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Judgment
ORDER
[Oral Judgment : Justice Sharad Kumar Sharma, Member Judicial)]
The Appellant who claims his status as to be that of the financial creditor of the Respondent company, puts a challenge to the Impugned Order dated 02.08.2019, as it was passed in I.A. No. IBA/553/2019, whereby the application preferred by the appellant under Section 7 of the I & B Code, which was filed before the NCLT, Chennai Bench as against the Respondent stood rejected, and consequently the process of recovering of alleged outstanding debt of Rs.7,02,82,191.78, was declined on the ground that, it was not a financial debt which would not be falling within the ambit of its definition, as prescribed under the statute.
The Appellant has come up with a case in this appeal, that there was a loan agreement alleged to have been executed on 14.01.2015, entered into between the Appellant (Lender), with one Mr. T.G.S. Mahesh, as its borrower and a company called M/s. Cetex Petrochemicals Limited and that, on account of default committed by the borrower on repayment of the aforesaid loan he initiated proceedings under Section 7, for initiation of CIRP to be drawn against the Company (Respondent herein). But however after considering the rival contentions, the Learned Adjudicating Authority, by virtue of the Impugned Order under challenge dated 02.08.2019, has rejected the application preferred under Section 7 of I & B Code, by the Appellant, holding thereof that, on a simple interpretation to be given, to the contents of the agreement of 14.01.2015, it does not constitute to be loan agreement qua the Corporate Debtor have so as to be treated as to be a financial debt, which would have enabled him to initiate the proceedings under Section 7 of the I & B Code.
The Learned Adjudicating Authority, while determining the aforesaid aspect, about the status of the “financial debt”, which was the prime factor to be considered, while deciding the application preferred under Section 7 of the I & B Code, has taken into consideration the definition of “debt” as defined under Section 3(11) of the Code, which in a nutshell means the liability or a financial obligation in respect, of a claim which is due from any person and includes a “financial debt” and “operational debt”. If the said definition of the “debt”, as provided under Section 3(11) is read in consonance with the definition of “financial debt”, as given under Section 5(8) of the Code, the financial debt would mean a debt along with the interest, if any, which is disbursed against the consideration, for the time value of money. The Learned Adjudicating Authority, after considering the interplay of the two definitions which were primarily required to be considered and satisfied for the purposes of determining as to whether based on the agreement dated 14.01.2015, there had chanced a financial debt, which could have attracted the provisions contained under Section 7 of the I & B Code, for the purposes of drawing the proceedings for initiation of the CIRP, as against the Corporate Debtor.
It is seen that the Learned Adjudicating Authority while making its analysis, in the Impugned Judgment, has ultimately arrived at a conclusion that the appellant has at all stages of the proceedings, has utterly failed to establish that, it was a debt extended to the Corporate Debtor and was falling within the ambit of the definition provided under Section 3(11) to be read with Section 5 (8) as well as Section 7 of the Code and that the legal obligation on part of the Corporate Debtor for the purposes of remittance of the amount due to be paid as claimed by the Appellant, was not established. In the absence of establishment or proof of financial debt due to be paid to the appellant towards the Corporate Debtor, the Adjudicating Authority by the Impugned Order has observed that, the appellant has failed to satisfy the parameters prescribed for the initiation of Section 7 proceedings and consequently by the Impugned Order had rejected the application under Section 7 of I & B Code.
When the matter was taken up for hearing, the Learned Counsel for the Appellant in support of his contention had made reference to the agreement which was executed on 14.01.2015. The said agreement describes the borrower as under: -
“1.Mr. T.G.S. Mahesh, son of Mr. T.S. Gowri Sankar, aged about 45 years and having his address at 145, Second Main Road, Ranga Reddy Gardens, Neelangarai, Chennai – 600 041, hereinafter referred to as the “Borrower” which expression shall, unless repugnant to the context or meaning thereof, include his successors and assigns) of the First Part;”.
The description of the borrower as given therein the agreement, makes it crystal clear that Mr. T.G.S. Mahesh in person, as son of Mr. T.S. Gowri Sankar and as the resident of the particular place as contained therein and the status of him, as per the said agreement has to be taken as to be the ‘borrower’. It will be relevant to point out that, at the stage when Mr. T.G.S. Mahesh was being described as a borrower in the agreement, no expression was ever given therein that it also includes the Corporate Debtor (Respondent herein), as to be the borrower for the purposes of availing the aforesaid amount under the agreement of 14.01.2015, as to be a financial debt. Further the agreement nowhere makes any reference that Mr. T.G. Mahesh was acting on behalf of Corporate Debtor.
In continuation thereof, the Learned Counsel for the Appellant submitted that, the said amount under the agreement as extended by the lender, to the borrower, would be treated as to be the ‘financial debt’ in respect of the Corporate Debtor for the reason being that, in the balance sheet of the Corporate Debtor, certain cheques have been reflected as to have been extended as a “security” for the purposes of advancement of said loan to the borrower. Such cheques reflected in books of account, will itself not amount to be evidence of financial debt.
