Shri Yarlagadda Krishna Mohan & Ors. vs State Bank Of India & Anr.

Oral Judgment: Justice Sharad Kumar Sharma, Member (Judicial):-

These are three Company Appeals, preferred by invoking the provisions contained under Section 61 of the I & B Code, 2016. Since facts and law involving consideration happen to be common, for the purpose of brevity, they are being taken up together.

An entity under the name of M/s. YKM Entertainment and Hotels Private Limited, being a family venture, was incorporated by the Appellants of each of the Company Appeals, as family members enterprise on 16.06.2008. The objective of the aforesaid company was to establish a five-star hotel near Renigunta airport, Tirupathi, in order to offer a comfortable stay to the devotees of Lord Tirumala Balaji. The project, which was thus ventured by the Appellants, under the name and style of M/s. YKM Entertainment and Hotels Private Limited, was made as a part of a well-known five-star chain of hotels, namely, Holiday Inn, at Tirupati. The construction of the aforesaid project was completed in June 2017. The entire superstructure was completed along with 215 rooms in it, and only a few minor superstructure, landscaping and other ancillary work was required to be completed.

For the said purpose, M/s. YKM Entertainment and Hotels Private Limited, is said to have availed financial assistance, from a consortium of lenders, which ultimately later on merged into the State Bank of India, i.e., Respondent No.1 herein.

To fortify the requirement of financial assistance, a loan agreement dated 30.08.2011 was executed by M/s. YKM Entertainment and Hotels Private Limited, the Corporate Debtor, who was disbursed with an overall credit limit of Rs. 78 crores and the revised total financial assistance was extended on 23.07.2014, was enhanced and revised to Rs. 113.70 crores, comprising of Rs.111 crores as fund-based, and INR 2.70 crores as non-fund based limits.

This credit facility to the Corporate Debtor was once again revised on 27.10.2015 and was increased to Rs. 138.70 crores, including non-fund based facility of INR 2.70 crores.

The aforesaid financial assistance, as granted under the principal loan agreement of 30.08.2011 and subsequently revised on 23.07.2014 and 27.10.2015, were secured by a Deed of Guarantee dated 27.10.2015, executed by the three personal guarantors i.e., Mr. Yarlagadda Krishna Mohan, Ms. Yarlagadda Padmavathi & Mr. Yarlagadda Madhu Mohan, the personal guarantors, the respective Appellants of three Company Appeals. The loan was secured by way of creation of mortgage of the immovable properties owned by the Appellants.

It is an admitted case that the financial assistance, thus disbursed, was not entirely utilised for the project by the Corporate Debtor. As of June 2017, some major work, landscaping and other surrounding areas were still left to be completed in the periphery of the campus of the project.

The case of the Appellant in these three Company Appeals, is that in order to complete the pending peripheral work, the Corporate Debtor was in need of an additional amount of finances to the tune of Rs. 40 crores, for which he approached Respondent No.1, State Bank of India. It is contended by the Appellant that, at that stage, the State Bank of India instructed the Corporate Debtor to clear the earlier dues in order to enable to sanction further amount. It is contended, though not relevant for the present Company Appeals, that, the promoter Corporate Debtor, including the Appellant, are said to have paid a certain amount of Rs. 12 crores to service the interest over dues.

The Respondent No.1 subsequently formulated a corrective action plan in 2016 to sanction additional loan of Rs.34.80 crores; however, the said corrective action plan was not implemented by the lenders and owing to the same, the project got stalled, and the Corporate Debtor was not able to operate the hotel. As a result, Corporate Debtor’s Bank account was declared as NPA on 29.11.2016.

Hence, Respondent No.1 issued notice under Section 13(2) of the SARFAESI Act on 09.08.2018, for an outstanding amount of Rs.181.71 crores that was due as on 30.06.2018 and accordingly, Respondent No.1 filed an OA No.767/2018 before DRT, wherein Respondent No.1 sought to recover Rs.184,82,88,871 from the Corporate Debtor due as on 24.10.2018. Admittedly, a Possession Notice under Section 13(4) of the SARFAESI Act was issued by the Respondent No.1 on 30.11.2018, and the Sale Notice too was issued thereof on 10.01.2019.

