Asset Care and Reconstruction Enterprise Limited vs Divyesh Desai

Prayers in IA/3786/2024

a)

Pass appropriate orders directing the Respondent to admit the Applicant’s claim as a secured financial creditor under the Insolvency and Bankruptcy Code 2016 in the corporate insolvency resolution process of Rajesh Estates and Nirman Private Limited arising out of the RDPL DTD;

b)

Pass any other order/orders that this Tribunal deems fit in the interest of justice.

Prayers in IA/3787/2024

a)

Pass appropriate orders directing the Respondent to admit the Applicant’s claims as a secured financial creditor under the Insolvency and Bankruptcy Code 2016 in the corporate insolvency resolution process of Rajesh Estates and Nirman Private Limited arising out of the RCPL DTD, RLPPL DTD and RBPL DTD;

b)

Pass any other order/orders that this Tribunal deems fit in the interest of justice.

Submissions of the Parties

4. Submissions of the Applicant

5. Submissions of the Resolution Professional

Analysis & Findings

“‘Guarantee’ means the deed of guarantee, dated on or about the date of the Debenture Trust Deed, executed inter alia by the Corporate Guarantor and Personal Guarantors in favour of the Debenture Trustee in relation to the Debentures.

‘Guarantors’ means the Corporate Guarantor and the Personal Guarantors.”

“(H)

Further, the Guarantors have agreed to guarantee the discharge of the Secured Obligations by providing the Guarantee for the benefit of the Security Parties to credit-enhance the obligations of the Issuer under this Deed.”

“From: Divyesh Desai Sent: Thursday, February 1, 2024 3:05 PM To: Manish Manav <[email protected]> Cc: Divyesh Desai <[email protected]>; Amit Kedia <[email protected]>; [email protected]; Kairavi Desai <[email protected]> Subject: Rajesh Estates and Nirman Private Limited - Claims submitted for debentures issued to Rajguru Developers, Rajesh Buildspaces, Rajesh Landmark and Rajesh Cityspaces Dear Sir, This has reference to claim form dated April 11, 2023 submitted by Assets Care and Reconstruction Enterprise Limited (acting in its capacity as Trustee of India Real Estate 2021 Trust) (“Assets Care”) in the Corporate Insolvency Resolution Process (CIRP) of Rajesh Estates and Nirman Private Limited (Corporate Debtor). Assets Care has submitted the claim in Form C (Submission of Claim by Financial Creditors) under Regulation 8 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”). However, the undersigned would like to apprise you that basis perusal of the aforesaid claim form and supporting documents, Assets Care does not fall within the purview of Financial Creditor in terms of the applicable provisions of IBC, 2016 for the reasons as set out in hereinafter. Basis perusal of the Claim Form and supporting documents, Altice Capital India Limited (“ACIL”) had subscribed to the debentures issued by Rajguru Developers Private Limited ("RDPL") by debenture trust deed dated March 19, 2018. These debentures are secured by assets of Rajesh Estates and Nirman Private Limited as one of the Mortgagor. Thereafter, by way of Deed of Assignment executed on March 4, 2021 between ACIL and Assets Care, the aforesaid loan facility together with all rights, title, benefits and interests was assigned from ACIL in favour of Assets Care. Hence, in order to secure the debentures issued by RDPL to ACIL (now Assets Care being the lender by virtue of assignment), Corporate Debtor had extended security by virtue of creatin mortgage over its rights, title and interest in the mortgaged property in favour of ACIL. The undersigned wishes to draw your attention to following relevant judicial pronouncements on the subject matter: Supreme Court: Anu; Jain, Interim Resolution Professional for Jaypee lnfratech Ltd. vs. Axis Bank Ltd. & Ors ., (2020/ 8 sec 401" (“JIL Judgment”) Para 50.2. “Therefore, we have no hesitation in saying that a person having only security interest over the assets of corporate debtor (like the instant third party securities), even if falling within the description o/ 'secured creditor' by virtue of collateral security extended by the corporate debtor, would nevertheless stand outside the sect of 'financial creditors' as per the definitions contained in subsections (7) and (8) of Section 5 of the Code. Differently put, if a corporate debtor has given its property in mortgage to secure the debts as a third party, it may lead to a mortgage debt and, therefore, it may fall within the definition of 'debt' under Section 3(10) of the Code. However, it would remain a debt alone and cannot partake the character of a 'financial debt' within the meaning of Section 5(8) of the Code.” “The respondent mortgagees are not the financial creditors of corporate debtor JIL.” Para 51. “Indisputably, the debts in question are in the form of third party security; said to have been given by the corporate debtor JIL so as to secure the loans/advances/facilities obtained by JAL from the respondent-lenders. Such a ‘debt’ is not and cannot be a 'financial debt' within the meaning of Section 5(8) of the Code; and hence, the respondent-lenders, the mortgagees, are not the 'financial creditors' of the corporate debtor JIL.” Further, the above-mentioned observation made in the matter of JIL Judgment has been observed by the Hon'ble National Company Law Appellate Tribunal, New Delhi in the matter of Edelweiss Asset Reconstruction Company Limited v. Mr. Anuj Jain, Resolution Professional of Ballardpur Industries Limited [Company Appeal (AT) (Insolvency) No.517 & 518 of 2023] (in paragraph 16). In view of the above, Assets Care may consider submitting a fresh claim in Form F (Proof of Claim by Creditors other than Financial Creditors and Operational Creditors) under Regulation 9A of the CIRP Regulations. Best regards, Divyesh Desai Resolution Professional - Rajesh Estates and Nirman Private Limited IBBI/IPA-001/IP-P0016912017-18/10338”