The question which emerges for consideration before us as to whether the reflection of certain cheques in the balance sheet of the Corporate Debtor, which is alleged to have been extended as a security against the loan availed by the borrower could be taken as the evidence of the said loan being availed by the Corporate Debtor.
After giving a thoughtful consideration and after hearing the Learned Counsels for the parties this Appellate Tribunal is of the view that, for the purposes of determining as to who will be a borrower in aspect of “financial debt” as defined under the statute, it has to be shown to be confined specifically to the person or the body who has been described in the loan agreement and who is the beneficiary of financial assistance, as to be the borrower. Therefore, in the absence of there being any specific mention of the Corporate Debtor, as to be the borrower of the loan, under the Agreement of 14.01.2015, the financial debt, cannot be said to be standing against the Corporate Debtor, which could have enabled the appellant to initiate Section 7 proceedings, as against the Corporate Debtor.
As against the argument extended by the Learned Counsel for the Appellant in the context of the entries made in the balance sheet of the Corporate Debtor, a simpliciter answer could be given that, under the accounting laws the Corporate Debtor was bound to reflect such amount in the balance sheet which was extended even by way of surety for the purpose of extension of the loan to Mr. T.G.S. Mahesh, for the reason being that, the said surety was nothing but an assurance extended by the Corporate Debtor for the purposes of extension of loan to Mr. T.G.S. Mahesh, in an individual capacity and not as the representative of the Corporate Debtor itself. We are of the view that, the reflection of the security, in the balance sheet or in the books of account of the Corporate Debtor will not in itself amount to be a financial debt or a debt as described under the I & B Code.
The aforesaid aspect has been quite elaborately considered by the Learned Adjudicating Authority, holding that since the aforesaid amount as extended under the agreement of 14.01.2015, is not a financial debt it will not attract the provisions of Section 7 of I & B Code, for the purposes of initiation of the CIRP Proceedings. The Learned Counsel for the Appellant in support of his contention has relied on catena of Judgments in order to substantiate his arguments, as to under what circumstances such financial assistance, extended under an agreement would be treated as to be a financial debt. He has made reference to the Judgment reported in 2019 Volume 4 SCC Page 197 BIR Singh Vs Mukesh Kumar and particularly he has referred to Para 32 & Para 36 of the said Judgment, which are extracted hereunder: -
“32.The proposition of law which emerges from the judgments referred to above is that the onus to rebut the presumption under Section 139 that the cheque has been issued in discharge of a debt or liability is on the accused and the fact that the cheque might be post-dated does not absolve the drawer of a cheque of the penal consequences of Section 138 of the Negotiable Instruments Act.
36.Even a blank cheque leaf, voluntarily signed and handed over by the accused, which is towards some payment, would attract presumption under Section 139 of the Negotiable Instruments Act, in the absence of any cogent evidence to show that the cheque was not issued in discharge of a debt”.
The Appellant contends in the context of this Judgment that the terms of the agreement itself the presence of cheques in the balance sheet of the Corporate Debtor will suffice to make loan as extended to Mr. T.G.S. Mahesh in his individual capacity, to be treated as to be a financial debt for the Corporate Debtor. With all due reverence at our command, we are unable to accept the argument extended by the Learned Counsel for the Appellant in the context of the Judgment of the BIR Singh (supra) for the reason being that, when the counsel in a judicial proceedings relies upon a Judgment in support of his contention, he has to be conscious of the fact as to, under what backdrop the said inference have been drawn by a judicial precedence which becomes of much relevance, for the purposes of supporting his case. In the Judgment of BIR Singh (supra), the reference which was being decided by the Hon’ble Apex Court has been dealt with by the Hon’ble Apex Court in Para 1 where it was dealing with the matter in a criminal petition, emanating from the proceeding under Section 138 of the Negotiable Instruments Act. And thus, the reference made to by the Learned Counsel for the Appellant to Para 32 & 36, (which has already been extracted above), it clearly demonstrates that, the preposition of law which was considered by the Hon’ble Apex Court in the said Judgment was for the purposes of determining, as to what would be the “debt” or the “liability” which was in the context of the “presumption” which has been prescribed under Section 139 of the Negotiable Instruments Act and not in the context of the “financial debt” as it has been described under the I & B Code. Even with regards to the inference drawn from Para 36, which refers to a blank cheque leaf, which has been signed by the Lender and handed over to the borrower, the issue therein was whether the simpliciter execution of the cheque would itself fall to be within the ambit of Section 139 of the Negotiable Instruments Act to draw a presumption, which was the subject, being considered by the Hon’ble Apex Court in the said Judgment.
The aspect as to whether a simpliciter issuance of cheque will amount to a financial debt was an aspect which has already been dealt by the Principal Bench of the NCLAT, which would be dealt with by this Appellate Tribunal in the forthcoming paragraphs. But as far as the aforesaid Judgment of BIR Singh (supra), is concerned and particularly if the implications of Para 32 & 36 as extracted above is read in the context of the subject dealt with in Para 1, the said Judgment has got no implication as such to substantiate the argument extended by the Appellant that, the agreement of 14.01.2015, could at all be taken as to be a financial debt qua the Corporate Debtor.
