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Judgment
ORAL ORDER
The present petition has been preferred by Varsha for initiation of Insolvency Resolution Process qua Ritzy Chemicals Pvt. Ltd. The amount of debt and default has been mentioned in Part-IV of the petition which reads thus:
The factual matrix given by the Petitioner in synopsis filed in the petition is not controverted on behalf of the Corporate Debtor. The same reads thus: -
Having drawn our attention to settlement deed dated 21.02.2024, the Ld. Counsel for the Creditor submitted that the Debtor was liable to pay the amount of default which could be paid as per Clause 2 of the deed. According to the Ld. Counsel for the Creditor, neither the upfront amount nor the instalment due on 30.10.2024 has been paid. The full and final settlement deed placed on record as Annexure I (J) of the petition reads thus:
The Petitioner has enclosed with the petition the deed of guarantee. When the Ld. Counsel for the Petitioner relied upon Section 140 of the Indian Contract Act to espouse that the Guarantor is entitled to recover the amount of debt paid by him/her/it to the Creditor, the Ld. Counsel for the Debtor submitted that the amount of debt allegedly defaulted to be paid cannot be treated as financial debt. Section 140 of the Indian Contract Act reads thus:
“140.Rights of surety on payment or performance. —Where a guaranteed debt has become due, or default of the principal debtor to perform a guaranteed duty has taken place, the surety upon payment or performance of all that he is liable for, is invested with all the rights which the creditor had against the principal debtor.”
The Ld. Counsel for the Corporate Debtor referred to the judgment of Hon'ble Supreme Court extracted in her reply, to contend that the amount of debt referred to in Part-IV of the application is not financial debt. The judgement as quoted in her reply reads thus:
As far as the issue of the debt being financial debt is concerned, it would not be out of context to note that when liabilities between the parties to any business or profession is created on the account of running/operating the business, the liability so created has to be treated as operational liability and can be called as operational debt. Similarly, when any liability is created in the process of availing/extending financial facility, indubitably the same is financial liability and has to be treated as financial debt. In any case, to make the proposition clear, the Ld. Counsel for the Petitioner could make reference to the judgment of Hon’ble Supreme Court in Amrit Lal Goverdhan Lalan (dead) by his Legal Representative vs. State Bank of Travancore and Others [1968 SCC Online SC 246]. In the said judgment Hon’ble Supreme Court noted and ruled that the surety would be entitled to every remedy which the creditor has against the principal debtor; to enforce every security and all means of payment; to stand in the place of the creditor.
Para 7 of the judgment reads thus:
“7.We proceed to consider the next important question arising in this case, namely, whether a portion of the security was lost by the creditor or parted with without the surety's consent and whether the surety is discharged to the extent of the value of the security so lost. It was pointed out on behalf of the appellant that when the quantity of the goods actually in stock was verified with the weekly statement dated April 18, 1957 shortage of goods to the value of Rs 35,690 was found. The weekly statement dated March 15, 1957 shows that the stock was valued at Rs 99,991 and odd and in the course of his evidence the Agent of the respondent Bank said that “he did not know how the shortage occurred” and “there was a possibility of Defendants 1 to 5 taking away the goods”. On behalf of the respondent Bank reference was made to clause 5 of Ex. P-4 which has already been quoted. It was contended that on account of this clause in Ex. P-4 the appellant has opted out of the benefit of Section 141 of the Indian Contract Act. We are unable to accept the argument put forward by the Attorney-General on behalf of the respondent Bank. In our opinion, the expression “any security” in clause 5 of Ex. P-4 should be properly construed as “any security other than the pledge of goods mentioned in the primary agreement, Ex. P-1 between the Bank and the firm”. We consider that there is nothing in clause 5 of Ex. P-4 to indicate that the appellant is not entitled to invoke the provisions of Section 141 of the Indian Contract Act. In this connection it is necessary to consider the provisions of Section 140 of the Indian Contract Act, 1872 which states:
“Where a guaranteed debt has become due, or default of the principal debtor to perform a guaranteed duty has taken place, the surety, upon payment or performance of all that he is liable for, is invested with all the rights which the creditor had against the principal debtor(s).” This section embodies the general rule of equity expounded by Sir Samuel Romilly as counsel and accepted by the Court of Chancery in Cravthorne v. Swinburne, namely:
“The surety will be entitled to every remedy which the creditor has against the principal debtor; to enforce every security and all means of payment; to stand in the place of the creditor; not only through the medium of contract, but even by means of securities entered into without the knowledge of the surety; having a right to have those securities transferred to him, though there was no stipulation for that; and to avail himself of all those securities against the debtor. This right of a surety also stands, not upon contract, but upon a principle of natural justice.” The language of the section which employs the words “is invested with all the rights which the creditor had against the principal debtor” makes it plain that even without the necessity of a transfer, the law vests those rights in the surety. Section 141 of the Indian Contract Act, 1872 states;
“A surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship is entered into, whether the surety knows of the existence of such security or not; and, if the creditor loses, or, without the consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security.
