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Judgment
Per Justice N. Seshasayee, Member (Judicial)
This appeal is preferred by the Suspended Director of the CD who challenges the Order of the Adjudicating Authority (NCLT, Kolkata) dated 17.12.2024 in CP (IB) No. 89 of 2024, which the first respondent herein has instituted for initiating a CIRP.
The CD was not the principal borrower, but the corporate guarantor for the loan which the first respondent had advanced to M/s Eastern Gases Ltd., the principal borrower. The defence to the initiation of CIRP was founded on the validity, subsistence, invocation, and enforceability of the corporate guarantee itself are in serious dispute.
THE FACTS
The essential facts necessary for appreciating the merit of this appeal are stated as below:
The CD is, inter alia, engaged in the business of real estate investment and management. Be that as it may, on 16.11.2012, a consortium of banks led by the first respondent sanctioned a working capital loan of Rs.20.0 crores to M/s Eastern Gases Ltd., the principal borrower. The sanctioned facilities comprised of fund-based and non-fund-based limits and were extended under a consortium arrangement. As part of the security structure for the said facilities, the consortium inter alia required corporate guarantees and the CD herein offered to be a corporate guarantor. Accordingly, on 05.02.2013 the CD executed necessary deed of guarantee in favour of the consortium banks, which, needless to state included the first respondent herein. Besides, the CD had also offered its nine residential apartments as security for the said loan and created an equitable mortgage over them.
While so, on 21.01. 2016, the principal lender and the CD entered into a supplemental working capital agreement, following which a further deed of guarantee came to be executed by the CD. According to the lender, this deed of guarantee constituted a valid and continuing guarantee.
On 02.05.2017, the loan account of the principal borrower was classified as NPA, and eventually on 08.11.2017 a CIRP was initiated against the principal borrower vide Order in CP(IB) 482 of 2017. This CIRP against the principal borrower failed, and on 21.08.2018, it was ordered to be liquidated. In this liquidation proceedings, the first respondent made a claim of Rs.23,15,37,663/-, but managed to recover only Rs.10,20,37,136/-. The remaining amount continued to remain unpaid, on which interest continued to accrue.
Now turning to the CD herein (to repeat the corporate guarantor), the bank had issued communication to it requiring the former to discharge its liability. Notice under Sec.13(2) of the SARFAESI Act was issued in October 2017. And, in April, 2022, the bank issued a show-cause notice to the CD proposing to classify it as a willful defaulter in relation to the account of the principal borrower. In response, the CD had sought information regarding the status of the loan account and the securities. According to the CD, it was at this stage it came to know of the sanction letter dated 30.06.2016.
Subsequently, in the same year, the CD instituted a suit in C.S.2156 of 2022 before the City Civil Court, Kolkata, inter alia for a declaration that for the cancellation of the corporate guarantee and release of the mortgaged flats. The said suit is pending.
It is in this setting, on 04.03.2024, the first respondent laid a petition under Sec.7 of the IBC seeking initiation of CIRP against the CD. In its petition, the bank claimed that the CD had defaulted in paying Rs.42,51,09,234/-, which is made up of the amount fell in short after realization of part of the debt-dues through the liquidation of the principal debtor with interest thereon calculated up to 20.02.2024. To establish that the petition was within limitation, the financial creditor placed reliance on the balance sheets of the CD for the years from 2019– 2020 to 2022–2023, in which the loan liability of the principal debtor was denoted as ‘contingent liability’.
In its reply, the CD would contend:
On 30.06.2016, the first respondent which is the lead bank of the consortium, issued a communication relinquishing its security interest over the 9 flats and there was substitution of security by way of lien on fixed deposit of Rs.2.0 crores. These facts were not informed to the CD then, but the CD came to know of it only when the respondent issued a letter dated 16.04.2022, demanding the repayment of loan. It had come to light that the respondent had advanced loan not as part of the consortium but independently to the principal borrower. The CD however, had initially offered guarantee for the loan advanced by the consortium and not by the respondent. This apart there was large scale misapplication of loan amount by the principal borrower with the help of the respondent. In these circumstances, the CD instituted C.S.2156 of 2022 inter alia for the cancellation of the deed of guarantee and release of the nine apartments which were originally offered as collateral security. Hence the petition itself is not sustainable.
The petition is barred by limitation. The reasons are:
The loan was sanctioned to the principal borrower on 15.11.2012 with a validity period of one year, ending 15.11.2013. And, the guarantee was not invoked within a period of three years;
In its correspondence dated 16.04.2022, the respondent has disclosed that even as early as 02.07.2017, the loan to the principal borrower was classified as NPA. But the petition was instituted only in 2024.
