Amit Kumar Kejriwal vs UCO Bank & Anr.

“If any member of the Customers' firm is adjudicated insolvent or if the Customers firm is dissolved or if the or Customers' company is taken into liquidation whether voluntary or otherwise or if the customers firm or company enters into any arrangement or makes any composition with the creditors thereof the Bank may (notwithstanding payment to the Bank by me/us or any other person of the whole or any part of the amount of my/our liability under these presents) rank as creditors and prove against the assets of such firm or company for the full amount of the Bank's claim or agree to and accept any composition in respect of the same and the Bank may and shall receive and retain the whole of the dividends, composition or other payments thereon to the exclusion of all my/our rights under these presents against such customers in competition with the Bank until the claim of the Bank is fully satisfied and I/we shall not by paying off the amount due by me/us to the Bank under these presents or any part thereof or upon any other ground prove or claim to prove in respect thereof or any part thereof until the whole of the Bank’s claim against the customers has been satisfied. To the intent that the Bank may obtain satisfaction of the whole of its claim against the customers, I/we agree that the Bank may enforce the payment of and recover the full amount due by me/us under these presents notwithstanding any such proof of composition as aforesaid and not withstanding any other indemnity, security or remedy which the Bank may hold or be entitled to in respect of the sum due to the Bank by such Customers”.

“Notwithstanding anything hereinbefore contained my/our liability under these presents shall extend to all accounts of the Customers whether the same are the account or accounts of such customers solely or are accounts on which such Customers may become liable jointly in any manner whatsoever with any company or firm, person or persons and in whatever name the same may stand and shall not be affected by any change in the constitution or name of the Customers' firm or company or any change in the constitution of the Bank, its successors or assigns or by its absorption in or by Its amalgamation with any other Bank or Banks”.

“I/We agree that a statement of account signed by an Officer of the Bank showing amount due by the Customers as appearing in the books of account of the Bank will be sufficient proof of the liability of the Customers and the same, will be binding on me/us and I/we promise and agree to pay on demand being made upon me/us by the Bank the amount due at the foot of the said statement of account with interest mentioned above”.

“Any admission or acknowledgment in writing by the customers of the amount of indebtedness of the customers to the Bank shall be binding and conclusive on and against me/us, my/our heirs, executors, administrators and legal representatives in all courts of law or otherwise and the customers shall be my/our agent for giving such acknowledgment from time to time on behalf of myself/ourselves and my/our heirs, executors, administrators and legal representatives”.

“The Bank shall also be at liberty to release or discharge any of us from the obligations of this guarantee or to accept any composition from or make any other arrangements with any of us without thereby prejudice or affecting the Bank’s rights and remedies against the other or others of us. I/We waive in the Bank’s favour all or any or may/our rights against the Bank or the provisions of this guarantee.

The guarantee given by me/us hereunder is in addition and without prejudice to any other guarantee or securities which the Bank may now or hereafter have from me/us or any of us from the customers or from anyone else in respect of any indebtedness or liabilities hereby guaranteed.

I/We further agree that in respect of my/our liability hereunder the Bank shall have a lien on all securities belonging to me/us now or hereafter held by the Bank and all moneys now or hereafter standing to my/our credit with the Bank on any current or any other account whatsoever.

A demand in writing shall be deemed to have been duly given to me/us or my/our heirs or assigns by leaving the same at my/our last known address recorded with the Bank and shall be effectual notwithstanding any change of address or notwithstanding notice thereof to the Bank and such demand if sent by post shall be deemed to be received by me/us or my/our heirs or assigns 24 hours after posting thereof and shall be sufficient if signed by anry officer of the Bank and in proving such service it shall be sufficient to prove that the letter containing the demand was properly addressed and put into the post”.

“11.1

We find that the Applicant Bank has issued Form B notice on 24.09.2020 pursuant to Rule 7(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rule, 2019).

11.2

Learned Counsel appearing for the petitioner Bank rightly submits that if after issuance of section Form B notice, the debt is not paid then the Section 95 petition will be maintainable against the Personal Guarantor.

11.3

Further, the order passed by the Coordinate Bench at Mumbai in C.P. (IB) No. 161/MB/2021 dated 08.12.2021 simply says that:

"3.

