Smt. Yarlagadda Padmavathi vs M/s. State Bank of India

(Hybrid Mode)

Per: Justice Sharad Kumar Sharma, Member (Judicial)

These are a set of three Company Appeals as against the order of admission of the applications filed under Section 95 of I & B Code against the respective Personal Guarantors/Appellants herein and commencement of Insolvency Resolution Process against them. As of now under the changed set of circumstances, the Appeal proceedings would amount to beating around of the dead wood, owing to the fact that, as against the present Appellants, the bankruptcy proceedings as contemplated under Section 126 of the I & B Code, have already been directed to be commenced, and the order of bankruptcy is already under challenge before this Appellate Tribunal.

The Appellants are personal guarantors to the loan facilities extended by the financial creditor (FC), State Bank of India, the Respondent-1 herein, to the Corporate Debtor (CD), M/s YKM Entertainment & Hotels Private Limited, under 3 sets of loan agreements and Guarantee Deeds executed by the personal guarantors.

Before we embark upon to deal with the arguments that has been extended by the Learned Counsel for the Appellant, as of today, a few precise facts are required to be referred herein.

The records reveal that the Corporate Debtor had availed financial assistance from the aforesaid Financial Creditor and its associate banks, i.e., State Bank of Hyderabad, i.e., erstwhile State Bank of Patiala, erstwhile State Bank of Mysore, erstwhile State Bank of Travancore and erstwhile State Bank of Bikaner and Jaipur. Later on, these banks stood merged with the bank of Respondent No.1. Therefore, Respondent No.2, after the merger of other banks, would be taken to be the sole financial creditor.

The loan agreement between the Corporate Debtor and the Financial Creditor was executed on 30.08.2011 for the extension of the term loan of Rs.78 crores. On the same date, the Guarantee Agreement was also executed by the 3 Appellants herein/the personal guarantors, for the purpose to support the execution of the loan agreement. Besides, a Hypothecation Agreement of goods and assets was also executed. The said financial assistance of Rs.78 crores was revised upwards on 23.07.2014 to Rs.113.70 crores, and a revised Guarantee Deed was executed on 23.07.2014, along with the corresponding Hypothecation Deed of goods and assets. In continuation of the two Loan Agreements of 30.08.2011, 23.07.2014, the loan was further revised upward to Rs. 130.78 crore, and a third loan agreement was signed on 27.10.2015 between the CD and the FC. Once again, this enhanced financial assistance of Rs.130.78 crores were backed by an execution of a fresh Guarantee Agreement of 27.10.2015, as well as the Hypothecation Agreement of the goods and assets on the same date, to secure the loan facility to the Corporate Debtor. Admittedly the Appellants to respective Appeals stood as personal guarantors in all three agreements of 30.08.2011, 23.07.2014 & 27.10.2015.

It is not in dispute that the Corporate Debtor committed a default in paying the loan amount fallen due to be paid under the three agreements of 30.08.2011, 23.07.2014 & 27.10.2015, and accordingly, the FC was constrained to declare the accounts of the Corporate Debtor as to be a Non-Performing Asset. As a consequence of the declaration of the Corporate Debtor accounts as to be Non-Performing Asset, the FC initiated the proceedings under Section 13(2) of the SARFAESI Act, by issuing the same on 09.08.2018 for inability of the Corporate Debtor to pay the total outstanding amount due to be paid for Rs.184,82,88,871.00/- and initiated proceeding before the Learned DRT under Section 19 of the Act by filing OA No.767/2018.

During the pendency of the proceedings before the Learned DRT, a One-Time Settlement proposal was offered by the Corporate Debtor vide its correspondence dated 02.04.2019. There would be an automatic implication that, offer of such One-Time Settlement by the Corporate Debtor would amount to be an admission of debt and default, and admission of the liability to pay the amount covered by the notice under Section 13(2) of the SARFAESI Act, as it was issued on 09.08.2018.

During the pendency of the aforesaid proceedings under the SARFAESI Act, the Corporate Debtor entered into a compromise with the financial creditor on 30.08.2019 before the Debt Recovery Tribunal (DRT), wherein it was agreed that the Appellants herein and the Corporate Debtor in the proceedings of DRT would repay the settled amount of Rs. 112 crores under the terms of the Compromise Agreement dated 30.08.2019 as against the total debt payable under the One-Time Settlement. This further strengthens the stand of the Financial Creditor that the offer of the OTS proposal, the acceptance of the OTS proposal, and thereafter the settlement arrived before the DRT will amount to be an explicit admission by the Corporate Debtor about the liability, more particularly when the Settlement Agreement was signed by the present Appellants.

