Canara Bank vs Rajneesh Nagar

ORDER

“This is an application filed by Canara Bank under Section 95 of the IBC, 2016 with a prayer to initiate IR Process against the Personal Guarantor Rajneesh Nagar and appoint an RP. Ld. Counsel appearing for the Applicant stated that the guarantee given by the Applicant herein was invoked vide letter dated 30.06.2018 issued by the Syndicate Bank known as Canara Bank, which is annexed at page No. 107 of the application.

As per the provisions of the Law, on filing of this application, the interim moratorium has already commenced as stipulated under Section 96(1)(a) in relation of all debts of the Personal Guarantor.

As proposed by the Applicant/ Guarantor, this Bench appoints Mr. Sandeep Kumar Bhatt (Email ID [email protected]) as Resolution Professional, whose details are given overleaf:

The Resolution Professional Mr. Sandeep Kumar Bhatt shall exercise all the powers as stipulated under Section 99 of IBC, 2016 read with Rules made thereunder. He is directed to examine the application and make recommendation with reasons in writing for acceptance or rejection of the present application within the time stipulated under Section 99 of IBC, 2016.”

“8) THE RECOMMENDATION OF THE RP BEFORE THE HON’BLE TRIBUNAL

Based upon the above analysis and considering the legal provisions, the RP presents his final report to the Hon’ble Adjudicating Authority as under:

i.

That RP has obtained all the information and explanations which to the best of his knowledge and belief were necessary to frame his opinion for the recommendations for acceptance or rejection of the application by the Hon’ble Adjudicating Authority.

ii.

On examination of the application and as submitted above, the debt is proved and complies the requirements set out as per Sec 95 of the IB Code, 2016 because of the following reasons:

a)

That the debt is proved

b)

The debt is owed by the CD of which personal guarantee is executed by the guarantor i.e., Rajneesh Nagar and the debt is duly acknowledged by the CD and the Guarantor;

c)

The dues with interest calculation are given by the applicant till 30.06.2022 amounting to Rs. 48.94 Cr;

d)

That the guarantor has failed to repay the debt within 14 days of the service of notice of demand;

e)

That the details of documents and evidences in support of the claim by the applicant has been enclosed in the application; f) That the application is well within the limitation period;

iii.

Based on the above analysis and as per section 99(1) of the IB Code, 2016, the RP hereby recommends for the admission of the application filed by the Canara Bank u/s 95 of the IB Code subject to final amount of recovery from the Guarantor which is to be adjudicated by the Hon’ble Tribunal.

iv.

Accordingly, the Hon’ble Adjudicating Authority is prayed to order to initiate Insolvency against the Personal Guarantor as per section 100 of the IB Code as parameters set out as per section 99 of the IB Code are complied with. Submitted for Kind Consideration of the Hon’ble Tribunal.”

“IA-1240/2024: The Ld. Counsel for the Petitioner submitted that since the IBBI has passed an order placing Mr. Sandeep Kumar Bhatt under suspension, the applicant bank may be allowed to replace him. At this stage the RP has already filed his report in terms of the provisions of Section 99 of IBC, 2016 and the requirement of RP would be there, if the petition is admitted and further process is required to be conducted. Nevertheless, in terms of the provisions of Section 98 of IBC, 2016, the creditor can seek replacement of the RP. The provisions of Section 98 reads thus:-

“98.

Replacement of Resolution Professional- (1) Where the debtor or the creditor is of the opinion that the resolution professional appointed under section 97 is required to be replaced, he may apply to the Adjudicating Authority for the replacement of the such resolution professional.

(2)

The Adjudicating Authority shall within seven days of the receipt of the application under sub-section (1) make a reference to the Board for replacement of the resolution professional.

(3)

The Board shall, within ten days of the receipt of a reference from the Adjudicating Authority under sub-section (2), recommend the name of the resolution professional to the Adjudicating Authority against whom no disciplinary proceedings are pending.

