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Judgment
O R D E R
Orders pronounced vide separate orders in Company Petition IB/75/2021. The Petiton is hereby admitted. Consequently, the Insolvency Resolution Process is hereby initiated against the Personal Guarantor and moratorium is declared.
PER: BENCH
ORDER
This petition is filed by Badveli Sreedhara Reddy (Personal Guarantor) under Section 94 of Insolvency of Bankruptcy Code, 2016 (herein after referred as Code) read with Rule 6 (1) of the Insolvency & Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtor) Rules, 2019 (herein after referred to as Personal Guarantors Insolvency Rules, 2019), seeking an order for initiation of the Insolvency Resolution Process (“IR Process”) against him who is the Personal Guarantor of M/s Southern Online Biotechnologies Limited.
The gist apropos to the case of the Petitioner is that in order to meet the long and short term fund requirements, the Respondent No.2 availed credit facilities from Respondent No.1 and Respondents No. 3 to 5 (Financial Creditors).
The 2nd Respondent could not maintain the financial discipline with the banks, as the result of which the accounts of the Company were declared NPA by the financial creditors.
The Financial Creditor i.e. Respondent No.1 also filed a company petition before this Tribunal under Section 7 of the Code to initiate CIRP against the Corporate Debtor vide CP (IB) No. 343/7/HDB/2018. The Petition was admitted and since no viable successful resolution plan was received, the Company was ordered to be liquidated. During the process of liquidation, 2nd Respondent Company was disposed of as a going concern.
The Applicant/Debtor has clearly brought it out in his petition that he has extended his personal property for securing the debt to the Respondents 1, 3, 4 & 5 Banks for which he has given the personal guarantee on behalf of the Company and therefore it will in the interest of the creditors of the Petitioner/Debtor to initiate the Insolvency Resolution Process under Chapter III of Part III of the IBC. 2016.
On presentation of the Petition, this Tribunal vide order dated 29.09.2021 has granted interim-moratorium and has appointed Mr. Maligi Madhusudhana Reddy as Interim Resolution Professional, directing him to file his report within 10 days of his appointment, in terms of Section 99 of the Code, which has been filed by him on 11.10.2021, recommending the admission of the petition filed under Section 94 of the Code on the following grounds.
The Applicant satisfies the requirements set out in Section 94 of the Code.
That the Corporate Debtor has defaulted the repayment of the debt and underwent CIRP vide CP (IB) No. 343/7/HDB/2018. As the resolution plan was rejected by the Committee of Creditors, this Tribunal ordered initiation of liquidation proceedings of 2nd Respondent Company and during the process of liquidation, the 2nd Respondent was disposed of as a ‘going concern’ on 22.10.2019.
Badveli Sreedhar Reddy has given personal guarantee to the Respondents vide Agreement of Pledge of shares by the guarantors dated 19.11.2015, supplemented working capital consortium agreement dated 19.11.2015, Undertaking by borrower and all guarantors dated 19.11.2015 and Memorandum of extension of confirming deposit of title deeds dated 01.12.2015.
An amount of total debt due including interest or penalties is Rs. 528.00 crores to the Respondents.
The default occurred and the same due on 31.12.2013 and 01.09.2018.
Counter is filed by Bank of India/Respondent No.1 herein, inter-alia, contending that this Tribunal vide order passed in IA No. 1038/2019 dated 26.11.2019 approved sale of the Corporate Debtor as a ‘going concern’.
It is further contended that Respondent Nos. 1, 3 to 5 filed OA No. 656/2019 before DRT-2 Hyderabad for recovery of the following amounts with interest and a decree was passed by the DRT.
| Bank of India | Rs. 238,14,42,532.50 |
| UCO Bank | Rs. 99,24,29,981.70 |
| SBI | Rs. 166,14,97,243,30 |
| PNB | Rs. 13,80,10,936.00 |
| Grand Total | Rs. 517,33,80,693,50 |
It is further contended that the Petitioner at the time of submitting the Loan application, his net worth is shown as Rs. 7,04,00,000/- and offered the collateral security consisting of 1815 Sq.yds of the land in Survey No. 213/B (AA) & 213 (EE) at Chitukul, Medak District which is valued at Rs. 0.73 lakhs as per the valuation dated 03.02.2015.
It is also alleged that the Petitioner is associated and having financial transactions with M/s Sathwik Projects Private Limited. M/s Siddhartha Constructions, Mr. Harsha Vardhan Reddy Gajjala. Mr Narendra Chitturi, M/s B.K.R. Constructions, B.Veerramma and failed to disclose his financial transactions with the above parties and suppressed the material facts.
It is also alleged that the Petitioner has not disclosed his movable and immovable property and Jewellery and investments details made by him and his family members fully and prayed the Tribunal to dismiss the Petition as it is filed with an ulterior motive to obtain unlawful gain.