It’s based upon the compromise of 30.08.2019, where the liability and the debt were reflected to be admitted and settled to be paid, an IA was preferred before the DRT, being IA No.4620/2019 by filing the same on 13.09.2019, praying to record the compromise, which was entered into between the parties on 30.08.2019. Based upon the settlement of 30.08.2019, which was produced before the DRT on 13.09.2019 through IA No.4620/2019, Ld. DRT closed the proceedings of the OA No.767/2018. Up to this juncture, it does not leave any iota of doubt about the existence of the loan liability, the default committed by the Corporate Debtor and the aspect of admission of liability due to entering into a compromise, which were jointly signed by Appellants in the capacity of being the personal guarantors plus the admission to pay the amount as settled as per the terms of the OTS. In that eventuality, the debt and default chapter stands closed and is not required to be revisited or ventured into to be considered by us to be decided now at this stage.

The settlement of 30.08.2019 and the order of DRT dated 19.09.2019 were not complied with, and the CD defaulted in paying the agreed amount. As a result, the Financial Creditor vide its letter dated 24.01.2020 issued notices to the Corporate Debtor, and also moved a Miscellaneous Application No.61/2020 before the DRT in order to seek the recovery of the amount as covered in the notice under Section 13(2) of the SARFAESI Act, or at the most, the amount which was settled in the compromise of 30.08.2019.

Further, the Financial Creditor moved an application under Section 7 of the I & B Code against the Corporate Debtor, which was numbered as CP(IB) No.206/07/HDB/2021, before the Learned NCLT, Hyderabad, which was allowed on 05.01.2022 and the proceeding under Section 7 of the I & B Code was initiated as against the Corporate Debtor, with the direction for initiation of the CIRP.

After the commencement of CIRP as against the Corporate Debtor, the financial creditor issued a demand notice in Form–B dated 29.04.2022 to the Personal Guarantors/Appellants here in, demanding them to pay the amount in default to the tune of Rs. 271.37 crore as committed by them in the deed of guarantee executed by them. The said demand notices were issued under Rule 7 of Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for the Personal Guarantors to the Corporate Debtor) Rules 2019. It is stated that since the Appellants has failed to pay the amount within the time prescribed under the notice of demand issued, the Financial Creditor filed applications under section 95 of I&B Code against the Appellants in CP(IB) No.224/95/HDB/2022, CP(IB) No.228/95/HDB/2022 and CP(IB) No.222/95/HDB/2022 and the same were allowed by Ld. NCLT, admitting the Appellants into Personal Insolvency Resolution Process. Challenging the said orders passed by Ld. NCLT, the instant Company Appeals have been filed.

Though for the purposes of the instant Company Appeals, it only requires the judicial scrutiny of the impugned orders of 27.02.2024 admitting the Appellants to face the personal insolvency proceedings, certain additional facts are required to be referred to, owing to subsequent developments that have taken place. The said facts are that the Appellants have since preferred the Company Appeals being CA(AT) (CH) (Ins) No. 627, 628 & 631 of 2025, challenging the order of Ld. NCLT, directing the commencement of bankruptcy proceedings against them and appointing the Bankruptcy Trustee to supervise the bankruptcy process. We are not venturing into the merits of the said appeals or the orders sought to be impugned, because that is to be independently decided by us in the subsequent Company Appeals. However, the reference to the same became necessary for the reason being that up to the stage of the initiation of the bankruptcy, the Appellant had admitted the fact of the execution of the loan agreement of 30.08.2011 and the consequential Guarantee Agreement to execute on the same date, as well as the compromise.

Further, at this stage, it has been attempted by the Learned Counsel for the Appellant to bring in certain pleadings made in the subsequent Appeals in his arguments. But we are clear that the reference to the said Appeals are limited only for the purposes to show that much water has flown down the bridge, after the orders of initiation of the IRP process under Section 95 of the Code, as against the Appellants in the capacity of the Personal Guarantors, raising question as to whether, at all as of now, there is any relevance to continue to test judicially, orders of admission passed under section 100 of the Code by the Learned Adjudicating Authority on 27.02.2024 which are impugned in the instant Company Appeal. However, despite being posed with this question which remained unanswered, the Learned Counsel for the Appellant had chosen to address upon the present Company Appeal and rather has attempted to carve out absolutely a new argument, though it was not a case ever argued, pleaded or pressed before the Learned NCLT or even in the Memorandum of Appeal before this Appellate Tribunal.