Whether in the given facts and circumstances, the claim of the Applicant arising under the DTDs executed by RCPL, RDPL, RBPL and RLPPL fall under the category of ‘financial debt’ under section 5(8)(i) of the Code?

“3.7 Undertaking to Pay

(a)

Subject to paragraphs (c) below, each Security Provider (other than the Issue) irrevocably and unconditionally and severally covenants, undertakes and agrees that it has the obligation to, and shall promptly upon a demand from the Debenture Trustee, pay all the monies payable by the Issuer (including but not limited to the Debenture Amount, Interest, any Default Interest, Prepayment Premium, fees and costs and expenses and other Secured Obligations) to the Debenture Trustee and the Debenture Holders in accordance with the terms of the Debenture Documents (to the extent such Secured Obligations has not already been irrevocably paid by any other Obligor).

(b)

If upon a demand being made by the Debenture Trustee:

(i)

The Security Provider (other than the Issuer) do not pay the Secured Obligations in accordance with paragraph 9a) above to the satisfaction of the Debenture Trustee within the time prescribed; and

(ii)

The Secured Obligations has not already been irrevocably paid by any other Obligor or otherwise remains unpaid; and

(iii)

The aggregate amount recovered or realized by the Secured Parties pursuant to enforcement of their rights or remedies in relation to the Secured Assets is less than the Secured Obligations, (such difference the “Shortfall Amount”), then each of the Security Provider shall severally continue to remain liable to pay an amount equal to the Shortfall Amount to the Secured Parties.

(c)

Each Security Provider (other than the Issuer) further acknowledges, undertakes, confirms and agrees that:

(i)

its obligation to pay the Obligations and the Shortfall Amount in accordance with paragraphs (a) and (b) above_ constitutes financial debt (as defined under the Insolvency and Bankruptcy Code, 2016 (“Insolvency Code”); and

(ii)

notwithstanding anything to the contrary contained in this Deed or in any of the other Transaction Documents, its obligation to pay the Obligations and the Shortfall Amount, and the amount of Obligations being secured by the Secured Assets, shall be determined by reference to the amount of Obligations due under the Debenture Documents without giving effect to any reductions or haircuts that may be imposed or sought to be imposed in respect of the obligations of the Issuer or any other Obligor whether pursuant to the Insolvency Code, or any mechanism as provided for in guidelines of the RBI or otherwise.”