The Corporate Debtor filed SA No.56/2019, challenging the Sale Notice of 10.01.2019.

It is during this period that, a One-Time Settlement Proposal, was proposed by the Corporate Debtor to pay an amount of Rs. 112 crores, as a full and final settlement, towards the one-time settlement of the entire outstanding amount. The same was accepted by Respondent No.1, and a joint compromise by Respondent No.1 and the Corporate Debtor was preferred before the DRT in order to settle the dues for Rs.112 crores. Accordingly, the DRT was pleased to dispose of the OA No.767/2018 on 19.09.2019 in view of the joint compromise dated 30.08.2019.

There was a default by the Corporate Debtor in payment as per OTS agreement, formalised in OA before DRT. Thus, an application was preferred by the Respondent No.1, being Miscellaneous Application No.61/2020, seeking revival of the OA proceedings before Learned DRT due to the default committed by the Corporate Debtor in compliance with the joint compromise of 30.08.2019. Hence, a subsequent Auction Notice was issued by Respondent No.1 on 27.10.2021, fixing the auction date for the properties mortgaged in favour of Respondent No.1. In terms of the Auction Notice, the reserved price fixed for all the properties mortgaged in favour of Respondent No.1 was settled to be Rs.154 crores, Respondent No.1 proceeded with the auction and part of the properties was sold, resulting in a recovery of Rs.37.68 crores.

It was on 21.07.2021 that, the Section 7 application was preferred by Respondent No.1, as against the Corporate Debtor, for the default of the outstanding amount of Rs.227.56 crores, which was shown to be due to be payable as on 19.07.2021. The Section 7 proceedings were admitted against the Corporate Debtor on 05.01.2022. The Resolution Plan with respect to the Corporate Debtor was approved on 07.12.2023, by the Learned Adjudicating Authority for an amount Rs.81 crores. It is submitted that as the Successful Resolution Applicant failed to make the required payments as provided under the plan, the Corporate Debtor proposed another OTS proposal of Rs. 100 crores. The said OTS offer was not accepted by the Financial Creditor, SBI.

Since the Appellants in these three Company Appeals are the personal guarantors, whose liabilities are governed by the admitted terms of Guarantee Deed executed by them on 27.10.2015, the Financial Creditor also sought to recover the dues from them as per the guarantee deeds. Accordingly, the Demand Notice as contemplated under Section 95(4)(b) under the Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors, Rules 2019 was issued on 29.04.2022 raising a demand of INR 271,37,80,931 as an amount due to be payable as on 26.04.2022.

Further, the Section 95 proceedings, by way of CP(IB) No.228/95/HDB/2022, CP(IB) No.224/95/HDB/2022 & CP(IB) No.222/95/HDB/2022, stood initiated as against the respective personal guarantors, namely Mr. Yarlagadda Krishna Mohan, Ms. Yarlagadda Padmavathi & Mr. Yarlagadda Madhu Mohan respectively. On 27.08.2022, a report was submitted under Section 99 of the I & B Code, by the Resolution Professional recommending the admission of the Section 95 Petition as against the personal guarantors. The proceedings under Section 95 were contested by the personal guarantors as detailed above, who filed their counter on 05.12.2023. However, the Section 95 Petition was allowed by the Learned Tribunal vide its order of 27.02.2024, resulting into the commencement of the Personal Insolvency Resolution Process (PIRP) in respect of the Appellants. The admission of Section 95 application as against the personal guarantors was challenged by them by filing appeals in Comp App (AT) (CH) (Ins) No.155/2024, Comp App (AT) (CH) (Ins) No.154/2024 and Comp App (AT) (CH) (Ins) No.156/2024 respectively before this Appellate Tribunal, which have been dismissed by this Tribunal vide order dated 06.02.2025.