The gist of the argument of Learned Counsel for the Appellant in the instant Company Appeals is from the perspective that the entire proceedings would be vitiated as it does not satisfy the condition required under Section 95 (4) (a) of the I & B Code. Section 95 (4) (a) of the I & B Code reads as under: -

Section 95(4): An application under Sub-Section (1) shall be accompanied with details and documents relating to: -

These stipulations, as contained under the aforesaid provision of Section 95(4)(a), prescribe that the details of debts owed by the debtor to the creditor or to the creditors will have to be provided, while submitting the application for initiation of the Insolvency Resolution Process. What has been attempted to be argued by the Learned Counsel, is that until or unless the aspect of the debt owed by the debtor to a creditor or creditors is established and is detailed in the application itself that has been preferred under Sub-Section (1) of Section 95 of the I & B Code, the parameters required under Sub-Section (4) of Section 95 of the I & B Code will not be satisfied and therefore, the application itself would not be maintainable. He has stated that the applications preferred under section 95 of the Code, as against the Appellants, did not carry the full details of the debt owed by them, and hence the impugned orders passed allowing the said applications will be bad in law. This is the limited argument which has been attempted to be raised by the Learned Counsel for the Appellant for pressing upon the instant Company Appeal. No other point has been pressed, though in the Appeal memo, the Appellants had raised a few grounds to challenge the impugned orders.

On a plain reading, section 95(4) stipulates that the debt owed by the debtor has to be prima facie reflected in the application to be filed under section 95 of the Code. Debt is defined in section 3(11) of the Code, which reads as under:-

We have to also refer to the definition of “Person” given under Section 3(23) of the I & B Code, which classifies the body or the individual, which would be falling within the definition of person given therein, which is extracted hereunder:

On a conjoint reading of the definition of debt under Section 3(11) of the I & B Code, with the definition of person under Section 3(23) of the I & B Code, as extracted above, the status of the personal guarantor would be that of an individual, who would not be outside the ambit of the debtor, whose terms of the financial liabilities are governed by the Guarantee Deeds which is an admitted obligation on a default, as it was admittedly executed by the Appellants on 30.08.2011, 23.07.2014 and 27.10.2015, for the loans granted to the Corporate Debtor. The very execution of the guarantee deeds along with the loan agreements was an admission of an assurance by way of security extended on behalf of Corporate Debtor to avail the loan facility. Having executed the guarantee deeds, the personal guarantors would be bound by it being an assurer of debt and cannot resile from its liability. Hence the Appellants, for all practical purposes, would be treated as to be a debtors on default by borrower and in that eventuality, the exception attempted to be carved out by the Appellant by drawing the attention to the ground taken for the first time in the rejoinder without pursuing or agitating the same before the Learned Tribunal, cannot be permitted to be agitated because it is the “debt” that was owed by the debtor to the creditor.

Further, tabulation of the debt itself will not itself ensure initiation of the CIRP process under Section 95, for the reason being that if the Section 95(4)(a) is taken into consideration, it’s only an obligation which is cast upon an applicant to provide certain details when he or she is preferring the application for initiation of the proceedings under Section 95 so as to help the Adjudicating Authority to take a decision on initiation of the Personal Insolvency Process under Section 95. Thus, Section 95(4)(a) in itself does not provide that in case stipulations made therein are not satisfied to the full, the application preferred under Section 95 is liable to be dismissed. The obligation to provide the details is only a facilitating provision to continue with the process under Section 95, but that provision, in itself since being procedural in nature, will not act as a bar for initiation of proceedings under section 95 of the Code because all the facts that are contained therein, are required to be established by way of an evidence to be adduced by the parties in accordance with rules during the course of the proceedings to be conducted by the Learned Adjudicating Authority for the purpose of initiation of the CIRP process.

The question as to whether the detailed reference of the debts allegedly owed by the debtor is required to be made in the application to be preferred under Sub-Section (1) of Section 95 of the I & B Code is a relevant question. But there cannot be a common yardstick which could be applied to test whether the narration of the debt liability in the application preferred under Sub-Section (1) as contemplated under Clause (1) of Sub-Section (4) of Section 95 of the I & B Code meets the intention of the said section, because Clause (a) only contains that the application is to be accompanied with the details and the documents.

