State Bank of India Vs. Mahendra Kumar Jajodia - The Adjudicating Authority erred in holding that since no CIRP or Liquidation Proceeding of the Corporate Debtor are pending the application under Section 95(1) filed by the Appellant is not maintainable.

NCLAT (27.01.2022) in State Bank of India Vs. Mahendra Kumar Jajodia [Company Appeal (AT) Insolvency No. 60 of 2022] held that;

• Section 60(2) is applicable only when CIRP or Liquidation Proceeding of a Corporate Debtor is pending, when CIRP or Liquidation Proceeding are not pending with regard to the Corporate Debtor there is no applicability of Section 60(2).

• The Adjudicating Authority erred in holding that since no CIRP or Liquidation Proceeding of the Corporate Debtor are pending the application under Section 95(1) filed by the Appellant is not maintainable.

 

Excerpts of the order;

27.01.2022: We have heard Learned Counsel for the Appellant and Respondent in both these Appeals. With the consent of the parties, we dispose of both these Appeals at the admission stage.

 

# 2. This Appeal has been filed against the Order dated 05th October, 2021 passed by National Company Law Tribunal, Kolkata Bench, Kolkata. The State Bank of India has filed an Application under Section 95(1) of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as ‘Code’) seeking initiation of Corporate Insolvency Resolution Process against the Guarantor. The Application came to be rejected by the Adjudicating Authority as premature by order dated 05th October, 2021. The reason given in for rejection of the Application as pre-mature is in paragraph 2 of the Impugned Order which is to the following effect: 

• “This is an application filed by the petitioner/financial  creditor u/s. 95(1) of the Insolvency and Bankruptcy Code, 2016 seeking initiation of Insolvency Resolution Process against the guarantor. As on date no CIRP or Liquidation Process is pending against the Corporate Debtor because of approval of the Resolution Plan. Section 60(2) of the Code requires that for an insolvency Resolution Process to be initiated against the guarantor there must be CIRP or Liquidation Process is pending against the principal borrower/Corporate Debtor. Since, that requirement is not satisfied in the present case, at this point of time CP(IB)/230/KB/2021 is premature and is dismissed as such.”

 

# 3. Learned Counsel for the Appellant submits that NCLT has not correctly interpreted Section 60(2) of the Code. It is submitted that Application was fully maintainable under Section 60(1) of the Code despite there being no pendency of any Corporate Insolvency Resolution Process in National Company Law Tribunal (NCLT in short).

 

# 4. Learned Counsel for the Respondent refuting the submissions of Learned Counsel for the Appellant submits that Section 60(2) of the Code clearly provides that Corporate Insolvency Resolution Process (CIRP in short) and Liquidation Process if pending before the NCLT, an Application relating to the Corporate Insolvency Resolution Process of the Corporate Guarantor and Personal Guarantor can be filed before the NCLT. He submits that since in the present case, no proceedings are pending as contemplated in Section 60(2) of the Code the Application has rightly been rejected by NCLT as premature.

 

# 5. We have considered the submissions of the Learned Counsel for the parties and perused the record.

 

# 6. Section 60 (1) & (2) which falls for consideration in the present case is as follows:

• “Section 60: Adjudicating Authority for corporate persons.

• *60. (1) The Adjudicating Authority, in relation to insolvency resolution and liquidation for corporate persons including corporate debtors and personal guarantors thereof shall be the National Company Law Tribunal having territorial jurisdiction over the place where the registered office of the corporate persons located.

• (2) Without prejudice to sub-section (1) and notwithstanding anything to the contrary contained in this Code, where a corporate insolvency resolution process or liquidation proceeding of a corporate debtor is pending before a National Company Law Tribunal, an application relating to the insolvency resolution or liquidation or bankruptcy of a corporate guarantor or personal guarantor, as the case may be, of such corporate debtor shall be filed before such National Company Law Tribunal.

