Nitin Chandrakant Naik Vs. Sanidhya Industries LLP - In Resolution Plan of Corporate Debtor provision relating to right of Financial Creditor to proceed against Personal Guarantor can be there, but enforcement of such right has to be as per provisions of law as discussed.

 NCLAT (26.08.2021) in Nitin Chandrakant Naik Vs. Sanidhya Industries LLP  [Company Appeal (AT) (Insolvency) No. 257 of 2020 & 239 of 2021] held that; 

• Now, after portion of Part-III has been applied to Personal Guarantors of Corporate Debtor, one would have to resort to those provisions under IBC if Personal Guarantors of Corporate Debtor are to be proceeded against. In Resolution Plan of Corporate Debtor provision relating to right of Financial Creditor to proceed against Personal Guarantor can be there, but enforcement of such right has to be as per provisions of law as discussed.

•  . . there have been material irregularities in exercise of powers by the Adjudicating Authority when it directed the Appellants (in para 26 of the impugned order (referred supra)), that the owners of the premises as mentioned in the judgment shall enter into Tripartite Agreements for transfer of the premises (as mentioned in para 18 of impugned order). In fact, if para 18 is seen, after describing the properties in the chart there is also portion added which says that the Financial Creditors shall be at liberty to proceed against the properties of the Promoters erstwhile Directors/ Guarantors “other than those mentioned above to recover their balance”. This, in the Resolution Plan would be blank cheque given to proceed even with regard to any other property also of the Personal Guarantors. In our view, without resorting to appropriate proceedings against the Personal Guarantors of Corporate Debtor this is irregular exercise of powers.

Excerpts of the order;

# 1. The Appellants, Promoter and Suspended Directors of the Corporate Debtor- ‘Simrut Foods & Hospitality Private Limited’ have filed this Appeal against impugned order dated 13.11.2019 passed by the Adjudicating Authority (National Company Law Tribunal, Mumbai Bench) in M.A. No. 3439/2019 in CP No. 1973/ 2018. By the Impugned Order, the Adjudicating Authority allowed the Application filed by Respondent No.3- Resolution Professional seeking approval of the Resolution Plan approved by the Committee of Creditors which plan was submitted by Respondent No.1-‘Sanidhya Industries LLP’. Aggrieved by the approval of the Resolution Plan, the Appellants have filed this Appeal mainly on the ground that the Resolution Plan has provision to transfer personal properties of the Appellants who had given their personal properties as security in favour of the Corporate Debtor, whom Corporate Debtor took loan.

 

# 2. The Appeal claims and it is argued on behalf of the Appellants that the Resolution Plan approved made provision of transfer of personal properties of the Appellants. It is claimed that the personal properties of the Shareholders/ Directors cannot form part of the Resolution Plan under Regulation 37 of the CIRP Regulations. Resolution Plan has to be with respect to the property of the Corporate Debtor and cannot enforce action against the properties of Shareholders/ Directors or Guarantors without proceeding against them. If the Creditor desires the Creditor has to proceed against the Guarantor under SARFAESI Act, 2002, Indian Contract Act, 1972 or the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, which proceedings could have been filed before the DRT as Part III of the Insolvency and Bankruptcy Code, 2016 (“IBC” for short) which has not yet been notified. The Appellants alleged that the Information Memorandum published by Respondent No.3-Resolution Professional did not show the personal properties of the Appellants as properties of the Corporate Debtor. . . . 

 

# 4. Before proceeding further, it needs to be noted here that in this matter the Resolution Plan was approved on 13.11.2019 and Section 2(e) and provisions of Part-III of IBC came to be notified on 15.11.2019 enforcing Part-III of IBC to limited extent of making it possible to enforce Resolution relating to personal Guarantors of the Corporate Debtor. Notification was issued by Government and a judgment was passed by Hon’ble Supreme Court in the matter of ‘Lalit Kumar Jain vs. Union of India & Ors.’-[Transferred Case (Civil) No. 245/2020] in this context. In the present matter thus, the disputes raised are on the basis of as to how the law stood (before making Part III of IBC applicable to Personal Guarantors of Corporate Debtor) at the time of approval of Resolution Plan by the Committee of Creditors and then by the Adjudicating Authority.

 

# 7. Respondent Nos. 4 and 5, the Financial Creditors have also filed reply and it is argued by these Respondents that the Appellants are the Promoters of the Corporate Debtor and they had mortgaged the subject properties to these Respondents vide Mortgaged Deed dated 20th October, 2014. It is claimed that the Appellants had executed personal guarantees in order to secure the advances given to the Corporate Debtor and that the properties concerned are commercial in nature (The documents show the properties on personal names of Appellants- See Schedule of Annexure-B- Joint Mortgage Deed dated 20.10.2014). It is claimed that these Respondents had proceeded to take action under Section 13(2) of the SARFAESI Act on 17.09.2018 and 28.07.2017 respectively and that the possession was taken by notice dated 19.02.2018 under the SARFAESI Act. The CIRP got initiated on 03.09.2018. Para 4 of Reply Diary No.23074 shows that these Respondents got the secured assets valued on 08.02.2019. These Respondent Nos.4 and 5 had 91.31% voting shares in the CoC. These Respondents are relying on para 22 of the judgment in the matter of “State Bank of India v. V. Ramakrishnan & Anr.” [Civil Appeal No.3595 of 2018] passed by the Hon’ble Supreme Court on 14th August, 2018. The said paragraph reads as under:-