The provision of law as they are made and embodied in a statute, have to be read keeping in mind as to what purpose they are meant to serve. In our view, the necessity of giving the details as stipulated in Sub-Section (4)(a) was only for the purposes to ensure completeness of the application before it is proceeded to be considered on merits and that, the said provisions only intend to facilitate the Tribunal to decide the application before it, by provision of the necessary facts and figures to be supplied by the Applicant, in compliance of the provision under Section 95(4) that on a prima facie perusal of the records there is a case for admission of Section 95 of the I & B Code.

The said provision has never been intended to be utilised as a tool to question the proceedings under Section 95 in any manner whatsoever, as its very purpose is to provide necessary information for deciding the application and not to facilitate the objection raised by the Respondent. In that context, if we look into the application under Section 95 of the I & B Code, as it was preferred by the Applicant, that itself shows that it has met the objectives of Section 95(4) because it was making out a sufficient ground to enable the Tribunal to prima facie decide whether a case for admission of the application thus preferred under Section 95 was being made out. This could very well be made out from the contents of part III of the application preferred under Section 95 under Form C as contemplated under Rule 7(2) of Insolvency & Bankruptcy (Application to Adjudicating Authority Insolvency Resolution Process of Personal Guarantors to the Corporate Debtor), Rules, 2019. If we see part-III of the application, it prescribes for giving details in 17 columns, namely:

the total debt (including any interest or penalties),

amount in default,

date on which the debt was due,

date on which default occurred,

nature of the debt,

secured debt, including particulars of security held, the date of its creation, its estimated value as per the creditor (as applicable),

unsecured debt (as applicable),

details of retention of title arrangement (if any) in respect of goods to which the debt refer,

details of any mutual credit, mutual debts, or other mutual dealings between the guarantor and the creditor, which may be set-off against the claim,

particulars of an order of a court, tribunal, or arbitral panel adjudicating on the default (if any)

record of default with the information utility, if any,

details of succession, certificate, or probate, or a will or letter of administration, or a court decree under the Indian succession act, 1925 (10 of 1925),

provision, law, contract, or other document under which the debt has become due,

statement of bank account where deposits are held or credit received normally by the creditor in respect of the debt of the corporate debtor, from the date on which the debt was incurred,

list of documents attached to this application in order to prove the existence of debt and the amount in default,

statement by the creditor in respect of excluded debt,

if you are a secured creditor, tick the applicable box in the right column relating to forfeiture of right to enforce security during the period of the repayment plan, which will determine the voting share as per section 110 of the code.

For the purpose of brevity, we will not extract the entire Part- III in this judgement. It will suffice to say that the particulars as furnished in the prescribed columns as described above, by the Financial Creditor / Applicant to the applications filed under section 95 of the Code, which constituted to be the part of the pleadings contained in the application under Section 95, in itself will be an answer to the questions raised by the Learned Counsel for the Appellant, qua the alleged non-fulfilment of the conditions under Section 95(4)(a) of the I & B Code. In that eventuality, there was no specific requirement for the applicant to Section 95 application to give any other particulars which has been otherwise quite detailed in the application itself for the initiation of Section 95 of the I & B Code. Thus, it could be inferred that those conditions have been satisfied, owing to the particulars which we have narrated above.

Owing to the history of the litigation and particularly the admission of the procedure adopted by the Appellants themselves and the admission of Guarantee Agreements and the consequent liability flowing from them, at this stage, raising the issue of alleged non-fulfilment of the provisions of Section 95(4)(a) of the Code may not have any relevance. The Appellants have acknowledged the debt and their respective liabilities in the following manner:

The order of the DRT itself, closing the proceedings under Section 19 by an order of 19.09.2019, based on terms of settlement admitted by Appellants as personal guarantors.

Once the compromise of 30.08.2019, of which the Appellants were the signatories, had persuaded the DRT to pass the judicial order of closing the proceedings of OA No.767/2018 by an order of 19.09.2019, it would amount to that nothing much more was required to be said by way of giving the details about the debt due, which is alleged to have been contemplated under Section 95 (4) (a) of the I & B Code. The order of 19.09.2019 itself satisfied all the parameters of Section 95(4)(a) of the Code due to its judicial determination, which has been attempted to be argued otherwise by the Learned Counsel for the Appellant for the first time before this Tribunal at an appellate stage and that too by way of an pleading raised in the shape of a rejoinder.