 

# 7. Sub-Section 1 of Section 60 provides that Adjudicating Authority for the corporate persons including corporate debtors and personal guarantors shall be the NCLT. The Sub-Section 2 of Section 60 requires that where a CIRP or Liquidation Process of the Corporate Debtor is pending before ‘a’ National Company Law Tribunal the application relating to CIRP of the Corporate Guarantor or Personal Guarantor as the case may be of such Corporate Debtor shall be filed before ‘such’ National Company Law Tribunal. The purpose and object of the sub-section 2 of Section 60 of the Code is that when proceedings are pending in ‘a’ National Company Law Tribunal, any proceeding against Corporate Guarantor should also be filed before ‘such’ National Company Law Tribunal. The idea is that both proceedings be entertained by one and the same NCLT. The sub-section 2 of Section 60 does not in any way prohibit filing of proceedings under Section 95 of the Code even if no proceedings are pending before NCLT.

 

# 8. The use of words ‘a’ and ‘such’ before National Company Law Tribunal clearly indicates that Section 60(2) was applicable only when a CIRP or Liquidation Proceeding of a Corporate Debtor is pending before NCLT. The object is that when a CIRP or Liquidation Proceeding of a Corporate Debtor is pending before ‘a’ NCLT the application relating to Insolvency Process of a Corporate Guarantor or Personal Guarantor should be filed before the same NCLT. This was to avoid two different NCLT to take up CIRP of Corporate Guarantor. Section 60(2) is applicable only when CIRP or Liquidation Proceeding of a Corporate Debtor is pending, when CIRP or Liquidation Proceeding are not pending with regard to the Corporate Debtor there is no applicability of Section 60(2).

 

# 9. Section 60(2) begins with expression ‘Without prejudice to sub-section (1)’ thus provision of Section 60(2) are without prejudice to Section 60(1) and are supplemental to sub-section (1) of Section 60. 

 

# 10. Sub-Section 1 of Section 60 provides that Adjudicating Authority in relation to Insolvency or Liquidation for Corporate Debtor including Corporate Guarantor or Personal Guarantor shall be the NCLT having territorial jurisdiction over the place where the Registered Office of the Corporate Person is located. The substantive provision for an Adjudicating Authority is Section 60, sub-Section (1), when a particular case is not covered under Section 60(2) the Application as referred to in sub-section (1) of Section 60 can be very well filed in the NCLT having territorial jurisdiction over the place where the Registered Office of corporate Person is located.

 

# 11. The Adjudicating Authority erred in holding that since no CIRP or Liquidation Proceeding of the Corporate Debtor are pending the application under Section 95(1) filed by the Appellant is not maintainable. The Application having been filed under Section 95(1) and the Adjudicating Authority for application under Section 95(1) as referred in Section 60(1) being the NCLT, the Application filed by the Appellant was fully maintainable and could not have been rejected only on the ground that no CIRP or Liquidation Proceeding of the Corporate Debtor are pending before the NCLT. In result, we set aside the order dated 05th October, 2021 passed by the Adjudicating Authority. The Application filed by the Appellant under Section 95(1) of the Code is revived before the NCLT which may be proceeded in accordance with the law.

 

Both the Appeals are allowed, accordingly.

 

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State Bank of India Vs Sahadulla M.I - It is also seen from the report of Resolution Professional that he has not recommended for a negotiation between the parties for arriving at an amicable settlement for repayment. Hence, we admit IBA/42/KOB /2020 filed under the provisions of Section 95 of IBC, 2016 under section 100 of the IBC, 2016

 NCLT Kochi (21.01.2022) in State Bank of India Vs Sahadulla M.I [IBA/42/KOB/2020] accepted the recommendations of RP and admitted the application for insolvency of Personal Guarantor.;

• It is also seen from the report of Resolution Professional that he has not recommended for a negotiation between the parties for arriving at an amicable settlement for repayment. 

