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Judgment
O R D E R
Per: Justice Rakesh Kumar Jain.
22.07.2022: This appeal is directed against the order dated 31.01.2020 read with Corrigendum order dated 13.02.2020, passed by the Adjudicating Authority (National Company Law Tribunal, Kolkata Bench, Kolkata) in CP (IB) No. 827/KB/2019, by which an application filed under Section 7 of the Insolvency and Bankruptcy Code, 2016 (in short ‘Code’) read with Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (in short ‘Rules’) has been dismissed.
In brief, the Appellant/Applicant ‘IL & FS Financial Services Limited’ (Financial Creditor) entered into a Loan Agreement on 27.02.2015 to extend a Term Loan Facility of up to Rs. 30,00,00,000/- towards Working Capital Requirements/General Corporate Purposes to Adhunik Meghalaya Steels Private Limited (the ‘Borrower’) and in pursuance thereof a sum of Rs. 24,44,44,456/- was disbursed to the Borrower on 17.03.2015. A Security Package was provided in the terms and conditions which read as under:-
“15. Security : 1. Primary Security
The Facility together with all amounts due and payable in terms of the Facility documents shall be secured by:
(a)Pledge of shares of Adhunik Metaliks Limited (AML) at a cover of 2x margin i.e. 50%. The said shares to be de-materialized, unencumbered, freely transfereeable (without any lock in stipulations specified by the Securities and Exchange Board of India)
The Borrower shall ensure that the necessary filing is made with the ROC in relation to the aforesaid security. The Borrower shall submit the necessary documents evidencing such filings with the Lender within 30 days from the date of creation of aforesaid security.
For the purpose of valuation, the market value of shares will be calculated on the basis of either the average of three months daily closing price on National Stock Exchange (NSE) or the current market price, whichever is lower
Top up of Security: In the event of any dip in the market price of shares by which top up as stipulated above is triggered, it would be necessary for the Borrower to arrange pledge of additional shares of AML from the pledgor(s) in favour of Lender as top up for the shortfall in the drawing power within 5 trading days from date of such shortfall. In the event top up by way of pledge of additional shares of AMIL cannot be provided, top by way of cash/cash collateral to be provided within the same timeframe.
(b)Personal Guarantee of Mr. Manoj Agarwal
II. Other Security
(a)Demand Promissory note in favour of Lender. The promissory note shall bear the common seal of the Borrower duly supported by a resolution of the Board of Directors of the Borrower
(b)ECS Mandate for Principal & Interest”
On 27.02.2015 itself an Unattested Pledge Agreement was also executed amongst the Financial Creditor, the Borrower, Mahananda Suppliers Limited and one Sungrowth Share & Stocks Limited. In this Agreement the Borrower has been referred to as Pledgor-I, Mahananda Suppliers Limited as Pledgor-II and Sungrowth Share and Stocks Limited as Pledgor-III. This agreement was executed simultaneously with the Facility Agreement dated 27.02.2015 as an additional security. A Schedule is appended having the details of the Pledged Securities with this Agreement which is reproduced as under:-
| Name of the holder/owner | Name of the Company | Number of Securities Pledged | Face Value of the Securities | Client ID/Depository ID No. |
|---|---|---|---|---|
| Sungrowth Share and Stocks Limited | Adhunik Meghalaya Steels Private Limited | 12,100,000 | Rs. 10/- | 10000144/IN 302978 |
| Sungrowth Share and Stocks Limited Sungrowth Share and Stocks Limited | Adhunik Meghalaya Steels Private Limited Adhunik Meghalaya Steels Private Limited | 7,750,000 1,506,753 | Rs. 10/-Rs. 10/- | 11508096/IN 300095 13949191/IN 302269 |
| Sungrowth Share and Stocks Limited | Adhunik Meghalaya Steels Private Limited | 906,349 | Rs. 10/- | 10000144/IN 302978 |
| Mahananda Suppliers Limited | Adhunik Meghalaya Steels Private Limited | 2,000,000 | Rs. 10/- | 10040714/IN 302978 |
| Mahananda Suppliers Limited | Adhunik Meghalaya Steels Private Limited | 143,485 | Rs. 10/- | 10040714/IN 302978 |
| Adhunik Meghalaya Steels Private Limited | Adhunik Meghalaya Steels Private Limited | 810,804 | Rs. 10/- | 10309029/IN 302978 |
| Total | 25,217,391 |
Insofar as the default and remedies are concerned, Para 8.2 of the Facility Agreement deals with it which is reproduced as under:-
“8.2 Remedies
If one or more of the Events of Defaults shall have happened for any reason whatsoever (and whether such occurrence shall be voluntary or involuntary or come about or be effected by the operation of law or pursuant to or in compliance with any judgment, decree, or order of any court, tribunal or other authority) then notwithstanding any other right available to IFIN under this Agreement or under any law for the time being in force.