Now, after relinquishing its security interest over the 9 flats belonging to the CD, the respondent has instituted the petition under Sec.7 IBC only with an ulterior intent to grab those properties.
So far as the alleged acknowledgement of debt in the balance sheet is concerned, after the Cd had come to know of the relinquishment of the bank guarantee on 30.06.2016, a provision was made as a matter of contingency in 2023, since the civil suit which the CD had filed is pending.
The pivot of the defence of the CD has been the letter of the respondent dated 30.06.2016 in which the respondent is stated to have relinquished its security interest over the nine flats etc., In its rejoinder, the respondent would contend that this letter in reference was the sanctioning letter, reviewing the loan facility granted to the principal borrower, offering fresh terms of sanction provided the principal borrower fulfilled all the terms and conditions of sanction. The principal borrower, however, chose not to act on the terms offered.
The Adjudicating Authority was not impressed with the quality of defence which the CD had offered and vide its Order now under challenge, it initiated a CIRP against the CD. Its line of reasoning is:
there is no dispute with regard to the execution of deed of corporate guarantees by the CD. Relying on the ratio in Laxmi Pat Surana v. Union Bank of India, [(2021) 8 SCC 481, it held that where a corporate person has furnished a guarantee in respect of a loan transaction, the right of the financial creditor to initiate proceedings against such corporate guarantor gets triggered the moment the principal borrower commits default.
the audited balance sheets of the CD an amount of Rs.43.0 Crores had been consistently shown as a contingent liability for multiple financial years including 2019–2020, 2021–2022, and 2022–2023, as well as the collateral securities that it had offered, and placed reliance on the authority of the Hon’ble Supreme Court in Asset Reconstruction Company (India) Ltd., Vs Bishal Jaiswal & another [Civil Appeal No. 323 of 2021], Mahabir Cold Storage Vs CIT, [1991 Supp (1) SCC 402].
So far as pendency of a civil suit which the CD has instituted against the bank, the same has zero effect when it faces a petition under Sec.7 IBC. Reliance was placed on the ratio in Kotak Mahindra Bank Ltd., Vs Kew Precision Parts (P) Ltd., [(2022) 9 SCC 364] and when once the debt and default are established, the Adjudicating Authority is bound to admit the application.
It may however, be stated that while the pivot of the CD’s defence was rooted in the letter of the respondent dated 30.06.2016, the Order does not show any discussion on the implication of this document.
The Arguments:
The learned counsel for the appellant submitted:
There is no concluded crystallised financial debt as is required to be understood within the scheme of Sec.7 IBC or default in paying the same. The Order under challenge is guided by a misconception as to the existence of debt and default as it converted a contingent contractual arrangement into a ground for the civil death of a solvent company, since a corporate guarantee, by its very nature, does not create a debt in praesenti but only a contingent obligation. Such contractual obligation itself gets triggered only if it is invoked in accordance with the terms of the guarantee and within limitation. In the instant case, neither the guarantee was invoked in the manner required nor is the financial debt alleged is alive.
The corporate guarantee dated 05.02.2013, which the appellant had executed was in the context of a specific sanction of loan dated 16.11.2012 to the principal debtor, and was valid only for a limited period. The guarantee was not intended to be open-ended in perpetuity and was intrinsically linked to the terms of the original sanction. And, where the financial creditor restructures or enhances or varies the credit facilities granted to the principal borrower without the knowledge, consent, or concurrence of the corporate guarantor, the latter will be discharged of its contractual obligation under Sec.133 of the Indian Contract Act, 1872.
So far as the deed of corporate guarantee dated 21.01.2016 on which the bank places reliance for invoking Sec.7 IBC, it is not a concluded document. It was only a draft, subject to the fulfilment of conditions and completion of blanks, which never occurred. This guarantee was never admitted in the books of the Company as a binding obligation and cannot be treated as a financial contract” within the meaning of the IBC.
The recital to the second mentioned guarantee deed dated 21.01.2016 reads:
“In terms of arrangement and as required by the Lead Bank, the Guarantor, at the request of the Borrower and in consideration of the Lead Bank having released and/or agreed to release the Outgoing Guarantors and thereupon have granted and/or agreed to grant inter alia, at the request of the Guarantor the abovementioned credit facilities to the Borrower have agreed to execute this Guarantee in favour of the Lead Bank on the terms and conditions hereinafter appearing”
In view of the same, the appellant was relieved of its contractual obligations which it had undertaken under the first deed of guarantee. At any rate, there is nothing to show that the respondent had obtained the second deed of guarantee with the consent of all the members of the consortium.