(4)

Without prejudice to the provisions contained in sub-section (1), the creditors may apply to the Adjudicating Authority for replacement of the resolution professional where it has been decided in the meeting of the creditors, to replace the resolution professional with a new resolution professional for implementation of the repayment plan.

(5)

Where the Adjudicating Authority admits an application made under sub-section (1) or sub-section (4), it shall direct the Board to confirm that there are no disciplinary proceedings pending against the proposed resolution professional.

(6)

The Board shall send a communication within ten days of receipt of the direction under sub-section (5) either—

(a)

confirming appointment of the nominated resolution professional; or

(b)

rejecting appointment of the nominated resolution professional and recommend a new resolution professional.

(7)

On the basis of the communication of the Board under sub-section (3) or sub-section (6), the Adjudicating Authority shall pass an order appointing a new resolution professional.

(8)

The Adjudicating Authority may give directions to the resolution professional replaced under sub-section (7)—

(a)

to share all information with the new resolution professional in respect of the insolvency resolution process; and

(b)

to co-operate with the new resolution professional in such matters as may be required.”

In the wake, the prayer made in the application is allowed and the present RP is replaced with Mr. Rajesh Kumar Parakh (Email [email protected]) as Resolution Professional, whose details are given below:

IBBI Registration No. : IBBI/IPA-001/IP-P00272/2017- 18/10516

E-mail Address : [email protected]

Contact Number : 9811350848

As far as the grievance raised by Mr. Sandeep Kumar Bhatt regarding the IRP cost and his fee is concerned. It would be open to him to move separate application.

IA stands disposed of.”

ANALYSIS AND FINDINGS:

“26.

We are also of the opinion that Sections 96 and 101, when contrasted with Section 14, would show that Section 14 cannot possibly apply to a personal guarantor. When an application is filed under Part III, an interim-moratorium or a moratorium is applicable in respect of any debt due. First and foremost, this is a separate moratorium, applicable separately in the case of personal guarantors against whom insolvency resolution processes may be initiated under Part III. Secondly, the protection of the moratorium under these sections is far greater than that of Section 14 in that pending legal proceedings in respect of the debt and not the debtor are stayed. The difference in language between Sections 14 and 101 is for a reason.

“26.1.

Section 14 refers only to debts due by corporate debtors, who are limited liability companies, and it is clear that in the vast majority of cases, personal guarantees are given by Directors who are in management of the companies. The object of the Code is not to allow such guarantors to escape from an independent and co-extensive liability to pay off the entire outstanding debt, which is why Section 14 is not applied to them. However, insofar as firms and individuals are concerned, guarantees are given in respect of individual debts by persons who have unlimited liability to pay them. And such guarantors may be complete strangers to the debtor — often it could be a personal friend. It is for this reason that the moratorium mentioned in Section 101 would cover such persons, as such moratorium is in relation to the debt and not the debtor. […]

31.

The Insolvency Law Committee, appointed by the Ministry of Corporate Affairs, by its Report dated 26-3-2018, made certain key recommendations, one of which was:

“(iv)

to clear the confusion regarding treatment of assets of guarantors of the corporate debtor vis-à-vis the moratorium on the assets of the corporate debtor, it has been recommended to clarify by way of an explanation that all assets of such guarantors to the corporate debtor shall be outside scope of moratorium imposed under the Code;”

32.

The Committee insofar as the moratorium under Section 14 is concerned, went on to find:

“5.5.

Section 14 provides for a moratorium or a stay on institution or continuation of proceeding, suits, etc. against the corporate debtor and its assets. There have been contradicting views on the scope of moratorium regarding its application to third parties affected by the debt of the corporate debtor, like guarantors or sureties. While some courts have taken the view that Section 14 may be interpreted literally to mean that it only restricts actions against the assets of the corporate debtor, a few others have taken an interpretation that the stay applies on enforcement of guarantee as well, if a CIRP is going on against the corporate debtor.” ***

“5.7.