(a)IFIN shall by a Notice in writing to the Borrower be entitled at its sole discretion to exercise any of the powers mentioned below:
(i)recall the whole or part of the principal amount of Facility together with accrued interest and other monies payable by the Borrower; and/or
(ii)declare the entire amount of the Borrower’s dues outstanding to be due and payable; and/or
(iii)declare that the said Facility is cancelled, suspended, terminated; and/or
(iv)enforce any or all of the Security, as specified in the Annexure hereto, in part or whole, to realize either in part or entire amount of the Borrower’s dues; and/or
(v)invoke any guarantee provided under this Agreement or as specified in the Annexure hereto; and/or
(vi)enforce repayment under the Promissory Note and/or the post dated cheques; and/or
(vii)enter upon and take possession of the Security, in part or whole, as mentioned under this Agreement or as specified in the Annexure hereto; and/or
(viii)exercise any and all rights specified in the documents executed with respect to the Security created; and/or
(ix)exercise other remedies as may be permitted under applicable laws.”
Para 6.2 of the Pledge Agreement deals with the remedies which is reproduced as under:-
“6.2 Remedies
If one or more of the Events of Defaults shall have happened for any reason whatsoever (and whether such occurrence shall be voluntary or involuntary or come about or be effected by the operation of law or pursuant to or in compliance with any judgment, decree, or order of any court, tribunal or other authority) then notwithstanding any other right available to IFIN under this Agreement or under any law for the time being in force.
(a)IFIN shall by a Notice in writing to the Borrower/Pledgor(s) be entitled at its sole discretion, to exercise any of the powers mentioned below:
(i)recall the whole or part of the principal amount of Facility together with accrued interest and other monies payable by the Borrower; and/or
(ii)declare the entire amount of the Borrower’s dues outstanding to be due and payable; and/or
(iii)declare that the said Facility is cancelled, suspended, terminated; and/or
(iv)enforce any or all of the Security, in part or whole as mentioned in this Agreement and/or the Facility Agreement, to realize either in part or entire amount of the Borrower’s dues; and/or
(v)invoke any guarantee provided under the Agreement; and/or
(vi)enforce repayment under the Promissory Note and/or the post dated cheques; and/or
(vii)enter upon and take possession of the Security, in part or whole, as mentioned under this Agreement and/or the Facility Agreement; and/or
(viii)exercise any and all rights specified in the documents executed with respect to the Security created; and/or
(ix)exercise other remedies as may be available under the Facility Agreement and/or permitted under applicable laws.”
The case set up by the Appellant is that the Borrower has failed to repay the loan amount and committed a default as a result of which it issued a notice of default on 10.07.2018 demanding payment of the outstanding dues. It also issued a notice on 20.08.2018 to the Respondent as a Corporate Guarantor recalling the term loan facility demanding payment of the outstanding dues. Thereafter, Section 7 application was filed, which has been contested by the Respondent, inter alia, on the ground that security for the loan facility was provided by the Borrower and the personal guarantee was given by Manoj Kumar Agrawal. It was denied that any guarantee was given to the Financial Creditor rather it is alleged that only the securities were pledged by the Pledge Agreement dated 27.02.2015.