• “22. Section 31 of the Act was also strongly relied upon by the Respondents. This Section only states that once a Resolution Plan, as approved by the Committee of Creditors, takes effect, it shall be binding on the corporate debtor as well as the guarantor. This is for the reason that otherwise, under Section 133 of the Indian Contract Act, 1872, any change made to the debt owed by the corporate debtor, without the surety’s consent, would relieve the guarantor from payment. Section 31(1), in fact, makes it clear that the guarantor cannot escape payment as the Resolution Plan, which has been approved, may well include provisions as to payments to be made by such guarantor. This is perhaps the reason that Annexure VI(e) to Form 6 contained in the Rules and Regulation 36(2) referred to above, require information as to personal guarantees that have been given in relation to the debts of the corporate debtor. Far from supporting the stand of the Respondents, it is clear that in point of fact, Section 31 is one more factor in favour of a personal guarantor having to pay for debts due without any moratorium applying to save him.”

 

# 8. These Respondents lay stress on the observations of the Hon’ble Supreme Court that the Resolution Plan ‘may well include provisions as to payments to be made by such guarantor’. On such basis, these Respondents claim that the Adjudicating Authority rightly approved the Resolution Plan and that the Appeal should be dismissed.

 

# 10. Thereafter, the Adjudicating Authority referred to Sections 30 and 31 of the IBC as well as Regulations 38 & 39 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulation, 2016’ (“CIRP Regulations” for short) and concluded in Para 21 that mandatory contents of Resolution Plan have been complied with, inter alia Adjudicating Authority went on to give direction in Para 26 of the impugned order as under:-

• “26. It is directed that Mrs. Megha Nitin Naik and Mr. Nitin Chandrakant Naik, the owners of the premises as mentioned above and the Corporate Debtor, shall enter into Tripartite Agreements (with the Financial Creditors), for transfer of the premises (as mentioned in paragraph 18 of this Order) to the Resolution Applicant in compliance with the decision of CoC.”

 

# 13. We have heard learned Counsel for the parties. When CIRP is initiated, in the first step, Interim Resolution Professional (IRP) is required under Section 18(1) to collect all information relating to the assets, finances and operations of the Corporate Debtor for determining the financial position of the Corporate Debtor. He has to make a list of assets and liabilities of Corporate Debtor. Regulation 36 of the CIRP Regulations provides as to what is required to be incorporated in the Information Memorandum which is to be issued by the Resolution Professional. Here also the Information Memorandum requires including details of the assets and liabilities of the Corporate Debtor as per Regulation 36(2) (a). Sub-clause (f) of Regulation 36(2) provides that the Information Memorandum should give details of guarantees that have been given in relation to the debts of the Corporate Debtor by other persons, specifying which of the guarantors is a related party. Thus reference to details of Guarantees given by Related Party has to be there. That reference does not make property of Guarantor a property of Corporate Debtor for which Section 36(2) (a) is there.

 

# 20. The Hon’ble Supreme Court observed that Section 31 is one more factor in favour of the fact that a personal guarantor is required to pay for debts due without any moratorium applying to save him. What is clear is that Section 31 does not absolve the personal guarantor from liability. But then the Respondents are trying to rely on para 22 of the judgment of the Hon’ble Supreme Court to say that in the Resolution Plan itself there can be provision to move against personal guarantor. We do not agree with these submissions. It appears Resolution Plan can have jurisdiction as to right of payment to be received from Personal Guarantor. To us, it does not appear that the Judgment lays down that in the Resolution Plan of the Corporate Debtor itself provision could be made to consume property of Personal Guarantor without recourse to appropriate proceedings which were, earlier as per Acts then applicable (and now without recourse to Part III of IBC). Before Part-III was enforced against personal guarantors of the Corporate Debtor, the provisions under which one could move against the personal guarantors are as mentioned by the Hon’ble Supreme Court in para 15 of the judgment in the matter of “State Bank of India v. V. Ramakrishnan & Anr.”. After coming into force of Part-III, now one would have to proceed as per Chapter III of Part-III of IBC. If the arguments of the Respondents were to be accepted, there would have been no need of the earlier provision being maintained. After Part-III is enforced there would be no need of Part-III if properties of the Personal Guarantors could be simply included in the Resolution Plan and disposed directing them to sign the transfer deed as is being done in the present matter.

 

# 23. Going back to the judgment in the matter of “State Bank of India v. V. Ramakrishnan & Anr.”, if Moratorium under Section 14 of the IBC during CIRP did not apply to Personal Guarantors of the Corporate Debtor, personal properties of the Corporate Debtor cannot be realised by sale/ transfer etc. in the CIRP of the Corporate Debtor without resorting to proceeding before appropriate authority/ Court under the existing enactment before portion of Part-III has been applied to the Personal Guarantors of Corporate Debtor. Now, after portion of Part-III has been applied to Personal Guarantors of Corporate Debtor, one would have to resort to those provisions under IBC if Personal Guarantors of Corporate Debtor are to be proceeded against. In Resolution Plan of Corporate Debtor provision relating to right of Financial Creditor to proceed against Personal Guarantor can be there, but enforcement of such right has to be as per provisions of law as discussed.