The Petitioner is to place on record the following information on the next date of hearing:

(a)

Consent of IRP.

(b)

Invocation of Personal Guarantee.

(c)

Issuance of form-B/ proof of delivery of Form-B.

(d)

Proof of delivery of Petition on the Personal Guarantor." Evidently, the Mumbai Bench has asked for details of invocation of personal guarantee, issuance and delivery of Form B but has not laid down any law about separate invocation preceding service of form B notice.

11.5

There is nothing on record to demonstrate a explicate requirement of a distinct invocation of guarantee by the creditor before service of form B notice.

11.6

After examination of the application as per Sub-section (6) of Section 99 of the Insolvency and Bankruptcy Code, 2016, it appears that upon due verification of records and with proper application of mind the resolution professional and the applicant herein has recommended acceptance of the application filed under Section 95(1) of the Insolvency and Bankruptcy Code, 2016 for commencement of Insolvency Resolution Process against the personal guarantor

11.7

We have perused the Report and the documents referred to therein we find no reason to reject the application. Accordingly, it is admitted under Section 100 of 1&B Code”.

(11)

“debt” means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt;

(12)

“default” means non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not 1[Paid] by the debtor or the corporate debtor, as the case may be;

(22)

“personal guarantor” means an individual who is the surety in a contract of guarantee to a corporate debtor;

95. Application by creditor to initiate insolvency resolution process. —

(1)

A creditor may apply either by himself, or jointly with other creditors, or through a resolution professional to the Adjudicating Authority for initiating an insolvency resolution process under this section by submitting an application.

(2)

A creditor may apply under sub-section (1) in relation to any partnership debt owed to him for initiating an insolvency resolution process against—

(a)

any one or more partners of the firm; or

(b)

the firm.

(3)

Where an application has been made against one partner in a firm, any other application against another partner in the same firm shall be presented in or transferred to the Adjudicating Authority in which the first mentioned application is pending for adjudication and such Adjudicating Authority may give such directions for consolidating the proceedings under the applications as it thinks just.

(4)

An application under sub-section (1) shall be accompanied with details and documents relating to—

(a)

the debts owed by the debtor to the creditor or creditors submitting the application for insolvency resolution process as on the date of application;

(b)

the failure by the debtor to pay the debt within a period of fourteen days of the service of the notice of demand; and

(c)

relevant evidence of such default or non-repayment of debt.

(5)

The creditor shall also provide a copy of the application made under sub-section (1) to the debtor.

(6)

The application referred to in sub-section (1) shall be in such form and manner and accompanied by such fee as may be prescribed.

(7)

The details and documents required to be submitted under sub-section (4) shall be such as may be specified.

“guarantor” means a debtor who is a personal guarantor to a corporate debtor and in respect of whom guarantee has been invoked by the creditor and remains unpaid in full or part;

7.

Application by creditor. ― (1) A demand notice under clause (b) of sub-section (4) of section 95 shall be served on the guarantor demanding payment of the amount of default, in Form B.

(2)

The application under sub-section (1) of section 95 shall be submitted in Form C, along with a fee of two thousand

rupees. (3) The creditor shall serve forthwith a copy of the application referred to in sub-rule (2) to the guarantor and the corporate debtor for whom the guarantor is a personal guarantor.

(4)

In case of a joint application, the creditors may nominate one amongst themselves to act on behalf of all the creditors.

“5.

We have heard learned counsel for the parties and perused the record. From the submission of learned counsel for the parties and materials on record following issues arise for consideration:

I. Whether default in payment of guaranteed amount by the Corporate Debtor is the same default as is committed by the Principal Borrower and the period of limitation for both the Principal Borrower and the Corporate Guarantor shall be same for the purposes of filing Section 7 application for the Bank?

II. Whether the Deed of Guarantee dated 17.05.2019 is guarantee on demand and the limitation of Guarantor shall ensue only when demand is made to the Guarantor?

III. Whether notice dated 01.10.2020 issued by the Bank to Guarantor can be treated to be notice on demand as contemplated in the guarantee and the default on the part of the Guarantor shall be only after notice dated 01.10.2020 i.e. during period of Section 10A?