Rejoinder is filed by the Petitioner refuting the objections raised by Respondent No.1, inter-alia, contending that the Corporate Debtor was sold as a going concern and as the sale consideration received from the sale was inadequate to meet the total dues of the Financial Creditors (R1, R3, R4 & R5), the financial creditors invoked the personal guarantee extended by the Petitioner on behalf of the Corporate Debtor/R-2 herein. The Petitioner relied on the judgement of Hon’ble Supreme Court of India in the matter of Lalit Kumar Jain vs Union of India & Ors. (2021 SCC Online SC 396; Transferred Case (Civil) No. 245/2020 dated 21.05.2021 regarding the vires and constitutionality of the notification dated 15.11.2019 issued by the Government of India. The Petitioner further relied on Section 60 (2) and submitted that the said provision has an overriding effect over Section 60 (1) which provides that if a CIRP against a Corporate Debtor is pending before NCLT, then any proceeding relating to the insolvency resolution, liquidation or bankruptcy of the Corporate Debtor or personal guarantor, as the case may be, would also lie before such NCLT. The Petition also placed reliance on the judgement of State Bank of India vs V. Ramakrishnan (2018) 17 SCC 394), wherein the Hon’ble Supreme Court has held that Section 31 (1) of the Code makes it clear that the guarantor cannot escape payment, since the resolution plan, which has been approved by NCLT, may also include the provisions of payments to be made by such guarantor.
It is contended that Respondents have concealed the material information with regard to the net worth declared by the Petitioner at the time of submitting Loan Application. It is stated that this net worth is inclusive of the holdings of equity shares of the Petitioner in Respondent No.2 herein and since the Corporate Debtor is sold as a going concern, the value of the equity shares declared at the time of submitting the loan application had become nil.
The Petitioner has denied having any connection or association with the parties mentioned the counter supra and the petitioner has already furnished the financial transactions with his mother Smt. B. Veeramma in the Petition.
Therefore, in the above backdrop, the point that emerges for consideration of the Tribunal is, Whether Insolvency Resolution Process can be ordered against the Petitioner?
We have heard Shri K. Purnachandra Rao, Learned Counsel for the Personal Guarantor and the RP and perused the material on record.
POINT
Whether Insolvency Resolution Process can be ordered against the Personal Guarantor?
The Petitioner has admitted the default in repayments of debt who has given personal guarantee to the Respondent No.2. It is stated that, as per the petition, the outstanding debt payable by the Corporate Debtor is Rs. 528 crores. From the report of Resolution Professional, it appears that no request has been made to the Resolution Professional for issuance of the instructions, for conducting negotiations between the personal Guarantor and Creditor and for arriving at the repayment plan. In this backdrop the RP recommended for admission of the petition in terms of provisions of the Code.
Per contra the Financial Creditor/Respondent No.1 has raised objection to the admission of the petition filed by the Personal Guarantor stating a decree has been awarded by the DRT. However, in the rejoinder filed by the Applicant, the Ld. Counsel for Petitioner would contend that an IA setting aside the ex-parte order passed in OA No. 656/2019 by the DRT on 14.01.2020 has been filed and the same is pending, which fact was concealed by Respondent No.2. The Ld. Counsel for Petitioner would contend that the net worth of the Petitioner is inclusive of the holdings of equity shares of the Petitioner in Southern Online Biotechnologies Limited/Corporate Debtor and the value of the shares became nil after the Company was sold as a going concern.
Section 94 (1) is as under:-
94.(1) A debtor who commits a default may apply, either personally or through a resolution professional, to the Adjudicating Authority for initiating the insolvency resolution process, by submitting an application.
(2)Where the debtor is a partner of a firm, such debtor shall not apply under this Chapter to the Adjudicating Authority in respect of the firm unless all or a majority of the partners of the firm file the application jointly.
(3)An application under sub-section (1) shall be submitted only in respect of debts which are not excluded debts. Discharge order. Standard of conduct.
Application by debtor to initiate insolvency resolution process.
(4)A debtor shall not be entitled to make an application under sub-section (1) if he is—
(a)an undischarged bankrupt;
(b)undergoing a fresh start process;
(c)undergoing an insolvency resolution process ; or
(d)undergoing a bankruptcy process.
(5)A debtor shall not be eligible to apply under sub-section (1) if an application under this Chapter has been admitted in respect of the debtor during the period of twelve months preceding the date of submission of the application under this section.
(6)The application referred to in sub-section (1) shall be in such form and manner and accompanied with such fee as may be prescribed.
Section 100 of IBC says as follows:-
*100. (1) The Adjudicating Authority shall, within fourteen days from the date of submission of the report under section 99 pass an order either admitting or rejecting the application referred to in section 94 or 95, as the case may be.
(2)Where the Adjudicating Authority admits an application under sub-section (1), it may, on the request of the resolution professional, issue instructions for the purpose of conducting negotiations between the debtor and creditors and for arriving at a repayment plan.
(3)The Adjudicating Authority shall provide a copy of the order passed under sub-section (1) along with the report of the resolution professional and the application referred to in section 94 or 95, as the case may be, to the creditors within seven days from the date of the said order.
