kumar Agarwal, Ex-Director of M/s Genegrow Commercial Pvt. Ltd. v. State Bank of India and Anr

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