IV. Whether the application filed by the Bank under Section 7 was barred by Section 10A?

24.

The scheme of I&B Code clearly indicate that both the Principal Borrower and the Guarantor become liable to pay the amount when the default is committed. When default is committed by the Principal Borrower the amount becomes due not only against the Principal Borrower but also against the Corporate Guarantor, which is the scheme of the I&B Code. When we read with as is delineated by Section 3(11) of the Code, debt becomes due both on Principal Borrower and the Guarantor, as noted above. The definition of default under Section 3(12) in addition to expression ‘due’ occurring in Section 3(11) uses two additional expressions i.e “payable” and “is not paid by the debtor or corporate debtor”. The expression ‘is not paid by the debtor’ has to be given some meaning. As laid down by the Hon’ble Supreme Court in “Syndicate Bank vs. Channaveerappa Beleri & Ors.” (supra), a guarantor’s liability depends on terms of his contract. There can be default by the Principal Borrower and the Guarantor on the same date or date of default for both may be different depending on the terms of contract of guarantee. It is well settled that the loan agreement with the Principal Borrower and the Bank as well as Deed of Guarantee between the Bank and the Guarantor are two different transactions and the Guarantor’s liability has to be read from the Deed of Guarantee.

26.

The judgment of the Hon’ble Supreme Court in “Syndicate Bank vs. Channaveerappa Beleri & Ors.” has categorically laid down that liability of the Guarantor depends on the terms of his contract. The relevant clauses of the Deed of Guarantee, as noted above, clearly contemplate demand by the Bank upon the Guarantor. Clause 1 provides that “the Guarantors shall forthwith on demand pay to the Bank the whole of such principal sum not exceeding Rs.186,60,00,000/-together with interest”. Similarly, Clause 13 uses expression, “the Guarantors shall forthwith on demand made by the Bank deposit with the Bank….”. Clause 20 again makes it clear that what was guaranteed by the Guarantor was that amount shall be payable to the Bank on serving the Guarantor with notice requiring payment of the amount.

27.

In view of the clear stipulation in the Deed of Guarantee, default on the part of the Guarantor cannot be treated to be on 05.09.2019, when it is alleged that the Principal Borrower committed default, nor the default on the part of the Guarantor can be on date of NPA i.e. 05.12.2019 for the purpose of present case. In the present case, admittedly, the Bank has issued notice dated 01.10.2020 to the Principal Borrower as well as to the Guarantor - Essel Infraprojects Ltd. Notice dated 01.10.2020 which has been brought on the record indicate that notice is addressed to the Principal Borrower and to Guarantors. In Para 8 of the notice following has been stated:

“8.

Our Clients states that, You Nos.2 to 4, executed Deed of Guarantee on respective dates inter alia agreeing to pay on demand and without demur to our clients alongwith interest, cost, charges, expenses and/or other money due thereon from time to time in terms of the Agreement of Loan for overall limits, Agreement of Hypothecation of Goods and Assets and Supplemental Agreements.”

“17.