 

# 24. For the above reasons, we hold under Section 61(3) of the IBC that the Resolution Plan as approved by the Adjudicating Authority is in contravention of the provisions of law as discussed above and there have been material irregularities in exercise of powers by the Adjudicating Authority when it directed the Appellants (in para 26 of the impugned order (referred supra)), that the owners of the premises as mentioned in the judgment shall enter into Tripartite Agreements for transfer of the premises (as mentioned in para 18 of impugned order). In fact, if para 18 is seen, after describing the properties in the chart there is also portion added which says that the Financial Creditors shall be at liberty to proceed against the properties of the Promoters erstwhile Directors/ Guarantors “other than those mentioned above to recover their balance”. This, in the Resolution Plan would be blank cheque given to proceed even with regard to any other property also of the Personal Guarantors. In our view, without resorting to appropriate proceedings against the Personal Guarantors of Corporate Debtor this is irregular exercise of powers.

 

# 25. For the above reasons, we pass the following order:-

ORDER

The Appeal is allowed. The impugned order is quashed. The Resolution Plan approved by the Adjudicating Authority is rejected. All actions taken in consequence of the impugned order approving the Resolution Plan shall stand set aside. As the Insolvency Resolution Process period under Section 12 of the IBC is already over, the matter is remitted back to the Adjudicating Authority to pass appropriate order of liquidation under Section 33 of the IBC.

 

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Mr. Ravi Ajit Kulkarni (Personal Guarantor of Pratibha Industries Ltd.) Vs. State Bank of India - The stage for considering default would arrive when the matter is taken up under Section 100 of IBC.

NCLAT (12.08.2021) in Mr. Ravi Ajit Kulkarni (Personal Guarantor of Pratibha Industries Ltd.) Vs. State Bank of India  [Company Appeal (AT) (Insolvency) No. 316 and 317 of 2021 ] held that;

• In substance, once the application is “filed” (as per Section 95, 96 read with Rule 10) the Adjudicating Authority has to act on it, and following principles of natural justice, give limited notice to Personal Guarantor to appear referring to the Interim Moratorium that has commenced as per terms of Section 96. Then the next stage is of appointing Resolution Professional as per Section 97 read with Rules and Regulations. Third stage will be Resolution Professional acting in terms of Section 99 and submitting Report. At the fourth stage comes in adjudication of the application under Section 100 which ought to be decided by giving hearing to parties keeping in view Application, evidence collected and report under Section 99.

• According to us, as mentioned, the stage for considering default would arrive when the matter is taken up under Section 100 of IBC. The Appellant is right when the Appellant submits that if the Adjudicating Authority gives such finding in advance, the report under Section 99 could not be in the negative. 

• At the stage of Section 95 Adjudicating Authority is to act upon the application to take further steps. The stage for “allowing” Application to admit or reject the application would be under Section 100. At the stage of appointment of Resolution Professional, such allowing is not contemplated. In Section 97 no adjudication as such is involved.

• The Personal Guarantor of Corporate Debtor can express “opinion” that Resolution Professional “appointed” under Section 97 is required to be replaced under Section 98 only after Resolution Professional has been appointed. No concurrence of such Personal Guarantor is required to be taken before appointment.

 

Facts of the case

The Appellants in both appeals are Personal Guarantor of Pratibha Industries Ltd., filed this appeal against the impugned order passed by the Adjudicating Authority in application under Section 95 of the IBC appointing Resolution Professional and calling report under Section 99 of the IBC. The Creditor had served a copy of the application after it was filed and a copy of amended application also after it was filed to the Appellant but the notice through Court was not served.

 

Excerpts of the order;

# 24. Section 95(5) requires the Creditor to provide copy of the application under sub-section (1) to the Debtor. This section needs to be read with Rule 3(1)(g) reproduced above. It is evident from reading the Section alongwith the Rule that what Creditor has to serve is copy of the application “made under sub-section (1)” to the Debtor. Reading Rule 7(2) with Rule 3 shows that the application filed under sub-section (1) of Section 95 shall be submitted in ‘Form C’ and that the Creditor will serve forthwith “a copy of the application” to the Guarantor and the Corporate Debtor for whom the Guarantor is a Personal Guarantor. Thus, what has to be served is the copy of application which has been “submitted”. What is contemplated is that the application in Form C should be “submitted” and then the Creditor should serve forthwith a copy of the application to the Guarantor and the Corporate Debtor for whom the Guarantor is a Personal Guarantor. The procedure thus prescribed will give the Personal Guarantor notice of the application already filed before the Adjudicating Authority. Section 95(5) requires Creditor to provided copy of the application “made under sub-section (1)” to the Debtor. Thus, serving advance copy is not contemplated.

# 25. Section 96 deals with Interim-moratorium. As is clear from the section reproduced above, relevant is that when an application is “filed” under Section 95, the interim-moratorium will automatically kick in. Thus, the effect of interim-moratorium immediately starts when the application is “filed”. No adjudication is involved here.

 

# 30. Between Section 97 dealing with appointment of Resolution Professional and Section 99 which deals with submission of report by Resolution Professional, the legislature has provided Section 98 which deals with regard to replacement of Resolution Professional. Counsel for the Appellant argued that before taking report from the Resolution Professional, the Debtor should have got an opportunity to seek replacement of the Resolution Professional and by the impugned order this opportunity has been denied.

 

# 31. Going through Section 98 of IBC, we do not find that Section 98 is stage specific. Section 98 itself shows that the Section could be resorted to even on stages like implementation of repayment plan which would be stage beyond Section 116, where implementation and supervision of repayment plan is provided for. Thus, the argument that before report of Resolution Professional the Debtor must get a chance to seek replacement of Resolution Professional and thus notice was required to be given has no substance. It is only after the Resolution Professional is appointed by the Adjudicating Authority under Section 97(5), that step under Section 98 is contemplated.