“As pointed out by this Court in State of Madhya Pradesh v. Kaluram the expression “security” in this section is not used in any technical sense; it includes all rights which the creditor has against the property at the date of the contract. The surety is entitled on payment of the debt or performance of all that he is liable for to the benefit of the rights of the creditor against the principal debtor which arise out of the transaction which gives rise to the right or liability. The surety is therefore on payment of the amount due by the principal debtor entitled to be put in the same position in which the creditor stood in relation to the principal debtor. If the creditor has lost or parted with the security without the consent of the surety, the latter is by the express provision contained in Section 141, discharged to the extent of the value of the security lost or parted with. In Wulff and Billing v. Jay , Hannen, J. stated the law as follows:
“… I take it to be established that the defendant became surety upon the faith of there being some real and substantial security pledged, as well as his own credit, to the plaintiff; and he was entitled, therefore, to the benefit of that real and substantial security in the event of his being called on to fulfil his duty as a surety, and to pay the debt for which he had so become surety. He will, however, be discharged from his liability as surety if the creditors have put it out of their power to hand over to the surety the means of recouping himself by the security given by the principal. That doctrine is very clearly expressed in the notes in Rees v. Barrington-2 White & Tudor's L.C., 4th Edn. at p. 1002 — ‘As a surety, on payment of the debt, is entitled to all the securities of the creditor, whether he is aware of their existence or not, even though they were given after the contract of suretyship, if the creditor who has had, or ought to have had, them in his full possession or power, loses them or permits them to get into the possession of the debtor, or does not make them effectual by giving proper notice, the surety to the extent of such security will be discharged. A surety, moreover, will be released if the creditor, by reason of what he has done, cannot, on payment by the surety, give him the securities in exactly the same condition as they formerly stood in his hands.” It is true that Section 141 of the Indian Contract Act has limited the surety's right to securities held by the creditor at the date of his becoming surety and has modified the English rule that the surety is entitled to the securities given to the creditor both before and after the contract of surety. But subject to this variation, Section 141 of the Indian Contract Act incorporates the rule of English law relating to the discharge from liability of a surety when the creditor parts with or loses the security held by him. Upon the evidence adduced by the parties in this case we are satisfied that there was shortage of goods of the value of Rs 35,690 brought about by the negligence of the Bank or for some other reason and to that extent there must be deemed to be a loss by the Bank of the securities which the Bank had at the time when the contract of surety was entered into. It follows therefore that the principle of Section 141 of the Indian Contract Act applies to this case and the surety is discharged of the liability to the Bank to the extent of Rs 35,690. We accordingly hold that the respondent Bank is entitled to a decree against Respondent 6, the appellant only to the extent of Rs 5243.58 and not to the sum of Rs 40,933.58 and to proportionate costs.”
The view taken in the aforementioned judgment was followed by Hon’ble Supreme Court in BRS Ventures Investments Ltd. vs. SREI Infrastructure Finance Ltd. and Another [2024 SCC Online SC 1767]. Para 24 & 25 of the judgment reads thus:
In view of the aforementioned judgment of the Hon’ble Supreme Court, we are left with no doubt that the principal debtor has liability to pay the amount of debt which the PG discharged qua the creditor to the principal debtor. Besides, the surety/guarantee being given by the personal guarantor in financial transaction of availing and extending the financial facility, there can be not to opinion that the liability of Corporate Debtor is to discharge the financial debt only.
The Applicant has given the particulars of the RP to be appointed in Part-III of the application which reads thus:
The RP has declared in Form-2 that no legal proceedings are pending against him. The relevant excerpt of the declaration made by the IP proposed to be appointed as RP reads thus: -
The Ld. Counsel for the Corporate Debtor could not point out any infirmity or deficiency in the application, thus the application is found as complete. The aforementioned settlement deed is sufficient evidence to establish the liability of Corporate Debtor to repay the amount of debt. The Ld. Counsel for the Corporate Debtor has not disputed that the amounts agreed to be paid as upfront, as the first instalment have defaulted to be paid. Thus, apparently the default is established. In the wake of the aforementioned, we are left with no option but to admit the present petition. Ordered accordingly.
In the backdrop, moratorium as provided under Section 14 of IBC, 2016 is declared qua the CD and as a necessary consequence thereof the following prohibitions are imposed, which must be followed by all and sundry:
The institution of suits or continuation of pending suits or proceedings against the Respondent including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;
Transferring, encumbering, alienating or disposing of by the Respondent any of its assets or any legal right or beneficial interest therein;
Any action to foreclose, recover or enforce any security interest created by the Respondent in respect of its property including any action under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;
The recovery of any property by an owner or lessor, where such property is occupied by or in the possession of the Respondent.
As proposed by the Petitioner, Mr. Parminder Singh Bhullar, having Registration No. IBBI/IPA-002/IP-N01127/2021-2022/13700, is appointed as IRP, subject to the condition that no disciplinary proceeding is pending against him and disclosures as required under IBBI Regulations, 2016 are made by him within a period of one week from this Order.
It is further ordered that Mr. Parminder Singh Bhullar, having Registration No. IBBI/IPA-002/IP-N01127/2021-2022/13700, shall take charge of the CIRP of the Corporate Debtor with immediate effect and would take steps as mandated under the IBC specifically under Section 15, 17, 18, 20 and 21 of IBC, 2016 read with extend provisions of IBBI (Insolvency Resolution of Corporate Persons) Regulations, 2016.”
The Petitioner is directed to deposit Rs. 2,00,000/- only with the IRP to meet the immediate expenses. The amount, however, will be subject to adjustment by the Committee of Creditors as accounted for by Interim Resolution Professional and shall be paid back to the Financial Creditor.
A copy of this Order shall immediately be communicated by the Registry/Court Officer of this Tribunal to the Petitioner /Financial Creditor, the Respondent/Corporate Debtor and the IRP mentioned above.
In addition, a copy of this Order shall also be forwarded by the Registry/Court Officer of this Tribunal to the IBBI for their records.