Another Judgment on which the Learned Counsel for the Appellant has relied upon is the Judgment of this Tribunal reported in 2019 SCC Online NCLAT 504 Ferro Alloys Corporation Ltd. Vs Rural Electrification Corporation Ltd., in which he has drawn the attention of this Tribunal to the contents of Para 27, on which he intends to rely upon. But the said contents of Para 27, have to be read conjointly with Para 24, 25 & 26 of the said Judgment for coming to any conclusion. The Principal Bench in Para 24 to 26 of the said Judgment, has observed that, for the purposes of recognising someone as a Corporate Debtor it is mandatory to satisfy the precondition that, there was a debt falling within the definition as prescribed under the I & B Code, and that, such debt should be correlated to be established as a financial debt, as provided therein and that is why the NCLAT, Principal Bench, in Para 26 has observed that, when a definition is interpreted for the purposes of determining as to whether there happens to be a financial debt or not, there has had to be a logical and harmonious construction and purposeful reading and reasoning of the provisions for the purpose to determine as to how a debt could be treated as to be financial debt. Para 24-27 are extracted hereunder: -
“24.On being default in making the payment of the debt amount by the 'principal borrower', the 'financial creditor' invoked the corporate guarantee of the 'Ferro Allows Corporation Limited' and called upon the 'Ferro Alloys Corporation Limited' ('corporate guarantor') to pay forthwith the amount due and payable by the 'FACOR Power Limited' (principal borrower') amounting to Rs. 564,63,50,544/- as on 30th September, 2015 along with future interest within a period of 21 days. Ferro Alloys Corporation ('corporate guarantor') issued a reply dated 26th November, 2015 but failed and neglected to pay the above sum.
25.The ‘financial creditor’ pleaded that the ‘corporate guarantee’ furnished by ‘Ferro Alloys Corporation Limited’ is an unconditional, continuing and irrevocable guarantee. As per the terms of the guarantee, the obligation of guarantor is separate, independent and is that of primary obligor and not merely as surety, on a full indemnity basis to indemnify the ‘financial creditor’. The ‘corporate guarantee’ provided by the ‘Ferro Alloys Corporation Limited’ is joint and several and co-extensive with that of the principal debtor and can be invoked even without exhausting the remedies against the principal debtor. Similar plea was taken before the Adjudicating Authority. The Adjudicating Authority taking into consideration the fact that there is a ‘debt’ and ‘default’ and the application under Section 7 being complete admitted the application by the impugned order dated 6th July, 2017.
26.We have heard the learned counsel for the parties and perused the record. The position of law is manifested in the I & B Code including the definitions which require harmonious and purposeful reading and reasoning
27.The term ‘corporate person’, defined under Section 3(7) of the I&B Code, is as under:
“(7)“corporate person” means a company as defined in clause (20) of section 2 of the Companies Act, 2013, a limited liability partnership, as defined in clause (n) of sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008, or any other person incorporated with limited liability under any law for the time being in force but shall not include any financial service provider;”
Insolvency Resolution Process under Section 7 of the I&B Code can be initiated against the guarantor who is a ‘corporate person’ and who by operation of law ipso facto becomes a ‘corporate debtor’ by satisfying the ingredients of the terms as defined under Section 3(8).
The term of ‘corporate debtor’ which is defined under Section 3(8) means a ‘corporate person’ who owes a debt to any person, as quoted below:
“(8)“corporate debtor” means a corporate person who owes a debt to any person;”
The term ‘debt’, as used in Section 3(8) is defined under Section 3(11) of the Code, is as under:
“(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;”
As per Section 3(8), the term ‘corporate debtor’ can be a debtor who may be any person. The term ‘person’, defined under Section 3(23), is as under:
(23)“person” includes—
(a)an individual;
(b)a Hindu Undivided Family;
(c)a company;
(d)a trust;
(e)a partnership;
(f)a limited liability partnership; and
(g)any other entity established under a statute, and includes a person resident outside India;”
Thus, a ‘corporate debtor’ must be a ‘corporate person’, [Section 3(7)] who owes a ‘debt’ [Section 3(11)], to any person [Section 3(23)]. The ‘debt’ as used in Section 3(8) has to be a ‘debt’ defined under Section 3(11) as quoted above. It must be the ‘liability’ or ‘obligation’ in respect of a ‘claim’ [Section 3(6)] which is due from any person [Section 3(23)] -which means even a corporate entity and shall include ‘financial debt’ and ‘operational debt’ as defined under section 5(8) and 5(21) as quoted hereunder:
(6)“claim” means—
(a)a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured;
(b)right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured;
(8)“financial debt” means a debt alongwith interest, if any, which is disbursed against the consideration for the time value of money and includes—
(a)money borrowed against the payment of interest;
(b)any amount raised by acceptance under any acceptance credit facility or its de-materialised equivalent;
(c)any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument;
(d)the amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed;
(e)receivables sold or discounted other than any receivables sold on nonrecourse basis;
(f)any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing;
(g)any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account;
(h)any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution;
(i)the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clauses (a) to (h) of this clause;
(21)“operational debt” means a claim in respect of the provision of goods or services including employment or a debt in respect of the repayment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority;
‘Corporate Insolvency Resolution Process’ under Section 7 of the I&B Code can be initiated by a ‘financial creditor’. Section 7(1) reads as under:
7.(1) A financial creditor either by itself or jointly with other financial creditors may file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred.