 

# 32. Section 99 require the Resolution Professional to “examine the application” and to “submit the report” to the Adjudicating Authority “recommending for approval or rejection of the application”. What the Resolution Professional does under Section 99(2) is to “require the Debtor to prove repayment of the debt claimed as unpaid by the Creditor” by furnishing (a) evidence of electronic transfer of the unpaid amount from the bank account of the Debtor; (b) evidence of encashment of a cheque issued by the Debtor; or  (c) a signed acknowledgement by the Creditor accepting receipt of dues. This is mere collection of evidence. These provisions give opportunity to the Debtor to submit material in his favour. Section 99(3) provides that where the debt for which an application has been filed by a Creditor is registered with the information utility, “the Debtor shall not be entitled to dispute the validity of such debt”. Thus, where debt concerned is registered with information utility is established, it would be conclusive evidence of valid debt and Personal Guarantor is not entitle to raise dispute regarding validity of the debt. Thus, where the debt is registered as mentioned, dispute of validity of debt cannot be raised and thus Adjudicating Authority need not adjudicate on it.

 

Section 99(4) shows that purpose of “examining” the application, is that Resolution Professional may seek such further information or explanation in connection with the application as may be required from the Debtor or the Creditor or any other person who in the opinion of the Resolution Professional may provide such information. Thus, Resolution Professional has option to call for information from different sources. Sub-section (5) of 99 makes provision that the person from whom information or explanation is sought “shall” furnish the same within seven days of receipt of request. Here again, the procedure for Resolution Professional is of collecting necessary material or evidence.

 

# 33. Like Section 99(1) and Section 99(4), sub-section (6) of Section 99 also refers to the Resolution Professional “examining” the application and ascertaining if the applicant satisfies the requirements set out in Section 95 and that the applicant has provided the necessary information and given explanation sought by the Resolution Professional. It is only after such collecting material and, examination by the Resolution Professional, Section 9(7) requires the Resolution Professional to “recommend” acceptance or rejection of application in his report. (Provision with regard to fresh start has not been enforced and thus sub-section (8) of Section 99 will not be relevant for present.) Sub-section (9) of Section 99 requires the Resolution Professional to “record” the reasons for acceptance or rejection of the application. Thus, the recommendation has to be supported by Resolution Professional with reasons. Resolution Professional does not adjudicate and only gives his reasons for the recommendation. Copy of report is to be given to the Debtor or Creditor, as the case may be, as per Section 99(10).

 

# 37. Form A referred in Regulation 4(2) is part of the Forms under the Regulations and provides for particulars required to be given by the Resolution Professional while giving written consent to act as Resolution Professional. These are protective measures. The procedures are time bound and legislature has expressed faith in the Resolution Professionals empanelled. Section 97(2)(a) does not bar the same Resolution Professional from being appointed who may have filed the application for Creditor under Section 95(1).

 

# 41. It has been argued that although in the present matter the Creditor had served a copy of the application after it was filed and a copy of amended application also after it was filed to the Appellant but the notice through Court was not served. We find from the scheme, as discussed above, the requirement is only to the extent that the application will be filed after serving a notice in terms of “Form B” of the Rules and when the application is filed in Form C the same would be served on the Personal Guarantor. This acts as a notice to the Personal Guarantor who would be given opportunity by the Resolution Professional while examining the application in terms of Section 99 of IBC to submit material as mentioned. Before the stage of appointment of the Resolution Professional, the Code or Rules and Regulations do not provide for any hearing as such to be given to the Debtor. Undertone of Section 97(5) also is to bind Adjudicating Authority to appoint Resolution Professional as nominated by the Board. Thus, once application under Section 95 is “filed” the next step for Adjudicating Authority is to appoint the Resolution Professional.

 

# 42. However, considering the judgment of the Hon’ble Supreme Court in the matter of ‘Swiss Ribbons’ it appears to us that keeping principles of natural justice in view, limited notice of the application should be given to the Personal Guarantors of the Corporate Debtors. The limited notice has to be only to secure presence of the Personal Guarantor referring to the Interim Moratorium which has commenced. Before appointment of the Resolution Professional no hearing as such is contemplated and before appointment of the Resolution Professional the Debtor cannot be allowed to raise disputes for which the stage would be Section 100. Under NCLT Rule 11, Adjudicating Authority is duty bound to pass orders to prevent abuse of process. As such, limited notice to appear may be given to the Personal Guarantors so that when Resolution Professional is appointed, he may provide material as per Section 99(2) of IBC. Till the stage of Section 100, the process is of collecting necessary evidence.

 

# 43. The Appellant is himself criticizing the impugned order claiming that the Adjudicating Authority has already recorded finding that the Personal Guarantor has committed a default and thus the Resolution Professional cannot while examining the application under Section 99 give a contrary opinion. At the same time, the Learned Senior Counsel for the Appellant has tried to submit that before appointment of Resolution Professional the Personal Guarantor should be able to show that the debt is not due or that it is not payable. This is contradiction. In our view, the stage for examining merits of the Application would be Section 100 of IBC. To prevent abuse of process of double hearings, first on merit before appointment of Resolution Professional and again at the stage of Section 100 which will defeat the objects of IBC by protracted disputes, after limited notice to appear has been issued even if Debtor raises disputes on merit, the same may be adjudicated only after receipt of report from Resolution Professional under Section 99. Before that point of time the process is more of filing of application and collecting of evidence through a professional person like Resolution Professional.