Pursuing action under PIRP, the Resolution Professional on 04.07.2024, filed an application report under Section 112(2)(d) of the I & B Code, intimating the NCLT, of non-submission of the Repayment Plan by the personal guarantor, and praying to permit him to initiate the proceedings of bankruptcy against the personal guarantors under Section 123 of the I & B Code.

The Learned Tribunal passed an order on 13.11.2024, granting the liberty to the Respondent No.1 to file an appropriate application under Section 123 of the I & B Code. Accordingly, an application under Section 123 of the I & B Code, was filed being IA No.399/2025, IA No.400/2025 & IA No.402/2025, which had been respectively preferred in the aforesaid three Company Petitions, seeking the declaration that the Appellants are bankrupt. These applications were opposed by the Appellants; and counter affidavits to the said IAs were filed on 22.05.2025. However, the IAs were allowed, resulting into the issuance of a direction for directing the bankruptcy proceedings to be drawn against the personal guarantors, challenging these orders, the instant Company Appeals have been filed by the Appellants.

When these Company Appeals preferred and were being argued as against the order passed under Section 123 of the I & B Code, the Learned Counsel for the Appellant had argued that, though a total of Rs.182.25 crores recovered towards the loan due as on April 2025 (in form of Rs.56.59 crores from Corporate Debtor, Rs.37.68 crores through sale of mortgaged properties and Rs.88 crores from the Resolution Plan), and these have not been given credit to, which filing the application for bankruptcy under Section 123(1)(c) of the I & B Code, for the amount due shown in these applications are highly inflated, and hence the bankruptcy proceedings are not maintainable.

In all these Company Appeals, it is a common position that all the Appellants have not been able to place any repayment plan during the stage when the Section 95 proceedings were pending consideration, consequent to which, the Learned Adjudicating Authority had granted permission to initiate bankruptcy proceedings against personal guarantors. The provisions governing submissions of repayment plan as contained under Section 105 of the I & B Code, 2016, which is extracted hereunder: -

It is made mandatory under Section 105(1) of the Code, for the debtor to submit the Repayment Plan along with a proposal for restructuring the debts. However, in accordance with the finding recorded in the impugned order, it is seen that Appellants did not submit the Repayment Plans, as contemplated under Section 105 of the I & B Code, though they have been submitting certain OTS proposals earlier. OTS Proposals in itself may not satisfy the parameters contemplated under Section 105 of the I & B Code, and therefore, submission of the OTS proposal cannot be taken as a substitute to the submission of the Repayment Plan, as contemplated under Section 105 of the I & B Code.

Even if we are go through the records of the proceedings of Section 95 of the I & B Code, and the proceedings under Section 123 of the I & B Code, it is seen that at every stage, the Appellants have only tried to negotiate with the State Bank of India and they have not chosen to prefer a Repayment Plan, though in order to portray the bonafides, they have submitted that, they had submitted OTS proposals for the purpose to amicably settle the outstanding dues. It is under the aforesaid backdrop that, it is necessary to go through the finding, which has been recorded in all three proceedings of Section 95 in relation to the three Appellants.

Ultimately, the Learned Tribunal proceeded to pass the impugned order dated 03.11.2025, in each of these Company Appeals directing the initiation of the bankruptcy proceedings against the personal guarantors, while considering the applications preferred under Form B, invoking the provisions as contained under Sections 121 to be read with 123 of the I & B Code which was to be read with Rule 7 of IBBI (Application to Adjudicating Authority Bankruptcy Process for Personal Guarantors to the Corporate Debtors), Rules 2019. A few common facts are that: -

Under the aforesaid circumstances, where the fact of the Appellants being the personal guarantors and being co-extensively bound by the terms of the Guarantee Agreement, stand established and when it is established from records that there was non-submission of the Repayment Plan by the Appellants at any stage of the proceedings under Section 95 of the I & B Code, or even thereafter, the consequences of passing of an order of bankruptcy was automatic and statutory in nature because thereafter the Tribunal had got no other option except to order initiation of the proceedings under Section 121 of the I & B Code, when applications praying for the same were filed by the Financial Creditor.