Explanation.— For the purposes of this sub-section, a default includes a default in respect of a financial debt owed not only to the applicant financial creditor but to any other financial creditor of the corporate debtor.”
Section 3(10) defines ‘creditor’ as under:
(10)“creditor” means any person to whom a debt is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decreeholder;
The term ‘financial creditor’ is defined under Section 5(7) which reads as under:
(7)“financial creditor” means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to;
The term ‘default’ is defined under Section 3(12) which encompasses default, both by principal borrower and principal guarantor, which reads as under:
(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 repaid by the debtor or the corporate debtor, as the case may be;
A guarantee becomes a debt or as soon as the guarantee is invoked against it whereinafter a guarantor (‘corporate guarantor’) becomes a ‘corporate debtor’ in terms of the I&B Code.”.
So far as the reference made by the Appellant to Para 27, as extracted above is concerned, the contents of the said paragraph are nothing, but an extraction of definitions given in the I & B Code, with regards to the different definitions and the language used under the I & B Code. That in itself will not lead to any inference, as to in what manner the financial debt is to be determined and as such the preceding paragraphs i.e., Paragraphs 24, 25 & 26 are to be read with harmonious construction with Para 27. Thus, this Judgment will be of no avail to the appellant to place reliance on in relation to the controversy at hand emanating from the agreement of 14.01.2015 where a simple individual debt is sought to be portrayed as to be the financial debt, exclusively based on the terms of the said agreement. However such the agreement itself prescribes that, a borrower happens to be an individual and not the Corporate Debtor. Therefore, until and unless it is satisfied beyond reasonable doubt that the borrower has got nexus with the Corporate Debtor, specifically laid down in the terms of the agreement, the debt extended to the the individual in the instant case, cannot be treated as to be a financial debt for the purposes of Section 7 of the I & B Code.
The Learned Counsel for the Appellant has further referred to yet another Judgment reported in 2021 Volume 6 SCC Page 366 Asset Reconstruction Company (India) Limited Vs Bishal Jaiswal and Anr., and particularly he has referred to Para 16 & 17 of the said Judgment which are extracted hereunder: -
“16.The next question that this Court must address is as to whether an entry made in a balance sheet of a corporate debtor would amount to an acknowledgment of liability under Section 18 of the Limitation Act.
17.Several judgments of this Court have indicated that an entry made in the books of accounts, including the balance sheet, can amount to an acknowledgment of liability within the meaning of Section 18 of the Limitation Act.”.
Para 17 of above Judgment uses the word ‘can’ which means such entries would always be subject to proof, and to establishment of their relationship with the alleged debt.
In the matters of Asset Reconstruction India Private Limited (supra), the subject matter, which was under consideration was that as to whether once the account of the Corporate Debtor has been declared a non-performing asset by the SBI, whether after the declaration of account as to be a non-performing asset whether the proceedings after the stage of Section 13(2) and 13(4) of the Securitisation Act could at all attract Section 7 for the purposes of initiation of CIRP Proceedings. Before dealing with Para 16 & 17 of the said Judgment, Para 1 & 2 of it also becomes relevant, because when the Counsel relied upon an authority, he should be conscious that, when a particular Judgment has been referred to and relied in a particular case, he has also to bear in mind under what context and under what framework such Judgment has been rendered by a Court of Law and particularly when contextually the controversy was not from the perspective or determining of the aspect as to who would be the financial creditor, the said Judgment will be of no avail for the appellants case, owing to the fact that it was altogether under a different subject qua the interplay of the Provisions of the Securitisation Act, with the proceedings to be drawn under the I & B Code under Section 7 of the I & B Code. Relevant Para 1 & 2 are extracted hereunder: -
“1.In 2009, Corporate Power Ltd. ("the corporate debtor") set up a thermal power project in Jharkhand, and for so doing, availed of loan facilities from various lenders, including State Bank of India ("SBI"). The account of the corporate debtor was declared as a non-performing asset by SBI on 31-7-2013. On 27-3-2015, SBI issued a loan-recall notice to the corporate debtor in its capacity as the lenders agent. On 31-3-2015, some of the original lenders of the corporate debtor, namely, India Infrastructure Finance Company Ltd., SBI, State Bank of Hyderabad, State Bank of Bikaner and Jaipur, State Bank of Patiala, and State Bank of Travancore assigned the debts owed to them by the corporate debtor to the appellant, Asset Reconstruction Co. (India) Ltd. On 20-6-2015, the appellant issued a notice under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 ("the SARFAESI Act") on behalf of itself and other consortium lenders to the corporate debtor. On 1-6-2016, the appellant took actual physical possession of the project assets of the corporate debtor under the SARFAESI Act,
2.On 26-12-2018, the appellant filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 ("IBC") before the National Company Law Tribunal, Calcutta ("NCLT) for a default amounting to Rs 5997,80,02,973 from the corporate debtor. As the relevant form indicating the date of default did not indicate any such date, this was made up by the appellant on 8-11-2019 by filing a supplementary affidavit before NCLT, specifically mentioning the date of default and annexing copies of balance sheets of the corporate debtor, which, according to the appellant, acknowledged periodically the debt that was due. On 19-2-2020, the Section 7 application was admitted by NCLT, observing that the balance sheets of the corporate debtor, wherein it acknowledged its liability, were signed before the expiry of three years from the date of default, and entries in such balance sheets being acknowledgments of the debt due for the purposes of Section 18 of the Limitation Act, 1963 ("the Limitation Act"), the Section 7 application is not barred by limitation”.