The respondent had issued a sanction letter dated 30.06.2016, whereunder, it, as the lead bank of the consortium, relinquished the mortgage security of nine residential flats and the corporate guarantee provided by the Corporate Debtor. Therefore, the appellant’s obligation under the deed of guarantee stands discharged. This communication was suppressed by the first respondent.
On the issue of limitation, even according to the bank, the principal debtor’s default in repaying the loan had it was classified as a NPA on 02.05.2017. Therefore, if at all the guarantee is presumed to be alive on that date, then it ought to have been invoked within three years from 02.05.2017, but the petition under Sec.7 IBC was filed only in March 2024. In this record, the alleged acknowledgement of debt in the balance sheets of the appellant may not be useful as the balance sheets themselves show that the debt in question was only a contingent liability.
The CIRP is wrongly invoked for recovering dues for in excess of the admitted liability of the principal borrower which goes against the tenets of the IBC.
The validity, enforceability, and subsistence of the corporate guarantee are directly in issue and are already the subject matter of a pending Civil Suit 2156 of 2022. The Appellant submits that while the insolvency proceedings may be summary in nature, they cannot be used to bypass the adjudication of foundational contractual disputes, particularly when the consequence is irreversible in corporate insolvency.
The impugned order is a non-speaking Order as it does not engage with the substantive defences raised by the Corporate Debtor.
Per contra, the learned counsel for the financial creditor, the first respondent argued:
The plea of non-invocation of bank guarantee is taken up for the first time before the appellate tribunal and was not urged before the Adjudicating Authority. The appellant therefore, is not disentitled to any relief. Reliance was placed on the ratio in Dalip Singh Vs State of Uttar Pradesh [(2010) 2 SCC 114] (wherein the Court strongly deprecated the tendency of the litigants to resort to falsehood, misrepresentation, and suppression of facts, and held that a litigant who pollutes the stream of justice is not entitled to any relief, interim or final), Amar Singh Vs Union of India [(2011) 7 SCC 69] (wherein the Supreme Court reiterated that a party seeking equitable relief must make full and fair disclosure of all material facts, failing which the proceedings are liable to be dismissed) and Ramjas Foundation Vs Union of India & Others [(2010) 14 SCC 38], (to contend that Courts are duty bound to protect themselves from unscrupulous litigants who attempt to mislead judicial fora by suppression or distortion of facts material to adjudication).
The pendency of Civil Suit No:2156 of 2022 expressly acknowledge that several demand notices were issued by the bank, including notices under Section 13(2) of the SARFAESI Act and under Section 95 of the IBC. The Respondent submits that the Appellant has deliberately omitted reference to these notices in the present appeal in order to falsely project that the guarantee was never invoked. Such suppression, it is contended, amounts to suppressio veri and suggestio falsi.
The deeds of corporate guarantees dated 05.02.2013 and 21.01.2016 were validly executed, duly stamped, and signed by the Corporate Debtor and were never revoked, discharged, or terminated in accordance with law. Clause 8 of the guarantee deed dated 05.02.2013 declares that the guarantee is a continuing guarantee, and hence the Appellant’s assertion that the guarantee was limited to a period of one year is factually incorrect and contractually unsustainable. This apart even the plaint in C.S.No: 2156 of 2022 does not allege that the guarantee had expired by efflux of time.
So far as the deed of corporate guarantee dated 21.01.2016, the appellant’s contention that the said guarantee was never finalised is entirely baseless and an afterthought, and has been taken for the first time before the appellate tribunal. The guarantee bears the signature and stamp of the CD and was executed pursuant to a revised working capital arrangement. Reliance is placed on the ratio in Rama Kt. Barman (Died) through LRs) Vs Md. Mahim Ali & Others., [2024 INSC 644] and Mathai Vs Varkey & Others [Civil Appeal No. 372 of 1960].
Turning to the alleged sanction letter dated 30.06.2016 which the appellant relies on to build a defence that the guarantee and the security interest created over certain immovable assets of the CD have been relinquished is concerned, it never fructified into a binding agreement. It is contended that the sanction letter is merely an offer, with a string of conditions attached to it, and unless acted upon by execution of necessary documents it does not result in novation or alteration of the existing contractual obligations. Indeed, the bank has not issued any NOC releasing the corporate guarantee or the mortgaged properties, and hence the charge in favour of the consortium continued to subsist.