 

# 44. In substance, once the application is “filed” (as per Section 95, 96 read with Rule 10) the Adjudicating Authority has to act on it, and following principles of natural justice, give limited notice to Personal Guarantor to appear referring to the Interim Moratorium that has commenced as per terms of Section 96. Then the next stage is of appointing Resolution Professional as per Section 97 read with Rules and Regulations. Third stage will be Resolution Professional acting in terms of Section 99 and submitting Report. At the fourth stage comes in adjudication of the application under Section 100 which ought to be decided by giving hearing to parties keeping in view Application, evidence collected and report under Section 99.

 

# 46. The observations have been made by the Adjudicating Authority that the Corporate Guarantor (should have been only ‘Guarantor’) has not filed any submission and on date of hearing there was no representation. It appears that the Adjudicating Authority was of the view that service of ‘Form C’ on 29th August, 2020 and ‘Amended Form C’ on 28th January, 2021 was the notice. Having gone through the Form and Rules and Regulations, we do not find that anywhere it is provided that when the Form is submitted it would also contain notice of date as to when the matter is coming up before the Adjudicating Authority. In the absence of any such requirement, we find, as above, that there has to be limited notice for presence conveying the “filing” of application and commencing of Interim Moratorium under Section 96 from date of filing (to be mentioned).

 

# 47. We also find that it was an error on the part of Adjudicating Authority to observe in Para 10 as reproduced above and hold that there is a “default” when matter was at the stage of acting on the application under Section 95 read with Section 96. According to us, as mentioned, the stage for considering default would arrive when the matter is taken up under Section 100 of IBC. The Appellant is right when the Appellant submits that if the Adjudicating Authority gives such finding in advance, the report under Section 99 could not be in the negative. Again the Adjudicating Authority mentioned in Para 11 of the impugned order that it was “allowing” the application under Section 95. At the stage of Section 95 Adjudicating Authority is to act upon the application to take further steps. The stage for “allowing” Application to admit or reject the application would be under Section 100. At the stage of appointment of Resolution Professional, such allowing is not contemplated. In Section 97 no adjudication as such is involved.

 

# 48. The Personal Guarantor of Corporate Debtor can express “opinion” that Resolution Professional “appointed” under Section 97 is required to be replaced under Section 98 only after Resolution Professional has been appointed. No concurrence of such Personal Guarantor is required to be taken before appointment. Apparently, the “opinion” contemplated is limited to say “X” Resolution Professional should be replaced. Reading Section 98(1) with Section 98(3) what appears relevant is whether there is disciplinary proceeding pending against the “X” Resolution Professional appointed.

 

# 49. For reasons mentioned above, Company Appeal (AT) (Insolvency) No. 316 of 2021 requires to be partly allowed. The findings and observations made by the Adjudicating Authority in Para 9 to 11 of impugned order are set aside. The appointment of Mr. Ram Ratan Kanoongoas Resolution Professional is not disturbed. It is stated that he has already given report. As we have set aside the premature observations made, with regard to default, by the Adjudicating Authority, we set aside the report given in consequence to such order. We remit back the matter to the Adjudicating Authority. Parties to appear before Adjudicating Authority on 20th August, 2021.The Resolution Professional will give opportunity to the Appellant in terms of Section 99 and give fresh report. The Adjudicating Authority will then proceed further with the matter as per law in the light of our observations and findings. With these observations the appeal is disposed of.

 

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State Bank of India Vs. Ms. Jaya Singh - Since the Applicant has not served the Demand Notice to the Personal Guarantor, as required mandatorily under Section 95(4)(b) of IBC 2016 read with Rule 7 (1) , we are not inclined to proceed further in the matter.

NCLT New Delhi-II (16.08.2021) in  State Bank of India   Vs. Ms. Jaya Singh   [Company Petition No. (IB)-411(ND)2021] held that; 

• Since the Applicant has not served the Demand Notice to the Personal Guarantor, as required mandatorily under Section 95(4)(b) of IBC 2016 read with Rule 7 (1) of the (Application to Adjudicating Authority for Insolvency Resolution Process of Personal Guarantors to Corporate Debtors) Rules, 2019, we are not inclined to proceed further in the matter. 

• Further, the date of NPA has also not been disclosed by the Applicant. Overall, the Application lacks material pleadings as to how the debt has become due and payable.

Excerpts of the order; 

Under consideration is the Application preferred by State Bank of India (the ‘Applicant/Financial Creditor’), under Section 95(1) read with Rule 7(2) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for IRP for Personal Guarantors to Corporate Debtor) Rules, 2019. The Application is filed by the SBI for initiating the Insolvency Resolution Process (the “IR Process") against Ms. Jaya Singh (hereinafter, referred to as Personal Guarantor/Debtor), who is the Guarantor of M/s Energo Engineering Projects Limited (the ‘Corporate Debtor’).