(4)If the application referred to in section 94 or 95, as the case may be, is rejected by the Adjudicating Authority on the basis of report submitted by the resolution professional that the application was made with the intention to defraud his creditors or the resolution professional, the order under sub-section (1) shall record that the creditor is entitled to file for a bankruptcy order under Chapter IV.
We have carefully perused the report of RP. The RP has stated in his report that the application dated 19.02.2021 has been accompanied with the details of documents relating to insolvency resolution process of personal guarantor to Corporate Debtor.
As per Section 99(2) of the Code, the Resolution Professional may require debtor to prove repayment of the debt claimed as unpaid by the creditor by furnishing;
evidence of electronic transfer of the unpaid amount from the Bank account of the debtor.
evidence of encashment of a cheque issued by the debtor; or
a signed acknowledgement by the creditor accepting receipt of dues.
However, no such proof has been submitted by the Personal Guarantor herein to the Resolution Professional.
The Resolution Professional, therefore recommended to accept the application filed under Section 94 of the IBC, 2016 for initiation of Insolvency Resolution Process in respect of Badveli Sreedhara Reddy, Personal Guarantor to the Corporate Debtor. The RP has given declaration that the debtor is not eligible for fresh start process under Chapter II of the Code since the Corporate Debtor has already been disposed of.
It may be stated that even according to the 1st Respondent, the Petitioner is the personal guarantor who has given guarantee to the loans availed by the Corporate Debtor. The Application filed under Section 94 of IBC can be rejected if it is shown that the same has been filed to de-fraud the creditors. From the record placed before us, especially the report of the Ld. RP, nothing is indicated that this petition has been filed to defraud the creditors.
We, therefore, find no reasons to dismiss the Petition. The Petitioner/Debtor herein has proposed the name of Shri Maligi Madhusudhan Reddy, Insolvency Professional to act as Resolution Professional, who has given his consent in Form-A. Therefore, by exercising powers under Section 100 of the Code, we pass the following orders:
The petition i.e. CP (IB) No. 75/94 (1) of IBC/HDB/2021 filed under the provisions of Section 94 of IBC, 2016 is hereby admitted.
Consequently, the Insolvency Resolution Process is hereby initiated against the Personal Guarantor Badveli Sreedhara Reddy and the moratorium is declared, which begins with effect from the date of admission of the petition and shall cease to have effect at the end of the period of 180 days, as provided under Section 101 of IBC, 2016. During the moratorium period;
Any pending legal action or proceeding in respect of any debt shall be deemed to have been stayed;
The creditors shall not initiate any legal action or legal proceedings in respect of any debt; and
the debtor shall not transfer, alienate, encumber or dispose of any of her assets or her legal rights or beneficial interest therein;
The provisions of this Section shall not apply to such transactions as may be notified by the Central Government in consultation with any financial sector regulator.
The Resolution Professional i.e. Shri Maligi Madhusudhan Reddy having IBBI registration no. IBBI/IPA-001/IP-P00843/2017-2018/11427, #R/o MM R Lion Corp, 4th Floor, HSR Eden Road No.2, Banjara Hills, Hyderabad -500034 who was appointed vide order dated 29.09.2021 is directed to cause public notice published on behalf of the Adjudicating Authority within 7 days of uploading of this order on the website of NCLT, Hyderabad, inviting claims from all creditors, who shall register their claims as provided under Section 103 of the Code within 21 days of such issuance. The notice shall contain the necessary information as provided under Section 102 (2) of IBC, 2016. The publication of notice shall be made in newspapers, one in English and other in vernacular (Telugu) which have wide circulation in the State where the Debtor resides. The Resolution Professional shall furnish two spare copies of the notice to the Registry. One shall be placed on our website by the Registry and the other shall be affixed in the premises of this Adjudicating Authority.
The Resolution Professional in exercise of the powers conferred under 104 shall prepare a list of creditors within 30 days from the date of the notice. The debtor shall prepare, in consultation with the resolution professional, a repayment plan containing a proposal to the creditors for restructuring of her debts or affairs as provided under Section 105 which shall include the provisions for payment of fee to the Resolution Professional. The Resolution Professional shall submit the repayment plan along with his report on the plan to this Adjudicating Authority within a period of 21 days from the last date of submission of claims as provided under Section 106.
In case the Resolution Professional recommends that a meeting of the creditors is not required to be summoned, he shall record the reasons thereof. If the Resolution Professional is of the opinion that the meeting of creditors should be summoned, he shall specify the details as provided under Section 106 (3). The date of meeting shall not be less than fourteen days or more than 28 days from the date of submission of the Report under Sub-Section (1) of Section 106, for which at least 14 days’ notice to the creditors (as per the list prepared) shall be issued by all modes. Such notice must contain the details as provided under the provisions of Section 107.
The meeting of the creditors shall be conducted in accordance with the provisions sections 109, 110 and 111. The Resolution Professional shall prepare a report of the meeting of the creditors on repayment plan with all details as provided under Section 112 and submit the same to the Authority, copies of which shall be provided to the guarantor and the creditors. It is made clear that the Resolution Professional shall perform his functions and duties in compliance with the Code of Conduct provided under Section 208 of IBC, 2016.