“45.

Clause 5 contains the Chargor’s covenants, representations and warranties. Sub-clause (iii) of Clause 5 is material, which reads thus:

“5. Chargor’s Covenants, Representations and Warranties

.. .. .. . .. .. .. .. .. .. .. . … .. .. .. .. .. . .. . ... . .. . ... .

(iii)

In the event that an Event of Default has occurred under a Facility Document the Security Trustee or its nominees shall, on receiving instructions from the Secured Lender/s, in accordance with Section 4 of the Security Trustee Agreement and after providing 7 (seven) Business Days notice to any of the Chargors and without assigning any reasons and at the risk and expense of the Chargors and if necessary as attorney for and in the name of the Chargors, be entitled to take charge and/or possession of, seize, recover, receive and remove them and/or sell by public auction or by private contract, dispatch or consign for realisation or otherwise dispose of or deal with all or any part of the Hypothecated Property (including by way or through the exercise of its powers and rights specified in Section 6 hereof) and to enforce, realise, settle, compromise and deal with any rights or claims relating thereto, without being bound to exercise any of these powers or be liable for any losses in the exercise or non-exercise thereof and without prejudice to the Security Trustee's rights and remedies of suit or otherwise. Notwithstanding any pending suit or other proceeding, each of the Chargors undertakes to give possession to the Security Trustee or its nominees or the Receiver within 7 (seven) Business Days of a notice of demand from the Security Trustee and/ or the Receiver the Charged Property and to transfer and to deliver to Security Trustee and/ or the Receiver all related bills, contracts and securities. Each of the Chargors further agrees to accept the Security Trustee's account of sales and realisations as sufficient proof of amounts realised and relative expenses and to pay on demand by the Security Trustee and/ or the Receiver any shortfall or deficiency thereby shown.

Provided however, the Security Trustee Or the Receiver shall not be in any way liable or responsible for any loss, damage or depreciation that the Hypothecated Property may suffer or sustain on any account whatsoever whilst the same are in possession of the Security Trustee or the Receiver or by reason of exercise or non-exercise of rights and remedies available to the Security Trustee or the Receiver as aforesaid and that all such loss, damage or depreciation shall be wholly debited to the account of the relevant Chargor howsoever the same may have been caused, except where such loss, damage or depreciation is caused by any negligence or wilful default of the Security Trustee or the Receiver.” (emphasis added)

In these appeals, we are called upon to interpret clause 5(iii) of the DoH and decide whether the clause creates any guarantee in favour of the appellants. Therefore, we need to analyse the said clause.

49.

The appellants are claiming that their case is covered by clause (i) of sub-section (8) of Section 5 of the IBC. Under clause (i), the amount of any liability in respect of any guarantee of the items referred to in clauses (a) to (h) becomes a financial debt. Therefore, when clause (i) of Section 5(8) is applicable, it is not necessary that the Financial Creditor actually tenders any amount to the Corporate Debtor. In this case, the appellants are claiming that the amount of liability covered by clause (i) is in respect of money borrowed by the RCom entities (excluding the Corporate Debtor) against payment of interest under the facility agreements. There is no dispute that facilities were granted by the appellants to RCom entities. The amount of any liability in respect of any of the guarantees for money borrowed against the payment of interest is a financial debt under Section 5(8) of the IBC.

“126. “Contract of guarantee”, “surety”,

“principal debtor” and “creditor”.— A “contract of guarantee” is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the “surety”; the person in respect of whose default the guarantee is given is called the “principal debtor”, and the person to whom the guarantee is given is called the “creditor”. A guarantee may be either oral or written.”

“127. Consideration for guarantee.- Anything

done, or any promise made, for the benefit of the principal debtor, may be a sufficient consideration to the surety for giving the guarantee.