• Hence, we admit IBA/42/KOB/2020 filed under the provisions of Section 95 of IBC, 2016 under section 100 of the IBC, 2016 and initiate Insolvency Resolution Process against the Respondent/Personal Guarantor and moratorium in relation to all the debts is declared, from today i.e. date of admission of the application and shall cease to have effect at the end of the period of 180 days,

 

Excerpts of the order;

Under consideration is an Application No. IBA/42/KOB/2020 filed under Section 95 (1) of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred as "IBC, 2016") r/w Rule 7 (2) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for IRP for Personal Guarantors to Corporate Debtor) Rules, 2019. The relief sought for is to initiate Corporate Insolvency Resolution Process (hereinafter referred as CIR Process") against Mr. Sahadulla M.I. Personal Guarantor of M/s. Green Gateway Leisure Limited for the default amount of Rs. 72,63,09,421/- in respect of credit facility availed on behalf of M/s. Green Gateway Leisure Limited (hereinafter referred as the "Corporate Debtor") from the Creditor.

 

The brief facts leading to the present application is as under: -

# 2. The Corporate Debtor Company M/s. Green Gateway Leisure Private Limited was admitted under Corporate Insolvency Resolution Process by this Tribunal vide Order dated 15.10.2020, pursuant to an application filed by the Union Bank of India under Section 7 of the I&B Code,2016. The Corporate Debtor was incorporated for the purpose of development of a hotel at Bekal, Kasaragod. The land comprising 55.43 acres was acquired by Bekal Resorts Development Corporation Limited (BRDC), a Kerala Government undertaking and leased in favour of the Corporate Debtor. The licence for development of the land was originally granted by BRDC in favour of M/s. AIR Travel Enterprises India Ltd (Air Travel), parent company of the Corporate Debtor, which was holding more than 51% shareholding in the Corporate Debtor at that point of time. Since, the Corporate Debtor was incorporated for implementation of the resort project, BRDC transferred the licence in favour of the Corporate Debtor on 16.10.2010.

 

# 3. In the application it is stated that for the implementation of the said project, the Corporate Debtor availed credit facilities from the Applicant Bank. Applicant Bank sanctioned a credit facility of Rupees 67,64,050 (Rupees Sixty-Seven Lakhs Sixty-Four Thousand and Fifty Only) on 14.01.2010 based on the acceptance of the conditions of the said sanction by the Corporate Debtor and guarantors including respondent herein, the applicant entered into a Term Loan Agreement with the Corporate Debtor. As a security towards the said facility, Respondent Guarantor executed a deed of guarantee for overall limit in favour of SBI on 14.01.2010.

 

# 4. It is also stated that based on further request from the Corporate Debtor, the applicant agreed to revalidate the term loan by increasing the limit by further Rupees 20 Crores on 24.02.2010 on the condition that Corporate Debtor shall give pari passu first charge on the fixed assets and directors including the respondent herein shall execute personal guarantees. This additional facility was granted considering Rupees 26 Crores net worth of the guarantors. Followed by the sanction, a supplemental agreement for loan increasing the Term Loan from Rs.67,64,050/- to Rs. 20,67,64,050/- (Rupees Twenty Crore Sixty-Four Lakh Sixty-Four Thousand and Fifty Only) was made on 27.03.2010 and respondent herein jointly with other director Mr. E.M Najeeb has executed a supplementary deed of guarantee for modifying the guarantee from Rs.67,64,050 to Rs. 20,67,64,050/- in favour of Applicant.

 

# 5. It is also stated that the applicant sanctioned another credit facility of Rupees 20 Crores to the Corporate Debtor on 20.05.2010 which also includes the personal guarantee of the respondent among other securities including pari passu first charge in the fixed assets and guarantee of other directors. Pursuant to the acceptance of the said sanction letter by the Corporate Debtor and directors, the applicant (formerly SBT) has entered into a term loan agreement with the Corporate Debtor on 09.06.2010. The respondent herein has executed Deed of Guarantee in favour of SBT on 09.06.2010 agreeing to guarantee the repayment of the said credit facilities. The SBT further sanctioned a term loan of Rupees.8 Crores on 09.02.2015. For this also the Corporate Debtor has executed a separate Term Loan agreement on 20.02.2015 and the Respondent has executed a deed of guarantee in favour of SBT towards the said additional facility of Rupees 8 Crores.