Rending of Para 16 & 17 makes it clear that it was dealing with the matter as to whether the entries which has been made in the balance sheet would amount to be acknowledgement of a liability under Section 18 of the Limitation Act. The Para 17 has dealt with one of the Judgments rendered by the Hon’ble Apex Court as reported in 1991 Supp (1) SCC 402 where based on the several earlier Judgments the Hon’ble Apex Court, has taken a view that, an entry made in the books of account including the balance sheet, can amount to be an “acknowledgment” of liability within the meaning of Section 18 of the Limitation Act. As far as the said principle is concerned, there cannot be any doubt about the said principle, but before making any inference about the entries made in the balance sheet of the Corporate Debtor, the nature of such entry as to, whether it happens to be an entry which was apparently establishing the fact of the financial debt being availed by the Corporate Debtor, is an aspect which is required to be first conclusively determined. In the instant case, the entries which were made in the balance sheet of the Corporate Debtor were for the extension of surety, and as such they cannot be taken as evidence of the financial debt availed by the Corporate Debtor. Hence, contextually the aforesaid Judgment does not support the contention of the Learned Counsel of the Appellant that, merely because in the balance sheet of the Corporate Debtor, the reference of the cheques have been made as to be the security against the loan which was extended to the principal borrower, that itself will not amount to be a debt payable by the Corporate Debtor so as to attract Section 7 of the I & B Code.
The Counsel for the Appellant has referred to yet another Judgment, though irrelevant for the purposes of the instant case as reported in 2022 SCC Online SC Page 1163 (K. Paramasivam Vs Karur Vysya Bank Ltd., & Another) and he has referred to Para 14 of the said Judgment which is extracted hereunder: -
“14.In Laxmi Pat Surana (supra), this Court held:-
“19.It is no more res integra that the Code is a complete code – provisioning for actions and proceedings relating to, amongst other, reorganisation and insolvency resolution of corporate persons in a time bound manner for maximisation of value of assets of such persons, availability of credit and balance the interest of all stakeholders including alteration in the order of priority of payment of government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto. *****
22.The term “financial creditor” has been defined in Section 5(7) read with expression “creditor” in Section 3(10) IBC to mean a person to whom such debt has been legally assigned or transferred to. This means that the applicant should be a person to whom a financial debt is owed. The expression “financial debt” has been defined in Section 5(8). Amongst other categories specified therein, it could be a debt along with interest, which is disbursed against the consideration for the time value of money and would include the amount of any liability in respect of any of the guarantee of indemnity for any of the items referred to in sub-clauses (a) to (h) of the same clause. It is so provided in sub-clause (i) of Section 5(8) of IBC to taken within its ambit a liability in relation to a guarantee offered by the corporate person as a result of the default committed by the principal borrower. The expression “claim” would certainly cover the right of the financial creditor to proceed against the corporate person being a guarantor due to the default committed by the principal borrower. The expression “claim” has been defined in Section 3(6), which means a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured. It also means a right to remedy for breach of contract under any law for the time being in force, if such breach give rise to a right to payment in respect of specified matters.
23.Indubitably, a right or cause of action would enure to the lender (financial creditor) to proceed against the principal borrower, as well as the guarantor in equal measure in case they commit default in repayment of the amount of debt acting jointly and severally. It would still be a case of default committed by the guarantor itself, if and when the principal borrower fails to discharge his obligation in respect of amount of debt. For, the obligation of the guarantor is coextensive and coterminous with that of the principal borrower to defray the debt, as predicated in Section 128 of the Contract Act. As a consequence of such default, the status of the guarantor metamorphoses into a debtor or a corporate debtor if it happens to be a corporate person, within the meaning of Section 3(8) IBC. For, as aforesaid, the expression "default" has also been defined in Section 3(12) IBC to mean non- payment of debt when whole or any part or instalment of the amount of debt has become due or payable and is not paid by the debtor or the corporate debtor, as the case may be.
24.A priori, in the context of the provisions of the Code, if the guarantor is a corporate person (as defined in Section 3(7) IBC], it would come within the purview of the expression "corporate debtor", within the meaning of Section 3(8) IBC.
25.It may be useful to also advert to the generic provision contained in Section 3(37). It postulates that the words and expressions used and not defined in the Code, but defined in enactments referred to therein, shall have the meanings respectively assigned to them in those Acts. Drawing support from this provision, it must follow that the lender would be a financial creditor within the meaning of the Code. The principal borrower may or may not be a corporate person, but if a corporate person extends guarantee for the loan transaction concerning a principal borrower not being a corporate person, it would still be covered within the meaning the expression "corporate debtor" in Section 3(8) IBC.”.