Owing to the language as contained therein, under Section 121 of the Code, when there is a non-satisfaction of the conditions of Section 95 of the I & B Code, Section 121 of the I & B Code is a consequence of it only, as no material determination is required since being consequential in nature due to the inaction of the personal guarantor. Section 121 of the I & B Code is extracted hereunder: -

Thus, the condition precedent for the invocation of Section 121 of the I & B Code, in order to pass an order on Section 123 of the I & B Code of initiation of the bankruptcy process are the orders passed by Adjudicating Authority either under Section 100(4) or under Section 115(2) or under Section 118(3) of the Code, as the case may be. In this case, Section 121 has been invoked on account of the order of Learned NCLT under Section 115(2) on 13.11.2024. Section 115(2) reads as under:-

Almost a similar issue came up for consideration before the Principal Bench of NCLAT in Company Appeal (AT) (Ins) No. 1494 of 2024, in the matters of, Sudip Dutta @ Sudip Bijoy Dutta Versus Prashant Jain, in this matter too, the Personal Guarantor has not submitted the repayment plan and consequent to which the Learned Principal Bench, after taking the entire conspicuous of the framework of the statutory scheme, had observed as under: -

This judgment almost deals with the same fact as involved hereto, where there was no submission of the repayment plan, hence the Ld. Tribunal observed that, when the repayment plan had not been submitted by the debtor, natural consequence was that, the Creditor was to file an application for bankruptcy proceeding.

In the light of the aforesaid judgment and the ratio laid down therein, the instant company appeals too are required to be assigned with the same destiny.

When it is an admitted case that, the Appellant had not submitted any Repayment Plan despite sufficient opportunities, it will be a case of deemed rejection of the repayment plan, as per the provisions contained under Section 115 of the I & B Code and thus the order of Learned NCLT to give liberty to Financial Creditor to file application under Section 121 and filing of the application for bankruptcy by the Financial Creditor by invoking Section 121 of the Code cannot be said to be vitiated.

The defence of the Appellant that Learned NCLT, passed the bankruptcy order mechanically and that Learned NCLT erroneously held that non-submission of a repayment plan is equivalent to rejection of such plan under Section 115(2) of the Code is thus answered. Their other contention that the dues as mentioned in the bankruptcy applications have been incorrectly computed will not matter because they have admitted the dues and the quantum can always be verified during bankruptcy proceedings. The other contentions raised by them such as non-sanction of loan by SBI to operationalise the hotel, which led to financial distress, non-consideration of OTS etc., are seen to be attempts to revert back, to the stages of Section 19 of the SARFAESI Act or the stage of Section 7 of the I & B Code, as against the Corporate Debtor. We are of the firm view that, these proceedings, which have already culminated and had attained finality, cannot be permitted to be excavated de novo to be opened at this matured stage when the proceedings under Section 123 of the I & B Code, had been taken in pursuance to the impugned order against the personal guarantor, that too particularly for their apparent inaction, thus bankruptcy was a legal consequence.

Since Sub-Section (2) of Section 121 of the I & B Code confess a right upon the applicant to Section 121 application to file an application for bankruptcy upon satisfying the conditions of Sub-Section (1) of Section 121 of the I & B Code, the filing of an application under Section 121 of the I & B Code, which is to be read with Section 123 of the I & B Code and the consequential orders passed of initiation of the bankruptcy proceedings against the personal guarantors resulting into the appointment of the bankruptcy trustee under Section 125 of the I & B Code, cannot be faulted in any manner. Thus, the Company Appeals lack merit, and the same are accordingly dismissed. Pending interlocutory applications, if any, would stand closed.