The Allahabad High Court subsequently took a differing view in Sanjeev Shriya v. SBI [Sanjeev Shriya v. SBI, 2017 SCC OnLine All 2717 : (2018) 2 All LJ 769 : (2017) 9 ADJ 723] , by applying moratorium to enforcement of guarantee against personal guarantor to the debt. The rationale being that if a CIRP is going on against the corporate debtor, then the debt owed by the corporate debtor is not final till the resolution plan is approved, and thus the liability of the surety would also be unclear. The Court took the view that until debt of the corporate debtor is crystallised, the guarantor's liability may not be triggered. The Committee deliberated and noted that this would mean that surety's liabilities are put on hold if a CIRP is going on against the corporate debtor, and such an interpretation may lead to the contracts of guarantee being infructuous, and not serving the purpose for which they have been entered into.

5.8.

In SBI v. V. Ramakrishnan [SBI v. V. Ramakrishnan, 2018 SCC OnLine Nclat 384] , Nclat took a broad interpretation of Section 14 and held that it would bar proceedings or actions against sureties. While doing so, it did not refer to any of the above judgments but instead held that proceedings against guarantors would affect the CIRP and may thus be barred by moratorium. The Committee felt that such a broad interpretation of the moratorium may curtail significant rights of the creditor which are intrinsic to a contract of guarantee.

5.9.

A contract of guarantee is between the creditor, the principal debtor and the surety, whereunder the creditor has a remedy in relation to his debt against both the principal debtor and the surety (National Project Construction Corpn. Ltd. v. Sadhu and Co. [National Project Construction Corpn. Ltd. v. Sadhu and Co., 1989 SCC OnLine P&H 1069 : AIR 1990 P&H 300] ). The surety here may be a corporate or a natural person and the liability of such person goes as far the liability of the principal debtor. As per Section 128 of the Contract Act, 1872, the liability of the surety is co-extensive with that of the principal debtor and the creditor may go against either the principal debtor, or the surety, or both, in no particular sequence (Chokalinga Chettiar v. Dandayuthapani Chettiar [Chokalinga Chettiar v. Dandayuthapani Chettiar, 1928 SCC OnLine Mad 236 : AIR 1928 Mad 1262] ). Though this may be limited by the terms of the contract of guarantee, the general principle of such contracts is that the liability of the principal debtor and the surety is co-extensive and is joint and several (Bank of Bihar Ltd. v. Damodar Prasad [Bank of Bihar Ltd. v. Damodar Prasad, AIR 1969 SC 297] ). The Committee noted that this characteristic of such contracts i.e. of having remedy against both the surety and the corporate debtor, without the obligation to exhaust the remedy against one of the parties before proceeding against the other, is of utmost importance for the creditor and is the hallmark of a guarantee contract, and the availability of such remedy is in most cases the basis on which the loan may have been extended.

5.10.

The Committee further noted that a literal interpretation of Section 14 is prudent, and a broader interpretation may not be necessary in the above context. The assets of the surety are separate from those of the corporate debtor, and proceedings against the corporate debtor may not be seriously impacted by the actions against assets of third parties like sureties. Additionally, enforcement of guarantee may not have a significant impact on the debt of the corporate debtor as the right of the creditor against the principal debtor is merely shifted to the surety, to the extent of payment by the surety. Thus, contractual principles of guarantee require being respected even during a moratorium and an alternate interpretation may not have been the intention of the Code, as is clear from a plain reading of Section 14.

5.11.

Further, since many guarantees for loans of corporates are given by its promoters in the form of personal guarantees, if there is a stay on actions against their assets during a CIRP, such promoters (who are also corporate applicants) may file frivolous applications to merely take advantage of the stay and guard their assets. In the judgments analysed in this relation, many have been filed by the corporate applicant under Section 10 of the Code and this may corroborate the above apprehension of abuse of the moratorium provision. The Committee concluded that Section 14 does not intend to bar actions against assets of guarantors to the debts of the corporate debtor and recommended that an explanation to clarify this may be inserted in Section 14 of the Code. The scope of the moratorium may be restricted to the assets of the corporate debtor only.”