In the said Judgment the question under consideration, was as to, whether the Personal Guarantor can be exclusively proceeded with without the proceedings being first drawn against the Corporate Debtor which is actual beneficiary of debt. In this context, the Hon’ble Apex Court had an occasion to deal with the issue from the perspective of a ratio already laid down in the earlier Judgment reported in 2021 Volume 8 SCC Page 481 Laxmi Pat Surana v. Union Bank of India wherein the Hon’ble Apex Court in its Para 22, 23 & 25 which has been extracted in Para 14 of the aforesaid Judgment, has observed that, in those cases where there is a coextensive liability cost on the Corporate Debtor and the Corporate Guarantor, the proceedings under Section 7 cannot be exclusively drawn against the Corporate Guarantor, without first proceeding being drawn against the principal borrower / Corporate Debtor. This was the answer, extended by the Hon’ble Apex Court, which becomes relevant to be extracted hereunder for the purpose of answering the argument raised by the Counsel for the Appellant in the context of the Judgment of K. Paramasivam (supra), that the same will not be applicable because it was rendered under altogether a different issue which was initially dealt by in the Judgment of Laxmi Pat Surana. Hence this Judgment too will not be of any avail to the Appellant to substantiate his case that, the Corporate Debtor had in ensured financial debt so as to justify his attempt to initiate proceeding under Section 7 of the I & B Code.
The Learned Counsel for the Appellant has referred to another Judgment which has been rendered by the Principal Bench which was reported in 2023 SCC Online NCLAT Page 1999 in the matters of Sathish Balan, Director of Balan and Chheda Developers Pvt. Ltd. Vs Neeta Navin Nagda and Another. He has referred to Para 14 of the said Judgment. Relevant Para 14 is extracted hereunder: -
“14.This ‘Appellate Tribunal’ observe that the Code no where prescribes that there should be a written agreement between the parties to prove the loan and its disbursement to be treated as financial debts. It is also observed that if there are acknowledgments by the ‘Corporate Debtor’ and where the statements of accounts of the ‘Corporate Debtor’ are in position to prove disbursement of loan and payment of interest, the absence of formal written agreement would not bar the ‘Financial Creditor’ (the Respondent No.1 herein) from initiating the CIRP”.
The context in which the said Judgment was rendered was in a case where an application filed by the Respondent under Section 7 of the I & B Code, was admitted by the Adjudicating Authority, initiating CIRP against the Corporate Debtor and aggrieved by the same the Appeal was preferred, in which the said Judgment was delivered. Thus the case is different from the instant case. Further, if Para 14 itself is taken into consideration it was not at all dealing with the circumstances as it stands in the instant case pertaining to the aspect as to what would amount to be an “acknowledgment” of “financial debt”. In the instant case, the Appellant derives the acknowledgment of debt from the agreement of 14.01.2015. Further, he intends to derive the acknowledgment by reading the aforesaid clause of the agreement in the context of the entries made in the balance sheet. But the exclusive proof of the debt cannot be determined from the entries which have been made in the books of accounts of the Corporate Debtor, particularly when they don’t reflect or relate to an extension of the financial debt to a Corporate Debtor exclusively.
Hence this Judgment too since altogether being under a different context, will not be applicable, because in that case the entries in the balance sheet was made, as against the Corporate Debtor who had derived the advantage of a financial debt and hence, he was liable to be brought under Section 7 proceedings of the I & B Code which is not the case in the instant Appeal. Lastly, the Learned Counsel for the Appellant has referred to another Judgment as reported in Manu/NL/0796/2023, as rendered by the principal bench in the matters of Agarwal Polysacks Limited Vs K.K. Agro Foods and Storage Limited. The Learned Counsel for the Appellant has referred to Para 11 & 21 of the said Judgment, in support of his contention. Relevant Para 11 & 21 is extracted hereunder: -
“11.We need to test the submission of learned counsel for the Respondent that the written financial contract is necessary for proving debt. A financial contract supported by financial statements as evidence of the debt is one of the documents contemplated in Regulation 8(2) but that is not exclusive requirement for proving existence of debt. Financial Contract thus can very well be furnished to prove the financial debt but a plain reading of Regulation 8(2) indicate that it is not mandatory that existence of financial debt has to be proved by a financial contract. For example: records available with an information utility can very well be used as proof for existence of financial debt. Further, financial statements showing that the debt has not been paid is also one of the clauses in Regulation 8(2) by which existence of debt can be proved.
21.When we look into the statutory scheme as reflected in the Application to Adjudicating Authority Rules, 2016 and CIRP Regulations, 2016, it is clear that financial debt can be proved from other relevant documents and it is not mandatory that written financial contract can be only basis for proving the financial debt. We, thus, answer Issue No.1 holding that it is not necessary that written financial contract be the only material to prove the financial debt”.