 

# 6. The Corporate Debtor and the guarantors including Respondent herein have jointly executed a revival letter on 16.03.2013 and 10.03.2016 in favour of the applicant acknowledging the execution of all loan documents and guarantee agreements for the overall limit of Rs.20,67,64,050/-. Similarly, the revival letters were also executed in favour of SBT on 30.03.2013 and 04.02.2016. In view of the default committed by the Corporate Debtor in the repayment of credit facilities, the accounts of the Corporate Debtor were declared as NPA on 28.06.2017, 29.06.2017 and on 24.07.2017. Applicant has issued notice to the Corporate Debtor and Guarantors for repayment/regularization of the account. However, the Corporate Debtor requested for additional facilities for completing the project and regularizing the account, to which the Creditor/Applicant did not agree to. Since, the Corporate Debtor failed to repay the debt, the Applicant jointly with other banks have issued notice under Section 13(2) of the SARFAESI Act on 29.12.2017 to repay the due of applicant Rs.53,01,79, 190/- within 60 days. The Creditor has also issued notice under Section 13(2) of the SARFAESI Act to the respondent by invoking the personal guarantees. The Creditor has taken possession of the secured asset on 15.05.2018. The Creditor jointly with other lenders have also filed OA.417 of 2018 on 24.07.2018 before the Debts Recovery Tribunal for recovery of the due from the Corporate Debtor and the Personal Guarantors including the respondent herein, which is pending consideration. On 30.09.2019, based on the request of the Corporate Debtor, the Creditor granted an OTS Scheme for Rs.38,14,49,303/-. However, the Corporate Debtor failed to comply with the OTS Scheme and hence OTS could not be materialized. The outstanding dues of the Corporate Debtor as on 15.10.2020 is Rupees 72,63,09,421. Due to non-payment of this amount the Applicant has filed this application for initiation of Insolvency Resolution Process against the Guarantor under Section 95(1) of I&B Code,2016. The applicant stated that they have issued demand notice to the Respondent on 17.11.2020 under Rule 7(1) of the Personal Guarantors Insolvency Rules, 2019. The demand notice was delivered to the Respondent on 21.11.2020, to which he has replied vide letter dated 30.11.2010, refusing to make any payment towards the debt stating the reason that he has not executed any loan documents and deed of guarantees and all the signatures in the documents executed were forged one. However, this submission was refuted by the Applicant stating that the respondent availed the credit facilities from SB1, SBT, Union Bank of India and Dhanlaxmi Bank being the Director of the Corporate Debtor and the Respondent’s submission that the documents are forged cannot be accepted.

 

# 7. The Applicant Bank invoked the personal guarantee of the respondent on 29.12.2017.

# 8. On presentation of the application by the Applicant/Financial Creditor, this Tribunal vide order dated 06th October 2021 appointed Mr. Kizhakkekara Kuriakose Jose, as Resolution Professional directing him to file report under Section 99 of Insolvency and Bankruptcy Code, 2016. The Resolution Professional has filed the report recommending the admission of the application filed under Section 95 of IBC, 2016. The grounds for admission of the application as per the Report are as follows: - 

• (i) Debt owed by M/s Green Gateway Leisure Ltd to the applicant State Bank of India is Rs.72,63,09,421/- as evidenced by the certified copy of the account statement. Mr Sahadulla M.I. had extended personal guarantee as evidenced by the deed of guarantees submitted along with the application. The applicant has invoked the personal guarantee against Mr Sahadulla M.I. by issuing notice under Section 13(2) of the SARFAESI Act on 29.12.2017 directing him to pay the amount within 60 days from the notice. However, the personal guarantor failed to repay the amount in default within 60 days from the issue of the demand notice. Hence the debt owed by Mr Sahadulla M.I. to the applicant is Rs 72,63,09,421/- This amount is not disputed by the Corporate Debtor M/s. Green Gateway Leisure Ltd. or by the guarantor Mr. Sahadulla M.I. and hence the requirement under Section 95(4)(a) is satisfied.