On the issue of invocation of guarantee, demand notices issued by the Bank clearly constitute valid invocation of the corporate guarantee. Reliance is placed on the judgment of this tribunal in Asha Basantilal Surana Vs SBI & Others, [Company Appeal (AT) (Ins.) No. 84 of 2025], wherein it was held that for determining whether a guarantee has been invoked, the contents and language of the notice must be examined to ascertain whether the guarantor has been called upon to discharge its liability). Reliance is also placed on Mavjibhai Nagarbhai Patel Vs State Bank of India & another [Company Appeal (AT) (Ins.) No. 1702 of 2024] and Amrit Rajani Vs Pegasus Assets Reconstruction Pvt. Ltd. & another, [Company Appeal (AT) (Ins.) No. 476 of 2024], (wherein it was held that where a notice raises a demand in terms of the guarantee agreement, such notice constitutes invocation of the guarantee.
On the question of limitation, the respondent submits that the impugned order correctly holds that the Section 7 application is within limitation. It is contended that the CD has continuously acknowledged its liability as a corporate guarantor by reflecting the guarantee amount as a contingent liability in its audited balance sheets from financial years 2019–2020 to 2022–2023. Placing reliance on the judgment of the Supreme Court in Asset Reconstruction Company (India) Ltd. Vs Bishal Jaiswal & another [2021 INSC 254], and Vidyasagar Prasad Vs UCO Bank & another [2024 INSC 810].
The Respondent further submits that acknowledgment of liability also flows from part-payments received during the liquidation of the principal borrower, which, by virtue of the express terms of the guarantee, are deemed to be acknowledgments by the guarantor as well. Reliance is placed on Laxmi Pat Surana Vs UCO Bank & another [Civil Appeal No. 2734 of 2020], wherein the Hon’ble Supreme Court has held that acknowledgment by the principal borrower or corporate guarantor, made within the prescribed period results in the renewal of limitation against both.
So far as the contention that the claim against the guarantor exceeds the admitted claim of the principal borrower is concerned, under the terms of the guarantee and the law on the aspect, the guarantor is liable not only for the principal sum but also for the interest and other contractual dues. Besides, this issue is not determinative at the stage of admission under Sec. 7 and that the Adjudicating Authority is only required to be satisfied as to the existence of debt and default.
On the issue of pendency of C.S.2156 of 2022 is concerned, it does not bar the initiation of an insolvency proceedings since a CIRP is not a recovery proceeding but only aims at resolution of corporate insolvency.
Discussion & Decision
The appellant’s strategy is straight forward: It has apparently executed two deeds of guarantee. So far as the first one, dated 05.12.2013, is concerned, it says that in view of the 3rd recital in the second deed of guarantee dated 21.01.2016, it was discharged of its obligation under the first deed of guarantee. But so far as the second deed of guarantee goes, it is unenforceable as it has couple of blank spaces, and what was purported to be the second deed of guarantee indeed is only a draft, because it has those blank spaces. Secondly, the appellant contends that the first deed was limited by time. It’s third contention is about the letter dated 30.06.2016 of the respondent, and according to the appellant, the guarantee that it had issued stands discharged by virtue of this letter. An allied issue is that even dehors it, inasmuch as the banks have enhanced the working capital credit limits and varied the terms of the original sanction in 2012, the CD’s contractual obligation stands discharged under Sec.133 of the Contract Act. They required to be considered. The third aspect is pendency of the Civil suit No:2156 of 2022 and its effect. And the last issue is one of bar of limitation.
To the first aspect, and it relates to the discharge of the appellant’s obligation under the first deed of guarantee and reliance here was to the 3rd recital in the second deed of guarantee. See: Paragraph 7(d) above for the text of this recital. Firstly, it is a recital merely and not an operative term of the contract. Secondly, a recital provides only those introductory facts that sets the circumstances for the execution of a deed. Thirdly, and more specifically, while the recital speaks of discharge of the outgoing guarantor, what is significant here is that the outgoing guarantor in terms of the first deed of guarantee and the incoming guarantor under the second deed of guarantee is the same.
Then arrives the issue of enforceability of second deed of guarantee in view of the alleged blank spaces in it. The fallacy which the appellant apparently has overlooked is that if the second deed of guarantee is void and unenforceable, then even the recital 3 thereof cannot be given any credence to, and this would imply that the first deed of guarantee and the obligations created thereunder would continue to haunt the appellant. Now, turning to the alleged blank spaces per se, the terms of the contract of guarantee is in a standard form where there are couple of blank spaces, but they are in the recital portion of the document, and not in the operative portion, and they relate to the date of sanction of the loan in 2012. They do not relate to the material terms of the contract, and hence the appellant cannot take shelter behind it. Inasmuch as the CD had executed this document with open eyes, for sustaining its argument on this aspect, it should have established how leaving a blank space in the document constituted a material omission and that it has created irresolvable ambiguity in understanding the terms of the contract as to render it unenforceable. In other words, it should have established a prima facie case that there involved an issue inviting construction of the second guarantee deed. That was not even attempted. This contention, with all its ingenuity or desperation does not help the appellant’s cause.