EFFECT OF CLAUSE 5(iii) OF DOH READ WITH MSTA

Relevance of nomenclature of DoH

“7.

It must be remembered that a contract is a commercial document between the parties and it must be interpreted in such a manner as to give efficacy to the contract rather than to invalidate it. It would not be right while interpreting a contract, entered into between two lay parties, to apply strict rules of construction which are ordinarily applicable to a conveyance and other formal documents. The meaning of such a contract must be gathered by adopting a common sense approach and it must not be allowed to be thwarted by a narrow, pedantic and legalistic interpretation. .. .. .. .. .. .. .. .. .. .. .. . .. .. .. . .. … . .. . ... . .. . ... . .. . ... . ..” (emphasis added)

58.

Sub-clause (iii) of clause 5 of the DoH further provides that each of the Chargors agree to accept the Security Trustee’s account of sales and realisation as sufficient proof of the amount realised and relative expenses and to pay on demand by the Security Trustee and/or receiver any shortfall or deficiency thereby shown. Under the DoH, even the Corporate Debtor hypothecated its goods. The last part of sub-clause (iii) of clause 5 means that if after the sale of hypothecated assets, there is any shortfall in the discharge of the liabilities of RCom or RTL, the Corporate Debtor is under an obligation to pay the shortfall or deficiency. Therefore, the latter part of clause 5(iii) of the DoH indicates that RITL-Corporate Debtor, who is not the borrower of the appellants, agreed to discharge the liability of the third parties (RCom and RTL) to the appellants in the case of default of RCom or RTL. Therefore, the second part of clause 5(iii) of the DoH amounts to a guarantee provided by the Corporate Debtor to the appellants in terms of Section 126 of the Contract Act.” (Emphasis provided)

20.

In the above case, (DoH) contained clause 5(iii) similar to clause 3.7 of DTD in the present case. The Hon’ble Apex Court, analyzed clause 5(iii) of DoH and held the later part of 5(iii) creates liability on the mortgager – corporate debtor to discharge the liability of third party by paying the shortfall, which amounts to a guarantee provided by the corporate debtor in terms of section 126 of the Indian Contract Act. The law has been authoritatively laid down by the Hon’ble Supreme Court.

21.

Mr. Lohia sought to distinguish the judgment of China Development Bank (supra) on the ground that in that case the primary document governing the obligations of the parties was only Deed of Hypothecation and there was no other documents like separate deed of guarantee by guarantors nor any party was expressly defined as guarantor unlike the present case at hand. He submitted that the Hon’ble Supreme Court in the same very judgment has observed that a document/agreement has to be read as a whole.

22.

He has taken us through various definitions contained in the Supplemental Agreement, deed of guarantees executed by parties defined as guarantors, separate board resolutions to show that a security provider in the present case cannot be treated as a guarantor.

23.

The phrasing of clause 3.7 of DTD demonstrates the intention of the parties to treat the Corporate Debtor/Security Provide also as a Guarantor for the shortfall amount. More particularly, the terms “irrevocably and unconditionally and severally covenants, undertakes and agrees that it has the obligation to, and shall promptly upon a demand from the Debenture Trustee, pay all the monies payable by the Issuer” and “each of the Security Provider shall severally continue to remain liable to pay an amount equal to the Shortfall Amount to the Secured Parties”, emphasizes that the Corporate Debtor besides being a Security Provider also has a liability towards the entire dues and to pay any shortfall upon demand. It is trite law that for ascertaining the true character of a transaction, substance over form has to be examined and mere title of a document cannot be a decisive factor in deciding the nature of the document or the transactions.

24.

Though clause 3.7 is contained in Debenture Trust Deed executed by the Issuer and the Security Provider, drawing strength from the interpretation given by the Hon’ble Supreme Court in China Development Bank (supra) to clause 5(iii) of Deed of Hypothecation, we have no hesitation in concluding that under the DTDs, the Corporate Debtor has provided a guarantee to the Applicant to repay the dues owed by the Borrowers.