• (ii) Demand notice dated 17.11.2020 issued under Rule 7(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process of Personal Guarantors to Corporate debtors) Rules 2019 was delivered on 21.11.2020 as evidenced by India Postal Track Consignment report annexed to the application. Sahadulla M.I. had filed a reply dated 30.11.2020 through a counsel disputing the liability stating various reasons in the reply. No repayment has been made within fourteen days of receipt of notice satisfying the requirement of Section 95(4)(b) 

• (iii) The applicant State Bank of India have provided the copy of the Account Statement of the Corporate Debtor M/s. Green Gateway Leisure Ltd. with certificate issued under Banker Book of Evidence Act. It is also confirmed by State Bank of India that no further payment was received either from M/s. Green Gateway Leisure Ltd. or from Mr. Sahadulla M.I., thus, meeting the requirement set out in 95(4)(c). 

• (iv) The Applicant State Bank of India have served a copy of the application to Mr. Sahadulla M.I. and M/s. Green Gateway Leisure Ltd. as evidenced by affidavit of proof of service and proof of service. 

• (v) The application was presented in Form C along with a fee of Two Thousand rupees as prescribed under Rule 7(2) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process of Personal Guarantors to Corporate Debtors) Rules 2019. Receipt from Bharatkosh.gov.in was submitted as proof of payment of fees section 95(7). 

 

Submission by the Respondent/ Personal Guarantor

# 9. The Respondent/ Guarantor filed a counter/reply statement and stated that the Resolution Professional simply narrated about the transactions in between the Creditor and the Corporate Debtor incorporating the copies of the statement of accounts of the transaction in between the Creditor and Corporate Debtor and has recorded his findings which are totally erroneous with respect to this Respondent who is only a Personal Guarantor. It is stated that Section 99 itself is incorporated with the noble intention to protect and safeguard the interests of the personal guarantors by affording them an opportunity, which includes whether or not he/they can be proceeded against in the status of personal guarantor. Such an opportunity was totally denied to him and the Resolution Professional was simply seeking the proof of discharge.

 

# 10. It is also stated that the respondent was all along seeking the production of the deed of guarantees before this Tribunal for getting expert opinion regarding the forgery and have even gone to the extent of filing IA(IBC) 49/KOB/2021, but the Resolution Professional in his report stated that he had gone through the deed of guarantees executed by the Respondent which were produced along with the application.

 

# 11. It is further stated that the Respondent/Personal Guarantor had disputed the execution of documents making him liable of a personal guarantor, from 26.02.2018 onwards and the documents produced by the Respondent/Personal Guarantor will make it clear that there is a pending dispute with respect to the execution of documents before the Debts Recovery Tribunal from 2019 onwards, by filing reply to IA No. 1405/2019 before DRT seeking production of original records by the creditor for sending the same for expert opinion.

 

# 12. It is also stated that there is no resolution process live/pending against the Corporate Debtor in any of the National Company Law Tribunals/High Courts. The applicant herein has spared the Corporate Debtor and is proceeding against the Respondent with an ulterior motive picturizing him as a personal guarantor, which is impermissible under law. This major anomaly is being suppressed from the judicial vicinity by the Resolution Professional.

 

FINDINGS 

# 13. We have heard the learned counsel for both the parties at length and perused the entire case records/documents. We have also gone through the report dated 22.10.2021 filed by the Resolution Professional. 

 

# 14. With regard to the averment of forgery of signature of the Respondent and filing documents before the Applicant, the learned counsel for the Respondent stated that the Respondent has not initiated any action against the person who forged his signature by filing a complaint before any competent authority. Hence, we presumed that the averment of forgery is only a contention raised by him to escape from the clutches of admission of this application and initiate CIRP against him. 