We are of the view that the implication of a Judgment is always to be read in its entirety and should not be done in a piecemeal extraction, to suit the purpose of the appellant. In the above case the issue which was the subject matter of consideration before the Principal Bench, was the question, as it was formulated in Para 5 of the said Judgment, as to how the financial debt needs to be established based on which the financial creditor can initiate CIRP Proceedings under Section 7 of I & B Code. The aspect under examination was as to whether written financial contract alone will prove existence of financial debt. Since in the instant case the reference which has been made with regards to the terms of the agreement to prove existence of debt, this Judgment will not come to the rescue of the Appellant. Further the instant case does not justify the test provided under Rule 4(1) of the Corporate Insolvency Resolution Process and the entries made therein do not commensurate to the entries as prescribed under Form 1. For the financial assistance to be construed as financial debt, the parameters prescribed in Form 1, was not satisfied, under the terms of the agreement dated 14.01.2015. The said Judgment will not be of any avail for the appellant for reason being that under Rule 4 (1), the Adjudicating Authority refers to the Insolvency and Bankruptcy Board of India. Regulation 16, which provides that, certain codal formalities as prescribed under Rule 8 (2) are to be satisfied for the purposes of substantiating as to what would be the financial debt, based upon the supporting documents, and the information supplied under the financial contract, and that all these would be the conjoint documents which are to be read together to determine, as to whether there was a financial debt or not. The Principal Bench of the NCLAT in Para 10, 11 & 12 of the said Judgment has elaborated the same which is extracted hereunder: -
“10.When we look into Regulation 8 Sub-regulation (2), it is clear that Regulation do not contemplate existence of all documents. Use of word “or” in Regulation 8(2)(a) indicate by any of the document referred to in Sub-regulation (2) existence of debt can be proved.
11.We need to test the submission of learned counsel for the Respondent that the written financial contract is necessary for proving debt. A financial contract supported by financial statements as evidence of the debt is one of the documents contemplated in Regulation 8(2) but that is not exclusive requirement for proving existence of debt. Financial contract thus can very well be furnished to prove the financial debt but a plain reading of Regulation 8(2) indicate that it is not mandatory that existence of financial debt has to be proved by a financial contract. For example: records available with an information utility can very well be used as proof for existence of financial debt. Further, financial statements showing that the debt has not been paid is also one of the clauses in Regulation 8(2) by which existence of debt can be proved.
12.Learned counsel for the Respondent has relied on judgment of this Tribunal in “Company Appeal (AT) (Ins.) No. 251 of 2020, Pawan Kumar v. Utsav Securities Pvt. Ltd.” To support his submission that it is obligatory on part of the Financial Creditor that there should be a Loan Agreement in writing only. This Tribunal in the above case considered the issue as to whether a transaction in question is a financial debt. This Tribunal has referred to RBI Guidelines dated 18.08.2023 which was issued for Non-Banking Financial Corporation (NBFC). In Para 20 of the judgment following was stated:
“20.On the other hand, as per the Corporate Debtor in absence of a Financial Contract defined in Rule 3(1)(d) the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 between the Corporate Debtor and Financial Creditor, the transaction cannot be termed as Financial Debt. RBI on 18.02.2013 issued guidelines to Non-Banking Finances Companies for fair practices which states that the Non-Baking Finances Company should convey in writing to the borrower in vernacular language as understood by the borrower by means sanctioned letter or otherwise, the amount of loan sanctioned alongwith the terms and conditions including annualised rate of interest. Thus, it is obligatory on the part of the Financial Creditor that there should be a loan agreement in writing only.”
Thus the Principal Bench of NCLAT has ruled that, there has had to be prior satisfaction of the parameters of Sub Regulation (2) of Regulation 8 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, to establish as to whether there is a financial debt and that it need not be a written financial contract, in relation to the Corporate Debtor, but that, records and documents as indicated in Rule 8(2) of said regulation should be available to prove the existence of the “financial debt”, which was to be payable by the Corporate Debtor.
In the instant case, there happens to be an apparent non-compliance of Regulation 8 (2) and thus looking to the statutory scheme that has been reflected by IBBI (Insolvency Resolution Process for Corporate Persons) Regulations 2016, it is clear that until and unless, the documentary evidence is placed on the record, apart from the agreement to show that there was a financial debt which is standing against the Corporate Debtor, it cannot be termed or treated as to be the financial debt. In the present case, it does not satisfy the ingredients contemplated under the definition clause and merely because of the fact that the cheques have been issued by way of the security by the Corporate Debtor, which has been reflected in the balance sheet, the same cannot be taken as the evidence that the financial assistance extended to Mr. T.G.S. Mahesh is actually a financial debt incurred by the Corporate Debtor. We hold it that, there was no sufficient and credible material as such before the Learned Adjudicating Authority to enable it to treat the individual loan as a financial debt incurred by the Corporate Debtor, and to hold that the agreement of 14.01.2015 satisfied the conditions to describe the financial assistance extended to Mr. T.G.S. Mahesh, as to be a financial debt towards the Corporate Debtor when it decided matter on 02.08.2019. In that eventuality, the conclusion which has been arrived at by the Learned Adjudicating Authority, does not suffer from any apparent error.