25.

Mr. Lohia made another contention that as per Clause 7.12 of the Supplemental Deed in the event of any inconsistency between the Supplemental Deed and the DTD or other transaction documents, the Supplemental Deed shall prevail. Supplemental Deeds defined Guarantors and Mortgagors separately, therefore, Mortgagors cannot be a guarantor and Clause 3.7 of DTDs being inconsistent to Supplemental Deed cannot be interpreted to be providing ‘guarantee’. However, we do not find any inconsistency.

26.

We note from the DTDs that the Corporate Debtor is defined as ‘Security Provider’. The Supplemental Deeds to the DTDs defines the term ‘Security Provider’ as follows:

“Security Provider(s)” means collectively:

i.

The Issuer;

ii.

The Mortgagors;

iii.

The Pledgors; and

iv.

The Guarantors.”

27.

Thus, on a conjoint reading of the DTDs and the Supplemental Deeds, it can be understood that the parties had executed the documents to give a wider scope to Security Providers and accordingly, the Corporate Debtor can be both a mortgagor as well as a guarantor. Further, there is no legal bar that a mortgagor cannot be a guarantor at the same time for the shortfall amount after handing over/sale of the mortgaged property. Therefore, based on the DTDs, the Corporate Debtor is a mortgagor beyond doubt. However, considering Clause 3.7 of the DTDs, the Corporate Debtor is also a Guarantor as the ingredients of contract of guarantee as per section 126 of the Indian Contract Act, 1872, are clearly found in Clause 3.7 of the DTDs and supported by China Development Bank (supra) judgment.

28.

In view of our observations above, we hold that the Applicant is a mortgagor as well as a guarantor under the DTDs and the claims of the Applicant under the aforesaid four DTDs are liable to be admitted by the RP under section 5(8)(i) of the Code as “secured financial debt”.

29.

At this juncture, we deem it appropriate to mention here that the order of this Tribunal in JC Flowers (supra) relied upon by the RP was passed prior to the decision of China Development Bank (supra) and as such does not come in aid of the RP.

30.

As regards the non-compliance or otherwise of section 186(2) of the Companies Act, 2013, we are of the view that such compliances are merely a procedural requirement and non-compliance of the same cannot prejudice the claim of the Applicant as a financial creditor due to the applicability of doctrine of ‘indoor management’.

31.

We refer to the judgment of Hon’ble Allahabad High Court in Lakshmi Ratan Cotton Mills Co. Ltd. vs. J.K. Jute Mills Co. Ltd. [AIR 1957 All 311] wherein it was observed as follows:

“8.

...The only point that survived for contest between the parties was point No. 3. The result was that the only plea that was left open to the defendant to plead was that the loan could not be held to be binding on the defendant as no resolution sanctioning the said loan was passed by the Board of Directors. The defendant could therefore, contest the suit only on the ground that even though Sri Gulab Chand Jain acted on behalf of the defendant the loan could not be binding on them because of the want of a resolution of the Board of Directors making him competent to enter into such a transaction. On this point, therefore, the Court framed a fresh issue being issue No. 4 which related to the question of competency of Sri Gulab Chand Jain to borrow the money on behalf of the defendant company. As stated above, the only ground of his incompetency pleaded by the defendant was the want of a resolution authorising him to borrow the money. The burden of proving that no such resolution was actually passed by the Board of Directors lay on the defendant. They have not produced their minute book, nor has Sri Gulab Chand Jain come in the witness-box to state that no such resolution was actually passed by the Board of Directors. The defendant having failed to produce any evidence in support of the only plea that had survived, the plea must be taken to have failed for want of evidence.

9.

Even if, however, the matter is approached from the legal stand point, we are of opinion that the defendant's plea in this regard cannot be sustained, as the plaintiff would be protected by the legal doctrine of internal management.”

32.

We also refer to the following observations of the Appellate Tribunal in the case of Sarveshwar Creations Pvt Ltd vs. Union of India [Company Appeal AT (Ins) No. 1003 of 2020]:

“5.