Is the guarantee deed dated 05.02.2013 limited by time, limited to one year from the date of its execution? Under this document, the CD became obligated to pay the debt for a sum not exceeding Rs.43.0 crores, which the first respondent as the lead bank of the consortium had agreed to advance the principal borrower. A careful reading of the deed of guarantee discloses that under Clause 8 thereof, the guarantee is described as a continuing guarantee. Contrary to the contention of the appellant, nowhere it could be found that the guarantee in question is limited by time. On the other hand, it indicates that its liability under the deed of guarantee will be co-existent with the liability of the principal debtor. Needless to state that this argument of the appellant fails.
The next aspect relates to the letter dated 30.06.2016. According to the appellant, under this letter, the bank had relinquished the guarantee which the CD had executed and hence the latter stands discharged of its liability. This communication dated 30.06.2016 was addressed by the first respondent-bank to the principal debtor. The communication itself states that it concerns with ‘Review proposal’. It describes the purpose of the term loan to include the takeover of the existing term loan of Rs.8.07 crores. It does indicate an intention to relieve the third-party guarantee and also giving up security interest over 22 apartments etc., but stipulated as many as six conditions which includes perfection of security for property located in Durgapur, West Bengal. As contended by the counsel for the respondent-bank, this document appears to be a proposal, and there is nothing on record to indicate that the principal borrower to whom the offer was made had ever responded to it and complied with the conditions. Therefore, a mere proposal of the bank to relieve the third-party guarantor of its original contractual obligation in the eventuality of the principal borrower complying with the conditions listed in the communication dated 30.06.2016 will not be adequate enough to provide a sustainable line of defence to the appellant.
11 The appellant contends about variance in the terms of contract between the lender and the principal borrower to bring into action Sec.133 of the Contract Act. It is already found that the deed of guarantee dated 21.06.2016 is valid and binding on the CD, and going by its terms, the CD will be liable to the bank for any sum not exceeding Rs.47.0 corers (though in clause 503 thereof, it is stipulated that the liability would be only upto Rs.43.0 crores) plus interest etc., This makes evident that the CD would be liable at least upto Rs.43.0 crores plus interests and charges detailed in the deed of guarantee and may not be beyond it. And, at any rate there is no material to conclude that there has been variance in the material terms of contract between the lender and the principal borrower as to impact the deed of guarantee which the CD herein had executed. The appellant fails on this aspect as well.
12 Turning to the issue on pendency of C.S.2156 of 2022 is concerned, pendency of the suit by itself may not be a ground to reject a petition under Sec.7, though it may be relevant for the one instituted under Sec.9 IBC. The pendency of the suit may become relevant if only the foundation for the same rests in any allegation of fraud played by the lender, but then facts constituting such allegation of fraud have to be independently pleaded and established in a proceeding under Sec.7 IBC. The appellant fails again.
This brings into focus the last aspect: the bar of limitation. According to the appellant, 02.05.2017, the loan to the principal borrower was classified as NPA but the petition under Sec.7 was laid only in March, 2024, which very obviously was beyond three years. The respondent explains that in the balance sheet of the guarantor-CD for 2019–2020, 2021–2022, and 2022–2023, it has acknowledged its liability arising out of its contract of guarantee and hence its petition under Sec.7 is within time. But the appellant would contend that in its balance-sheet the liability to the respondent is disclosed only as ‘contingent liability’ and that it would not amount to an acknowledgement.
This argument is impressive but it fails to hide the fallacy within. In law, the liability of the guarantor is co-extensive and not contingent – contigent upon principal borrower failing to discharge its obligation. When the appellant has signed the deed of guarantee, it has accepted only co-extensive liability along with the principal borrower and not any contingent liability. Therefore, merely because the appellant has chosen to describe its co-extensive liability arising under the deed of guarantee as contingent liability in its balance sheets may not have any legal consequence of a co-extensive liability into contingent liability. It is an unilateral and a self-serving statement which the appellant has made in its books merely. What is contextually relevant is, whether the appellant has acknowledged its liability, and not how he has chosen to describe it in the books of accounts of the corporate guarantor. Viewed thus, this tribunal holds that the appellant indeed has acknowledged its liability within the period of limitation, and necessarily it has to be held that the petition filed under Sec.7 IBC is not barred by time.
14 To conclude, we do not find any infirmity in the Order of the Adjudicating Authority, dated 17.12.2024 in C.P. 89 of 2024 and hence dismiss this appeal.