# 2. It is stated that the Applicant through its subsidiary erstwhile State Bank of Mysore (“SBM”) in consortium with Punjab National Bank, erstwhile State Bank of Hyderabad (“SBH”), erstwhile State Bank of Bikaner & Jaipur (“SBBJ”) and erstwhile State Bank of Travancore (“SBT”), which have merged with the Applicant vide Gazette Notification dated 22.02.2017, together had disbursed credit facilities to the tune of Rs.747.50 crore to the Corporate Debtor in terms of the Working Capital Consortium agreements. The total dues of the Applicant Creditor as on 15.12.2018 for the credit facilities granted to the Corporate Debtor, as mentioned in the Part III of the Application stood at Rs. 794,00,32,924.21,

# 3. It is contended by the Applicant that Ms. Jaya Singh executed the Deeds of Personal Guarantee dated 02.03.2013, 11.06.2014, 22.11.2014 and 08.01.2015 in the capacity of a Personal Guarantor in favour of the Applicant, thereby guaranteeing payment of all the debts (in respect of the underlying Loan Agreements) due and payable by the Borrower/Corporate Debtor to the Applicant in case of default by the Corporate Debtor.

# 4. It is submitted by the Applicant that the Corporate Debtor has failed to repay the said loans and therefore, it has invoked the guarantee by sending a recall notice dated 24.12.2018 to the Corporate Debtor as well as the Personal Guarantor.

# 5. It is further submitted by the Applicant that the Principal Bench of this Adjudicating Authority vide Order dated 21.08.2018 in IB-160/ND/ 2017 in the matter of M/s. Levon Valves Pvt. Ltd. Vs. Energo Engineering Projects Ltd. has initiated Liquidation proceedings under IBC 2016, against the Corporate Debtor.

# 6. It is averred by the Applicant that it had sent a Notice dated 29.06.2021 in Form B under Rule 7(1) of Insolvency & Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process of Personal Guarantors to Corporate Debtors) Rules, 2019 to the Personal Guarantor, demanding payment of total outstanding amount of Rs.794,00,32,924.21/-.

# 7. It is on account of this default in discharging its repayment obligations by the Personal Guarantor, the Applicant/Personal Guarantor has preferred the present Application under Section 95 read with Section 60(2) of the Code.

# 8. We have heard the Ld. Counsel for the Applicant on 09.08.2021 and gone through the averments made in the Application.

# 9. While going through the Petition, we find that the Notice of Demand as required to be served to Personal Guarantor under Section 95(4)(b) of IBC 2016, has been sent by the Applicant to one Mr. Dinesh B. Singh, who is not a party to the present case. Further no Notice of Demand has been placed on record which has been served to Ms. Jaya Singh, the Respondent/Personal Guarantor herein.

# 10. Here, it is worthwhile to refer to the contents of the Rule 7 (1) of the (Application to Adjudicating Authority for Insolvency Resolution Process of Personal Guarantors to Corporate Debtors) Rules, 2019, which reads as below :

• “7. Application by creditor.- (1) A demand notice under clause (b) of sub-section (4) of section 95 shall be served on the guarantor demanding payment of the amount of default, in Form B.”

# 11. Since the Applicant has not served the Demand Notice to the Personal Guarantor, as required mandatorily under Section 95(4)(b) of IBC 2016 read with Rule 7 (1) of the (Application to Adjudicating Authority for Insolvency Resolution Process of Personal Guarantors to Corporate Debtors) Rules, 2019, we are not inclined to proceed further in the matter.

# 12. That we also observe that the facts in the synopsis written at Page 1-2 of the Application are at variance with the facts mentioned in the Part III of the Application. Further, the date of NPA has also not been disclosed by the Applicant. Overall, the Application lacks material pleadings as to how the debt has become due and payable.

# 13. That we are constrained to observe that the Application has been filed in a casual manner by the Applicant Bank. The Applicant should have been diligent enough in filing the Application under Section 95 of IBC 201, since under this section the moment the Application is filed, interim moratorium under Section 96(1)(a) of IBC 2016 gets triggered, which could cause prejudice to other creditors of the Corporate Debtor.

# 14. In the light of the reason detailed in the para 10 above, the Petition is Dismissed.

# 15. However, liberty is granted to the Applicant to file a fresh Application on the same cause of action, after duly serving the Demand Notice to the Personal Guarantor concerned.

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Bank of Bihar Ltd. v. Damodar Prasad & Anr - Liability of Principal Borrower & Guarantor(s) towards the Creditor are Co-extensive.

Supreme Court of India (08.08.1968) in Bank of Bihar Ltd. v. Damodar Prasad & Anr, [Civil Appeal No. 1109 of 1965] referring to the judgment of the Bombay High Court in “Lachhman Joharimal v. Bapu Khandu and Tukaram Khandoji, [(1869) 6 Bombay High Court Reports 241] held as under:

• "The court is of opinion that a creditor is not bound to exhaust his remedy against the principal debtor before suing the surety and that when a decree is obtained against a surety, it may be enforced in the same manner as a decree for any other debt." It was further held:

• "The very object of the guarantee is defeated if the creditor is asked to postpone his remedies against the surety. In the present case the creditor is a banking company. A guarantee is a collateral security usually taken by a banker. The security will become useless if his rights against the surety can be so easily cut down."

Excerpts of the order;
The Trial Court decreed the suit against both the defendants. While passing the decree, the Trial Court directed that the "plaintiff bank shall be at liberty to enforce its dues in question against defendant No. 2 only after having exhausted its remedies against defendant No. 1". The plaintiff filed an appeal challenging the legality and propriety of this direction. The High Court dismissed the appeal. The plaintiff has filed the present appeal after obtaining a certificate.
 