33.

The Report of the said Committee makes it clear that the object of the amendment was to clarify and set at rest what the Committee thought was an overbroad interpretation of Section 14 […]”

“122.

It is therefore, clear that the sanction of a resolution plan and finality imparted to it by Section 31 does not per se operate as a discharge of the guarantor's liability. As to the nature and extent of the liability, much would depend on the terms of the guarantee itself. However, this Court has indicated, time and again, that an involuntary act of the principal debtor leading to loss of security, would not absolve a guarantor of its liability. In Maharashtra SEB [Maharashtra SEB v. Official Liquidator, (1982) 3 SCC 358] the liability of the guarantor (in a case where liability of the principal debtor was discharged under the Insolvency law or the Company law), was considered. It was held that in view of the unequivocal guarantee, such liability of the guarantor continues and the creditor can realise the same from the guarantor in view of the language of Section 128 of the Contract Act, 1872 as there is no discharge under Section 134 of that Act […]”

“125.

In view of the above discussion, it is held that approval of a resolution plan does not ipso facto discharge a personal guarantor (of a corporate debtor) of her or his liabilities under the contract of guarantee. As held by this Court, the release or discharge of a principal borrower from the debt owed by it to its creditor, by an involuntary process i.e. by operation of law, or due to liquidation or insolvency proceeding, does not absolve the surety/guarantor of his or her liability, which arises out of an independent contract.”

“18.

Effect of acknowledgment in writing.—(1) Where, before the expiration of the prescribed period for a suit or application in respect of any property or right, an acknowledgment of liability in respect of such property or right has been made in writing signed by the party against whom such property or right is claimed, or by any person through whom he derives his title or liability, a fresh period of limitation shall be computed from the time when the acknowledgment was so signed.”

“43.

Ordinarily, upon declaration of the loan account/debt as NPA that date can be reckoned as the date of default to enable the financial creditor to initiate action under Section 7 IBC. However, Section 7 comes into play when the corporate debtor commits “default”. Section 7, consciously uses the expression “default” — not the date of notifying the loan account of the corporate person as NPA. Further, the expression “default” has been defined in Section 3(12) to mean non-payment of “debt” when whole or any part or instalment of the amount of debt has become due and payable and is not paid by the debtor or the corporate debtor, as the case may be. In cases where the corporate person had offered guarantee in respect of loan transaction, the right of the financial creditor to initiate action against such entity being a corporate debtor (corporate guarantor), would get triggered the moment the principal borrower commits default due to non-payment of debt. Thus, when the principal borrower and/or the (corporate) guarantor admit and acknowledge their liability after declaration of NPA but before the expiration of three years therefrom including the fresh period of limitation due to (successive) acknowledgments, it is not possible to extricate them from the renewed limitation accruing due to the effect of Section 18 of the Limitation Act. Section 18 of the Limitation Act gets attracted the moment acknowledgment in writing signed by the party against whom such right to initiate resolution process under Section 7 IBC enures. Section 18 of the Limitation Act would come into play every time when the principal borrower and/or the corporate guarantor (corporate debtor), as the case may be, acknowledge their liability to pay the debt. Such acknowledgment, however, must be before the expiration of the prescribed period of limitation including the fresh period of limitation due to acknowledgment of the debt, from time to time, for institution of the proceedings under Section 7 IBC. Further, the acknowledgment must be of a liability in respect of which the financial creditor can initiate action under Section 7 IBC.”

“11.

A CERTIFICATE in writing under the hand of the Manager, Sub/Asst. Manager or the other Officer of the Bank stating the amount at any particular time due and payable to it under the guarantee shall be conclusive evidence as against the guarantors, each of them and their respective representative and estates.”