The Notice, thus, contemplate demanding payment of the amount of default. The above Rule clearly indicate that Demand Notice has to be issued, demanding payment of the amount in default. Thus, the default by Guarantor has to exist on the date when Notice in Form-B is being issued. When we read Section 95, sub-section (4) and Rule 7 of 2019 Rules, the above is the only intendment of the legislative scheme, i.e. default on the part of Guarantor should exist on the date when Notice in Form-B has to be issued. We have noticed the definitions of ‘debt’ and ‘default’ in Section 3 (11) and (12) of the IBC. Default shall arise on account of non-payment of debt, when whole or part of it become due. ‘Debt’ means a liability or obligation in respect of a claim which is due from any person. Thus, for a default, debt has to be due and Debtor shall be only that person, to whom debt is due. A Personal Guarantor becomes a Debtor only when guarantee is invoked, making him liable to make the payment to the Lender. We have noticed Clause 2 and Clause 21 of the Deed of Guarantee in the foregoing paragraphs of this judgment, which clearly contemplate that liability on Guarantor shall arise only when demand is made by the Lender, in event Principal Borrower fails to repay the amount. In the present case, there is no case setup by the Appellant that at any point of time guarantee was invoked, except issuance of Notice in Form-B, which is claimed by the Appellant to be treated as Notice for invocation of guarantee. Further, we have noticed the definition of ‘Guarantor’ under Rule 3(1)(e), which while defining a ‘Guarantor’ contain two conditions, i.e. (i) who is a Personal Guarantor to a Corporate Debtor; and (ii) in respect of whom, guarantee has been invoked by the Creditor and remains unpaid in full or part. Learned Counsel for the Appellant has contended that expression ‘and’ used in Rule 3 (1)(e) needs to be read as ‘or’ to make the provision workable and to avoid producing an unintelligible and absurd result. Learned Counsel for the Appellant has relied on two judgments of the Hon’ble Supreme Court in support of the above submission, i.e. AIR 1968 SC 1450 – Ishwar Singh Bindra and Ors. vs. State of U.P. The Hon’ble Supreme Court in the above case had occasion to consider the definition of ‘drug’ contained in Section 3(b)(i) of Drugs Act 1940. Expression ‘and’ used in Section 3(b)(1) of the Drugs Act was considered in the said case and in paragraph 11 of the judgment, following was laid down:

“11.

Now if the expression “substances” is to be taken to mean something other than “medicine” as has been held in our previous decision it becomes difficult to understand how the word “and” as used in the definition of drug in Section 3(b)(i) between “medicines” and “substances” could have been intended to have been used conjunctively. It would be much more appropriate in the context to read it disconjunctively. In Stroud's Judicial Dictionary, 3rd Edn. it is stated at p. 135 that “and” has generally a cumulative sense, requiring the fulfilment of all the conditions that it joins together, and herein it is the antithesis of or. Sometimes, however, even in such a connection, it is, by force of a contexts, read as “or”. Similarly, in Maxwell on Interpretation of Statutes, 11th Edn., it has been accepted that “to carry out the intention of the legislature it is occasionally found necessary to read the conjunctions ‘or’ and ‘and’ one for the other”.

“20.

The above judgment reiterates that one of the basic principles of interpretation of statutes is to construe them according to plain, literal and grammatical meaning of the words. When we look into definition of ‘Guarantor’ in Rule 3(1)(e), fulfilment of both the condition that Debtor is a Personal Guarantor to a Corporate Debtor and in respect of whom guarantee has been invoked, has been cumulatively used. The submission of the Appellant that use of the expression ‘and’ has to be read as ‘or’, shall not further the statutory object and purpose. Guarantor with regard to whom guarantee has not been invoked, shall not be a Debtor and no default can be committed by Guarantor, unless guarantee is invoked as per the terms of Deed of Guarantee. Thus, the insolvency resolution process against a Guarantor, against whom debt has not become due, is not understandable. We, thus, reject the submission of the Appellant that word ‘and’ used in Rule 3(1)(e) has to be read as ‘or’. Reading of word ‘or’ in place of ‘and’ shall be not in accordance with the statutory scheme and shall be against the statutory intendment.

22.

The requirement of date, when the default occurred, itself contemplate the default by Guarantor, when Application is filed against Guarantor. Obviously, the default has to be of the Guarantor and mentioning of date when the default occurred, itself contemplate default on the part of Guarantor, i.e. invocation of guarantee as per Deed of Guarantee. Thus, non-mention of requirement of whether guarantee has been invoked and proof thereof, is inconsequential, since the date when default occurred is specifically asked for.

“27.

In view of the foregoing discussion, we are not persuaded to accept the submission of the Appellant that Notice under Rule 7 (1) issued in Form-B to the Guarantor, demanding repayment of the default amount, has to be treated as Notice for invoking guarantee. Default before issuance of Notice under Rule 7(1), must exist on the part of the Guarantor. Hence, we reject the submission of the Appellant that Notice under Rule 7, sub-rule (1) is a Notice, invoking the guarantee. We, thus, do not find any error in the order of the Adjudicating Authority, rejecting Section 95 Application filed by the SBI. There is no merit in the Appeal. The Appeal is dismissed. There shall be no order as to costs.”