 

# 15. On-going through the averments in the IBA, the reply of Respondents after the report of the Resolution Professional as also the report of Resolution Professional narrated above, we are of the considered opinion that this is a fit case for admission and proceed against the Personal Guarantor/ Respondent and initiate Corporate Insolvency Resolution Process. It is also seen from the report of Resolution Professional that he has not recommended for a negotiation between the parties for arriving at an amicable settlement for repayment. Hence, we admit IBA/42/KOB/2020 filed under the provisions of Section 95 of IBC, 2016 under section 100 of the IBC, 2016 and initiate Insolvency Resolution Process against the Respondent/Personal Guarantor and moratorium in relation to all the debts is declared, from today i.e. date of admission of the application and shall cease to have effect at the end of the period of 180 days, or this Tribunal passes order on the repayment plan under Section 114 whichever is earlier as provided under Sec 101 of IBC, 2016. During the moratorium period;

• a) Any pending legal action or proceeding in respect of any debt shall be deemed to have been stayed; and

• b) The creditors of the debtor shall not initiate any legal action or proceedings in respect of any debt; and

• c) The debtor shall not transfer, alienate, encumber, or dispose of any of his assets or his legal rights or beneficial interest therein;

• d) The provisions of this section shall not apply to such transactions as may be notified by the Central Government in consultation with any financial sector regulator.

 

# 16. The Resolution Professional viz., Mr. Kizhakkekara Kuriakose Jose, having Registration No: IBBI/IPA-001/IP-P00445/2017-2018/10788, office at K.K Jose & Associates, Yenvee Complex, Temple Road, Aluva -683101 [e-mail id – kkjoseca@gmail.com] who was appointed when the Section 97 application was allowed vide Order dated 06.10.2021, is directed to cause a public notice published on behalf of the Adjudicating Authority within 7 days of passing this Order on the website of the NCLT Kochi Bench, inviting claims from all Creditors, within 21 days of such issue. The notice under Sub-Section (1) of Section 102(2) shall include: -

• (a) details of the order admitting the application;

• (b) particulars of the resolution professional with whom the claims are to be registered; and

• (c) the last date for submission of claims.

 

# 17. The publication of notice shall be made in two newspapers, one in English and other in Vernacular which have wide circulation in the State where the Corporate Debtor and Personal Guarantor resides. The Resolution Professional shall furnish two spare copies of the notice to the Registry for the record.

 

# 18. The Resolution Professional in exercise of the powers conferred under Section 104 shall prepare a list of creditors on the basis of 

• a) the information disclosed in the application filed by the debtor under Sections 94 or 95, as the case may be; and 

• b) claims received by the Resolution Professional under Section 102 within 30 days from the date of the notice. 

 

The debtor shall prepare a repayment plan under Section 105, in consultation with the Resolution Professional, containing a proposal to the Creditors for restructuring of his debts or affairs. The repayment plan may authorize or require the Resolution Professional to: -

• (a) carry on the debtor’s business or trade on his behalf or in his name; or

• (b) realise the assets of the debtor; or

• (c) administer or dispose of any funds of the debtor.

 

The repayment plan shall include the following, namely; -

• (a) justification for preparation of such repayment plan and reasons on the basis of which the creditors may agree upon the plan;

• (b) provision for payment of fee to the Resolution Professional;

• (c) such other matters as may be specified.

 

# 19. The Resolution Professional shall submit the repayment plan along with his report on the plan to this Authority within a period of 21 days from the last date of submission of claims, as provided under Section 106.

 

# 20. In case the Resolution Professional recommends that a meeting of the creditors is not required to be called, he shall record the reasons therefore. If the Resolution Professional is of the opinion that a meeting of the creditors should be summoned, he shall specify the details as provided under Section 106(3) of IBC, 2016. The date of meeting should not be less than 14 days or more than 28 days from the date of submission of the Report under Sub-Section (1) of Section 106 of IBC, 2016, for which at least 14 days' notice to the creditors [as per the list prepared] shall be issued by all modes. Such notice must contain the details as provided under the provisions of Section 107 of IBC, 2016.