The ld. Counsel for the Resolution Professional (RP)/Liquidator/Corporate Debtor (CD) has submitted that the lenders of the Holding Company could not be treated as Secured Financial Creditor in the CIRP of the subsidiary company since they didn’t directly advance any facility to the CD and hence it could not be said that the CD owed them any financial debt in terms of the law laid down in the Code. It was also submitted by Ld. Counsel for the RP that lender is to demonstrate that the security document relating to the loan transaction are legally valid and enforceable and further the mortgage was created validly in favour of the lender by the subsidiary of the Principal Borrower. It was also mentioned that the claim of the Bank as a secured financial creditor on the basis of corporate guarantee dated 06th May, 2017 is untenable on the ground that it has not complied with the provisions of Section 185 & 186 of the Companies Act, 2013 (the Act) though then prevailing in 2017. The Ld. Counsel also submitted that the constitutional courts have held that if there is a clear breach of a provision of a statute then the Doctrine of Indoor Management” under the Act or any other Act cannot be enforced. xxx

7.

.. ... .. .... ....

l. As far as the issue of contravention of provision of Section 185 of the Act prevailing as on that date (pre -07.05.2018 amendment to the Act) is concerned, it is very much clear that this is the provision which the company has to comply internally and if they fail to comply the necessary punishment is available in the same section i.e. Section 185, both monetary penalty and /or imprisonment. As far as bank is concerned, they have been provided time to time the Board Resolution showing the approval of the Board. Hence, if there is any irregularity then for that the Members of the Board are responsible. If the official of the bank have committed some irregularity, then it is the Bank who has to prosecute these officers against the provisions laid down under the law applicable to them. Bank is required to investigate internally. However, as far as the public fund with the public sector bank is concerned, the “Doctrine of Indoor Management” will be wholly and exclusively applicable.”

33.

Further, we refer to the Latin maxim commodum ex injuria sua nemo habere debet which means that no party can take advantage of its own wrong. In the present case, after signing the DTDs which includes clause 3.7 whereby an undertaking is given by the Corporate Debtor to discharge the entire liability of the Issuers, it cannot be thereafter argued that the Board Resolution signed by its directors does not authorize the same and the Corporate Debtor cannot wriggle out of its liability under the DTD on any ground of anomaly or violation of provisions of the Companies Act, 2013 or any other applicable law. Hence, the submissions of the RP in this regard are rejected.

34.

As regards the discrepancy in the Claim Form submitted by the Applicant, we refer to the judgment of Hon’ble Supreme Court in Greater Noida Industrial Development Authority vs. Prabhjit Singh Soni & Anr. [Civil Appeal Nos. 7590-7591 of 2023] wherein it has been categorically held:

“22.

As it could be noticed from the CIRP Regulations, 2016, on submission of a claim with proof, the IRP or the RP, as the case may be, has to verify the claim and prepare a list of creditors containing names of creditors along with the amount claimed by them and security interest, if any, the logical conclusion derivable from the provisions analysed above would be that the Form in which a claim is to be submitted under the CIRP Regulations 2016 is directory and not mandatory. What is important is, the claim must be supported by proof.”

35.

We are of the view that once the it is satisfied that a claim falls under a particular category under the Code, then a mere mentioning/non-mentioning in the Claim Form of the applicable category cannot be a ground to reject a valid claim. Thus, the RP’s submission in this regard is liable to be rejected.

36.

We further note that neither the execution of the documents nor the liability of the Corporate Debtor thereunder are disputed. The only dispute was with respect to the interpretation of the clauses thereunder. As we have already held that clause 3.7 unambiguously and clearly indicates that the Corporate Debtor undertook to repay the debt amount which includes the shortfall amount beyond the value of its security interest, there is no need to deal with other contention relating to presentation in the Financial Statement of the Corporate Debtor.

Corporate Debtor as a co-borrower of the financial assistance