According to the Appellant, Clause 5.1(g) of the Pledge Agreement is in fact a guarantee extended by the pledgors to the Financial Creditor to recover the amount in question from any one of the pledgors as they have admitted their liability jointly and severally. The Adjudicating Authority, vide the impugned order, did not agree with this contention and dismissed the application vide its order dated 31.01.2020 in which the following observations have been made:
“30.We have gone through the pleadings and heard very impressive arguments of the Ld. Counsel on both sides. The whole controversy revolves around the so called "unattested Pledge Agreement” which is being given a new nomenclature as agreement of pledge and guarantee. Each and every clause points to the clear cut intention of the parties who had entered into a Pledge Agreement thereby pledging the shares of the Corporate Debtor and other Pledgers. None of the clauses of the agreement except clause 5.1(g) referred to above and clause 6.2 (b) referred to above have been referred to by the Financial Creditor. The agreement runs into 20 pages and under different heads it beautifully describes the intention of the parties, assigning the role of the Pledger and the pledged shares. For understanding and interpreting this agreement one would have to go into and understand the circumstances which led to the execution of this agreement. Since the loan agreement between the Borrower and the Financial Creditor had also been entered into on the same date i.e. 27.02.2015 which required security package for the said loan to be submitted by the Borrower to the Financial Creditor.
31.Under the heading top up of Security, it was specifically mentioned that in the event of any dip in the market of shares by which top up as stipulated above is triggered, it would be necessary for the Borrower to arrange pledge of additional shares of AML from the pledgers in favour of Lender as top up for the short fall in the drawing power within 5 trading days from the date of such short fall. In the event top up by way of pledge of additional shares of AMIL cannot be provided, top up by way of cash/cash collateral to be provided within a time frame, in addition to this personal guarantee of Mr. Manoj Kumar Agarwal.
32.From the pleadings of the parties, documents placed on record and the arguments advanced, we are of the considered view that this agreement can be referred to as a hybrid agreement. Though it is in fact an agreement of pledge but, for the convenience of the Financial Creditor the same is repeatedly being referred to by the Financial Creditor in its pleadings as
“Agreement of Pledge and Guarantee" without there being any Guarantee explicitly or implicitly. This agreement cannot be interpreted as per the convenience of the Financial Creditor. The role of the Pledgers has been clearly specified from the very beginning and it was very much clear to all the parties including the Borrowers and the Financial Creditors. The Minutes of the Board Meeting submitted to the Financial Creditor by the Borrower specifically in clause 5 mentioned that the Corporate Debtor, and another Pledger shall pledge the number of shares mentioned against their respective names and that Mr. Manoj Kumar Agarwal shall execute Letter of Guarantee received from the Financial Creditor in this connection in favour of the Financial Creditor to secure the dues of the Company. If there had been any intention to include the Pledger Corporate Debtor herein as a Guarantor, a similar guarantee agreement would have been executed from the Corporate Debtor as well. An "unconditional and irrevocable personal guarantee of Mr. Manoj Kumar Agarwal, the Promoter Director of the Borrower Company had been directed to be given by the Financial Creditor which was submitted to them by the Borrower.
33.The present application under Section 7 seeking initiation of Corporate Insolvency Resolution Process against the Corporate Debtor, which is only a Pledger of shares, and has not availed any financial benefit from the Financial Creditor and has never signed any document intending to be a Guarantor, cannot be allowed to be proceeded against under Section 7 of the Code. Admission of this petition and initiation of CIRP against the corporate Debtor shall be the harshest action if allowed to be taken in the foregoing facts and circumstances. As a passing reference, we must mention that the Financial Creditor has taken no steps for recovery of its dues either against the principal borrower or against other Pledger and even against the sole Principal Guarantor Mr. Manoj Kumar Agarwal and the only action initiated is against the present Corporate Debtor Pledger of shares whose shares have already been invoked and are likely to be sold, if not already sold.
34.We understand that it is the option of the Financial Creditor that the liability of the principal borrower and that of the Guarantors is coextensive as submitted by the Ld. Counsel for the Financial Creditor but since in the present case we do not hold it as an agreement for guarantee, the present Pledger of shares cannot be termed as Corporate Debtor and would not owe any debt to the Financial Creditor as per the Pledge Agreement mentioned above.
35.In the aforesaid circumstances, the application of the Financial Creditor does not inspire confidence and has failed to convince us as regards fixing any liability on this Corporate Debtor as regards the outstanding dues of the Financial Creditor. Nothing is found due and payable by the corporate debtor to the financial creditor. The petition thus fails and is dismissed.”