Owing to the above background, when particularly, the factum of liability has been admitted by the personal guarantors at all stages of proceedings, being a parties to the proceedings under Section 19 of the SARFAESI Act, nothing more was required to be detailed in the application preferred under Section 95(1) of the I & B Code. When the debtor himself and personal guarantor admits its liability, which is to be paid to the creditor, and that too, on the basis of a judicial dictum, the very legislative purpose of the incorporation of Section 95(4)(a) stood satisfied when Section 95(1)(a) itself contained all the details about the previous commitments made by the personal guarantor acknowledging the liability under the agreement of 30.08.2019 and that itself sufficiently satisfies the condition and the procedural purpose of Section 95(4)(a) of the I & B Code. Hence, no independent elaborate explanation of the detailed liability (though was there) contemplated under Section 95(4)(a) was required because the application under Section 95 of the Code in the shape in which it was presented was satisfying of all the particulars of the financial liability due to be paid by the Appellants due to non-fulfilment of the terms of the admitted compromise of which they were the signatories. We are of the view that no other particulars would have been required to facilitate the determination of the liability of the Personal Guarantor by the Adjudicating Authority once the Guarantee Agreements and the admitted compromise were not disputed.

Admission of facts is the best evidence under law. The legislative purpose of Section 95(4)(a) of the I & B Code was intended to provide with the sufficient material, details and documents to the Adjudicating Authority to justify the initiation of proceedings, about the existence of the liability. But when the fact of the existence of liability is accepted by the personal guarantors, and has been determined in the judicial proceedings before the DRT, we are of the view that the purpose of Section 95(4)(a) of the I & B Code already stood satisfied, when all the previous procedural backdrop was already explained in the application preferred under Section 95(1) of the I & B Code against the personal guarantors and there will not be any requirement to deal with the same independently, that too when Section 95 application has been preferred because of a breach of commitment under a compromise which was entered in judicial proceedings. In fact, the intention of the provision stood satisfied when the details of the previous proceedings were the basis of Section 95 of the Code, and more particularly the admission of the liability in the compromise were admitted by the personal guarantor, the Appellant. Thus, the very purpose of Section 95(4)(a) of the I & B Code was satisfied, and this plea, though even raised for the first time at an appellate stage, is no more available to the Appellant.

Another ground for not to accept the arguments of the Learned Counsel for the Appellant would be that, carving out a new case at an appellate stage about the so-called purported non-compliance of Section 95(4)(a) of the I & B Code, could not have been a ground which would be available, that could have been fished out by the Appellant for the first time at an appellate stage and that too by way of raising a pleading in the rejoinder which as per the procedural law is not a part of pleading but its rather a simpliciter reply to the counter to the Appeal filed by the opposite party. If the said pleading was to be raised by the Appellant with regard to the effect of Section 95(4)(a) of the I & B Code, at the most it could have been taken by the Appellant by way of seeking an amendment in the Memorandum of Appeal itself and not by way of deriving a ground from the rejoinder, which otherwise under law is not reckoned to be as part of the pleading. Since the Appellant has not done so, he cannot be permitted to add a ground not argued before the Ld. NCLT, by taking it in the shape of the rejoinder affidavit in the proceedings of the instant Company Appeal. Development of a new ground would not be permissible at this appellate stage, having an effect of resiling the proceedings which otherwise had already concluded.

Besides that, this ground about the effect of Section 95(4)(a) of the I & B Code, ought to have been raised by the Appellant for the first time before the Learned NCLT, for the reason being that all facts were available at that stage too. Further, the interpretation to the requirement of Section 95(4) of the necessity to provide details about the liability payable as claimed in the application preferred under Sub-Section (1) of Section 95 of the I & B Code, entails an appreciation of fact, and it is not a pure question of law. Any issue which has a blend of mixed consideration of a question of fact and then arriving to a conclusion of law cannot be agitated for the first time before the first appellate forum, particularly when the first appellate forum is not equipped with the procedural entitlement to scrutinise evidence and introduce consideration of new issue at a belated stage, to arrive at a conclusion about the compliance of Section 95(4)(a) of the I & B Code. This could have been best considered before the NCLT, which the Appellant has failed to raise. Even otherwise, in the light of what we have observed above, it is not a ground available to the Appellant at all under the given set of factual circumstances narrated above.

Besides the effect of Section 95(4)(a) of the I & B Code, no other ground has been pressed by the Appellants. Since the said question raised has been answered in the preceding paragraphs, the Company Appeals being CA(AT)(CH)(Ins) 154, 155 & 156 of 2024 would stand dismissed, and all pending Interlocutory Applications will stand closed.