Just to add to it, it becomes inevitable for us to consider yet another Judgment of Principal Bench, as rendered in Comp App (AT) (Ins) No.922/2021 Shamji Optima Private Limited Vs Tridhaatu Aranya Developers LLP, where reference was made as to Para 11 & 12. The Learned Counsel for the Appellant has been consistently harping upon the fact that, the agreement thus finds reference to a cheque which was issued by the Corporate Debtor as a security, and that is being sought to be read with the balance sheet. The aforesaid Judgment of the Principal Bench has held that mere issue of cheque until and unless it stands substantiated by other supporting evidence, is to be placed on record as per Sub-Rule (8) of the Rules 2016 will not prove a debt and that a financial assistance merely on the basis of a cheque having been issued, as a security cannot be classified as to be a financial debt to Corporate Debtor to attract Section 7 of the I & B Code. The relevant Para 11 & 12 are extracted hereunder: -
“11.It is evident from the material on record that both the Retirement Deed dated 12/08/2016 and the Supplementary Retirement Deed dated 13/08/2016 were entered into between the Tridhaatu Group and ‘Prince Care Group’, to which the ‘Corporate Debtor’ Tridhaatu Aranya Developers LLP’ is not a party. The ‘Corporate Debtor’ is a Limited Liability Partnership incorporated under the provisions of the Limited Liability Partnership Act, 2008, and is a body incorporated independent of its partners. It is to be seen whether any debt/liability has been taken up by a partner in the name of the LLP. In the Application under Section 7 of the Code filed by the Appellant herein the ‘Corporate Debtor’ is described as an LLP, and as a part of the Tridhaatu Group’. The repayment amounts and the terms reflected in Clause 1(A)(c) of the Supplementary Retirement Deed dated 13.08.2016 are between Tridhaatu’ and ‘Prince Care’ ‘Groups’ and essentially between the partners thereof, pursuant to which, the post dated cheques were issued. Likewise, Clause 4, which speaks of ‘Default in Repayment’ also establishes that the terms are between the Partners of Tridhaatu’ and ‘Prince Care’ ‘Groups’ only. Even the correspondence dated 10.06.2019 is addressed by the representatives of the ‘Prince Care Group’ to the representative of the Tridhaatu Group’. It is specifically stated in the legal Notice dated 05.08.2019 issued on behalf of the ‘Prince Care’ ‘Group’ that the cheques issued by Tridhaatu Builders LLP’ and Tridhaatu Aranya Developers LLP’ were dishonoured, against which issue, the Appellant has issued Notices under the provisions of Section 138 of the Negotiable Instruments Act, 1861 and that their claim is against the ‘Tridhaatu Group’. The ‘Corporate Debtor’ is a distinct legal entity and the aforenoted ‘Deeds’ do not construe any privity of contract between the ‘Corporate Debtor’ and the Appellant and further establishes that mere issuances of these 2 cheques does not construe ‘liability’ having consideration for ‘time value of money’. Further, the LLP Retirement Deed refers to a lumpsum amount of Rs.45,08,08,384/- to be paid by the Tridhaatu Group’. It is the case of the Respondent that out of this sum, a sum of Rs.6,13,34,457/- is towards miscellaneous expenses and the remaining amount is not bifurcated and is towards ‘One Time Settlement’.
12.It is an admitted fact that there were disputes between the Appellant and continuing partners of the Respondent LLP. It is also evident from the Supplementary Deed which records that the parties may exchange ownership of facts to settle their obligations. It is pertinent to mention that the Appellant has for the first time, in this Appeal had pleaded that the partners can bind the LLP and relies on cheque copies and the Balance Sheet reference. The onus to establish that the amount which is ‘due and payable’ falls within the ambit of the definition of ‘Financial Debt’, as defined under Section 5(8) of the Code, is on the Appellant herein. We find force in the contention of the Counsel for the Respondent that the acknowledgment in the Financial Statements for the Financial Year ending 2018-19 cannot be read in isolation and has to be seen, keeping in view, the terms of both the Deeds entered into between the parties and the nature of relationship payable’ qua the Respondent herein. There is no ascertained sum crystallised as ‘due cheques amount to acknowledgement of any ‘Financial Debt’, especially in the light of the fact that the Retirement Deed and the Supplementary Retirement Deeds have been entered into between the Tridhaatu Group’ and ‘Prince Care Group’, for which the Respondent / ‘Corporate Debtor’ is not a party. Therefore, wer are of the earnest view that the ‘amounts’ do not possess the essential ingredients of ‘Financial Debt’ as defined under Section 5(8) of the Code. This Tribunal has also observed in a catena of Judgments that IBC is not a ‘recovery’ proceeding or a Code for settlement of collateral disputes”.
For the aforesaid reason, we are of the considered view that the Judgments which has been relied with by the appellants are absolutely, altogether under a different context dealing with absolutely different aspects and thus, are not factually applicable to the instant case, and that, by way of a reiteration it is observed that the agreement of 14.01.2015 since being an independent exclusive agreement of loan extended to an individual, cannot be classified to be treated as to be a loan extended to the Corporate Debtor, so as to be termed as to be a financial debt to attract Section 7 of I & B Code, to be drawn against the Corporate Debtor. For the reasons as given above, we do not find any apparent error in the Impugned Judgment of 02.08.2019. The Appeal lacks merit and the same is accordingly dismissed.