The guarantee bond in favour of the plaintiff bank is dated June 15, 1951. The surety agreed to pay and satisfy the liabilities of the principal debtor upo Rs. 12,000/- and interest thereon two days after demand. The bond provided that the plaintiff would be at liberty to enforce and to recover upon the guarantee notwithstanding any other guarantee security or remedy which the Bank might hold or be entitled to in respect of the amount secured
 
The demand for payment of the liability of the principal debtor was the only condition for the enforcement of the bond. That condition was fulfilled. Neither the principal debtor nor the surety discharged the admitted liability of the principal debtor in spite of demands. Under sec. 128 of the Indian Contract Act, save as provided in the contract, the liability of the surety is coextensive with that of the principal debtor. The surety became thus liable to pay the entire amount. His liability was immediate. It was not deferred until the creditor exhausted his remedies against the principal debtor.
 
Before payment the surety has no right to dictate terms to the creditor and ask him to pursue his remedies against the principal in the first instance. As Lord Eldon observed in Wright V. Simpson(1). "But the surety is a guarantee; and it is his business to see whether the principal pays, and not that of the creditor." In the absence of some special equity the surety has no fight to restrain an action against him by the creditor on the ground that the principal is solvent or that the creditor may have relief against the principal in some other proceedings. (1) 6 Ves. Jun. 714. 734: 31 E.R. 1272, 1282. 622
 
"The court is of opinion that a creditor is not bound to exhaust his remedy against the principal debtor before suing the surety and that when a decree is obtained against a surety, it may be enforced in the same manner as a decree for any other debt."
 
The injunction upon the creditor not to proceed against the surety until the creditor has exhausted his remedies against the principal is of the vaguest character. It is not stated how and when the creditor would exhaust his remedies against the principal. Is the creditor to ask for imprisonment of the principal ? Is he bound to discover at his peril all the properties of the principal and sell them; and if he cannot, does he lose his remedy against the surety ? Has he to file an insolvency petition against the principal ? The Trial Court gave no reasons for this extraordinary direction.
 
The very object of the guarantee is defeated if the creditor is asked to postpone his remedies against the surety. In the present case the creditor is a banking company. A guarantee is a collateral security usually taken by a banker. The security will become useless if his rights against the surety can be so easily cut down.

The impugned direction cannot be justified under O. XX r. 11 (1). Assuming that apart from O. XX r. 11 ( 1 ) the Court had the inherent power under s. 151 to direct postponement of execution of the decree, the ends of justice did not require such postponement.
 
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Thiruvengada Pillai Vs. Navaneethammal & Anr. - The Indian Stamp Act, 1899 nowhere prescribes any expiry date for use of a stamp paper.

Supreme Court (19.02.2008) in  Thiruvengada Pillai   Vs. Navaneethammal & Anr.   [Writ Petition (civil)  290 of 2001] held that; 

• The Indian Stamp Act, 1899 nowhere prescribes any expiry date for use of a stamp paper. Section 54 merely provides that a person possessing a stamp paper for which he has no immediate use (which is not spoiled or rendered unfit or useless), can seek refund of the value thereof by surrendering such stamp paper to the Collector provided it was purchased within the period of six months next preceding the date on which it was so surrendered. 

• The stipulation of the period of six months prescribed in section 54 is only for the purpose of seeking refund of the value of the unused stamp paper, and not for use of the stamp paper. Section 54 does not require the person who has purchased a stamp paper, to use it within six months. Therefore, there is no impediment for a stamp paper purchased more than six months prior to the proposed date of execution, being used for a document.

Excerpts of the order; 

# 5. On the said pleadings, three issues were framed by the trial court : 

• (i) whether the agreement put forth by the plaintiff was true or concocted ? 

• (ii) whether the second defendant had purchased the suit property for valid consideration ? and 

• (iii) whether the plaintiff was entitled to the relief of specific performance ? 

The plaintiff examined himself as PW-1 and the scribe of the agreement (Ramaswami Pillai) as PW-2 and an attesting witness to the sale agreement (Venkatesha Pillai) as PW-3. The agreement of sale was exhibited as Ex. A-1. The notice and reply were marked as Ex. A2 and A4. The second defendant, (purchaser of the site), gave evidence as DW-1 and the third defendant, who was also a witness to the sale deed dated 11.2.1980, was examined as DW-2. The sale deed dated 11.2.1980 executed by first defendant in favour of second defendant was marked as Ex.B2 and previous title deed was exhibited as Ex. B4. The plaintiff and his witnesses gave evidence that the sale agreement was duly executed by first defendant in favour of plaintiff. The defendants gave evidence about the sale in favour of second defendant and denied execution of any agreement of sale in favour of plaintiff.

# 6. The trial court after appreciating the evidence, dismissed the suit by judgment and decree dated 28.2.1984. It held that the agreement of sale put forth by plaintiff was false and must have been created after the sale on 11.2.1980 in favour of second defendant, by using some old stamp papers in his possession. The said finding was based on the following facts and circumstances :

• (a) The sale agreement (A-1) was not executed on currently purchased stamp paper, but was written on two stamp papers, one purchased on 25.8.1973 in the name of Thiruvengadam and another purchased on 7.8.1978 in the name of Thiruvengadam Pillai.

• (b) The two attestors to the agreement were close relatives of plaintiff. One of them was Kannan, brother of the plaintiff and he was not examined. The other was Venkatesa Pillai, uncle of plaintiff examined as PW3. The scribe (PW-2) was a caste-man of plaintiff. Their evidence was not trustworthy.