Since, there were some typographical error in the order dated 31.01.2020, therefore, a separate order was passed on 13.02.2020 for rectification of error in Paragraph 13 and 24.
Aggrieved against the aforesaid orders, the present appeal has been filed in which Counsel for the Appellant has submitted that the Adjudicating Authority has committed a patent error in not properly interpreting the import of Clause 5.1(g) of the Pledge Agreement. It is vehemently argued that it has been agreed by all the pledgors that they would be jointly and severally liable as principal debtors without exclusion/preference to the other or others of them for the payment of the Borrowers and the Financial Creditor shall have the option to recover its amount from any one of the pledgors even without exercising or exhausting any other remedy/right, it has against the Borrower.
Counsel for the Appellant has also referred to Clause 8.1 pertaining to indemnify which read as under:-
“The Borrower and the Pledgor(s) shall jointly and severally indemnify and keep indemnified IFIN from and against all suits/actions, proceedings, liabilities, accidents, claims, losses, damages, costs, charges and expenses whatsoever in respect of or in relation to, or arising out of, the obligations, performance and liabilities of the Borrower in connection with the Facility and/or the Pledged Securities and/or this Agreement.”
It is further submitted that in Clause 6.2 pertaining to the remedies it can enforce any or all of the security, in part or whole as mentioned in this Agreement and/or the Facility Agreement, to realize either in part or entire amount of the Borrower’s Dues and/or invoke any guarantee provided under the Facility Agreement. It is sought to be argued that the Financial Creditor has exclusive right to recover the amount payable from the present Respondent by virtue of Clause 5.1(g) of the Pledge Agreement which is basically a guarantee extended to the Financial Creditor on behalf of the Borrower.
In reply, Counsel for the Respondent has submitted that the Pledge Agreement cannot be read as an agreement of guarantee or even a hybrid agreement because it confines to the limited liability of the pledgors who had specifically pledged the security which is provided in the Schedule. It is submitted that the only personal guarantee is of Manoj Kumar Agarwal and it has been mentioned specifically in Clause 6.2 pertaining to the remedies of the Pledge Agreement that the said guarantee is provided in the Facility Agreement which can be invoked. It is further submitted that the remedy to recover the amount by the Financial Creditor is provided in Clause 6.2(a)(iv) which says that “enforce any or all of the Security, in part or whole as mentioned in this Agreement and/or the Facility Agreement, to realize either in part or entire amount of the Borrower’s dues; and/or”. It is submitted that the securities are given for the recovery of amount in the Facility Agreement and also in the Pledge Agreement which can be invoked by the Borrower but in case the guarantee is to be invoked then it is provided in the Facility Agreement alone by Manoj Kumar Agarwal and none else.
We have heard Counsel for the parties and perused the record with their able assistance.
It is apparent from the facts of the case that when it was decided by the Financial Creditor to extend loan to the Borrower a Facility Agreement was executed in which security package was given as contained in the terms and conditions. The only personal guarantee in the Facility Agreement is that of Manoj Kumar Agarwal and none else but it appears that this security was not found sufficient by the Financial Creditor, therefore, on the same date an Unattested Pledge Agreement was also executed in which the present Respondent i.e. Mahananda Suppliers Limited and Sungrowth Share and Stocks Limited came forward to support the Borrower i.e. Adhunik Meghalaya Steels Private Limited and all of them pledged their security which has been mentioned in the Schedule appended with the Agreement and made themselves liable to pay the dues of the Financial Creditor jointly and severally, meaning thereby giving an option to the Financial Creditor to initiate action against the security of any of the pledgor but in no case the pledgor can be termed as a principal debtor for the purpose of recovery of the entire amount that too by resorting to the filing of the application under Section 7 of the Code.
We have minutely gone through both the agreements and other relevant material on record together with the findings recorded by the Adjudicating Authority in which we do not find any error for the purpose of interfering in it and therefore, we are of the considered opinion that the present appeal is totally without any merit and deserves to be dismissed.
Thus, in view of the aforesaid facts and circumstances, the present appeal fails and the same is hereby dismissed but without any order as to costs.