• (c) Though the agreement of sale recited that the possession of the suit property was delivered to plaintiff, no such possession was delivered. On the other hand, the second defendant was put in possession on execution of the sale deed and she put up a thatched hut in the schedule property and was in actual physical possession. This falsified the agreement.

• (d) If really there was an agreement of sale, in the normal course, the plaintiff would have obtained the title deeds from the first defendant. But the earlier title deeds were not delivered to him. On the other hand, they were delivered to the second defendant who produced them as Ex.B3 and Ex.B4.

• (e) In spite of defendants denying the agreement (Ex.A1), the plaintiff failed to discharge his onus to prove that execution of the agreement as he did not seek reference to a fingerprint expert to establish that the thumb impression on the agreement was that of the first defendant.

# 9. On the contentions urged, the following questions arise for consideration :

• (i) Whether the agreement of sale executed on two stamp papers purchased on different dates and more than six months prior to date of execution is not valid?

• (ii) Whether the first appellate court was justified in comparing the disputed thumb impression with the admitted thumb impression and recording a finding about the authenticity of the thumb impression, without the benefit of any opinion of an expert?

• (iii) Whether the High Court erred in reversing the judgment of the first appellate court in second appeal?

Re : Question (i)

# 11. The Trial Court and the High Court have doubted the genuineness of the agreement dated 5.1.1980 because it was written on two stamp papers purchased on 25.8.1973 and 7.8.1978. The learned counsel for first respondent submitted that apart from raising a doubt about the authenticity of the document, the use of such old stamp papers invalidated the agreement itself for two reasons. Firstly, it was illegal to use stamp papers purchased on different dates for execution of a document. Secondly, as the stamp papers used in the agreement of sale were more than six months old, they were not valid stamp papers and consequently, the agreement prepared on such 'expired' papers was also not valid. We will deal with the second contention first. The Indian Stamp Act, 1899 nowhere prescribes any expiry date for use of a stamp paper. Section 54 merely provides that a person possessing a stamp paper for which he has no immediate use (which is not spoiled or rendered unfit or useless), can seek refund of the value thereof by surrendering such stamp paper to the Collector provided it was purchased within the period of six months next preceding the date on which it was so surrendered. The stipulation of the period of six months prescribed in section 54 is only for the purpose of seeking refund of the value of the unused stamp paper, and not for use of the stamp paper. Section 54 does not require the person who has purchased a stamp paper, to use it within six months. Therefore, there is no impediment for a stamp paper purchased more than six months prior to the proposed date of execution, being used for a document.

# 12. The Stamp Rules in many States provide that when a person wants to purchase stamp papers of a specified value and a single stamp paper of such value is not available, the stamp vendor can supply appropriate number of stamp papers required to make up the specified value; and that when more than one stamp paper is issued in regard to a single transaction, the stamp vendor is required to give consecutive numbers. In some States, the rules further require an endorsement by the stamp vendor on the stamp paper certifying that a single sheet of required value was not available and therefore more than one sheet (specifying the number of sheets) have been issued to make up the requisite stamp value. But the Indian Stamp Rules, 1925 applicable to Tamil Nadu, do not contain any provision that the stamp papers of required value should be purchased together from the same vendor with consecutive serial numbers. The Rules merely provide that where two or more sheets of paper on which stamps are engraved or embossed are used to make up the amount of duty chargeable in respect of any instrument, a portion of such instrument shall be written on each sheet so used. No other Rule was brought to our notice which required use of consecutively numbered stamp papers in the State of Tamil Nadu. The Stamp Act is a fiscal enactment intended to secure revenue for the State. In the absence of any Rule requiring consecutively numbered stamp papers purchased on the same day, being used for an instrument which is not intended to be registered, a document cannot be termed as invalid merely because it is written on two stamp papers purchased by the same person on different dates. Even assuming that use of such stamp papers is an irregularity, the court can only deem the document to be not properly stamped, but cannot, only on that ground, hold the document to be invalid. Even if an agreement is not executed on requisite stamp paper, it is admissible in evidence on payment of duty and penalty under section 35 or 37 of the Indian Stamp Act, 1899. If an agreement executed on a plain paper could be admitted in evidence by paying duty and penalty, there is no reason why an agreement executed on two stamp papers, even assuming that they were defective, cannot be accepted on payment of duty and penalty. But admissibility of a document into evidence and proof of genuineness of such document are different issues.

# 13. If a person wants to create or a back-dated agreement, the first hurdle he faces is the non-availability of stamp paper of such old date. Therefore tampering of the date of issue and seal affixed by the stamp vendor, as also the entries made by the stamp vendor, are quite common in a forged document. When the agreement is dated 5.1.1980, and the stamp papers used are purchased in the years 1973 and 1978, one of the possible inferences is that the plaintiff not being able to secure an anti-dated stamp paper for creating the agreement (bearing a date prior to the date of sale in favour of second defendant), made use of some old stamp papers that were available with him, to fabricate the document. The fact that very old stamp papers of different dates have been used, may certainly be a circumstance that can be used as a piece of evidence to cast doubt on the authenticity of the agreement. But that cannot be a clinching evidence. There is also a possibility that a lay man unfamiliar with legal provisions relating to stamps, may bona fide think that he could use the old unused stamp papers lying with him for preparation of the document and accordingly use the old stamp papers.

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