 

# 21. The meeting of the creditors shall be conducted in accordance with Sections 108, 109, 110 & 111 of IBC, 2016. The Resolution Professional shall prepare a report of the meeting of the creditors on repayment plan with all details as provided under Section 112 of IBC, 2016 and submit the same to this Tribunal, copies of which shall be provided to the Debtor and the Creditors. It is made clear that the Resolution Professional shall perform his functions and duties in compliance with the Code of Conduct provided under Section 208 of IBC, 2016.

 

# 22. The Resolution Professional shall submit his periodic reports before this Tribunal, as per rules.

 

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Kanchan Nanubhai Desai & Anr. vs Finquest Financial Solutions Pvt. Ltd. & Anr. - According to us, as mentioned, the stage for considering default would arrive when the matter is taken up under Section 100 of IBC.

NCLAT (03.01.2022) in Kanchan Nanubhai Desai & Anr. vs Finquest Financial Solutions Pvt. Ltd. & Anr. [Comp. App. (AT) (Ins.) No. 1089, 1090 & 1091 of 2021] held that;.

• 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.”

Excerpts of the Order;

03.01.2022: Heard Learned Counsel for the Appellants as well as Learned Counsel appearing for the Respondents. With the consent of Learned Counsel for the parties, Appeals itself have been heard at the stage of admission finally.

 

# 2. These Appeals have been filed against judgment and order dated 30.09.2021 passed by the Adjudicating Authority (National Company Law Tribunal), Mumbai Bench, Court-III, in I.A. 2495/2020 in C.P.(IB)- 457(MB)/2020. A Petition was filed under Section 95 of the Insolvency and Bankruptcy Code, 2016 (“I&B Code” for short) through the Resolution Professional (RP), Sudha Bhushan, against the three Appellants who are before us in these three Appeals. On the Application filed through the Resolution Professional, the Adjudicating Authority has passed the order directing the Resolution Professional to exercise the powers as enumerated under Section 99 of the ‘I&B Code’ read with the Rules made thereunder and submit the recommendations with reasons in writing for acceptance or rejection of Application within the stipulated time as envisaged under Section 99. Aggrieved by the order impugned, these Appeals have been filed.

 

# 3. Two principal submissions have been made by the Learned Counsel for the Appellant before us. Firstly, as per Section 97 of the ‘I&B Code’ even though Application was filed by the Resolution Professional, the Adjudicating Authority ought to have asked for confirmation of the Resolution Professional from the Board as required by Section 97 and secondly, at the stage when the report has not come from the Resolution Professional, there was no occasion to record any finding regarding default. He submits that the finding regarding the default were uncalled for and in view of the said finding, the Resolution Professional shall be handicapped to submit any negative report. Learned Counsel for the Appellant has placed reliance on the judgment of this Tribunal dated 12.08.2021 in Company Appeal (AT) (Ins.) No. 316 of 2021- “Mr. Ravi Ajit Kulkarni vs. State Bank of India”.

 

# 4. We have heard Mr. Sunil Fernandes, Learned Counsel for the Respondents. He submits that insofar as the appointment of the Resolution Professional is concerned, it is not the case of the Appellant that there was any disciplinary proceeding pending against the Resolution Professional. Hence, the submission is only a technical submission. It is submitted that the Adjudicating Authority has list of the Resolution Professionals against whom disciplinary proceedings are pending and no disciplinary proceeding is pending against the Resolution Professional. As no disciplinary proceedings pending against the Resolution Professional, the appointment has been confirmed by the Adjudicating Authority in which no error can be pointed out. Insofar as the second submission of the Appellant is concerned, it is contended that as far as the observations made by the Adjudicating Authority regarding default, the same may not affect the Resolution Professional while making the recommendation as required under Section 99.

 

# 5. We have considered the submissions of the Learned Counsel for the Appellants and have perused the record.

 

# 6. Section 97 of the ‘I&B Code’ which deals with ‘appointment of resolution professional’ with reference to Insolvency Resolution Process under Chapter III, following is a statutory scheme as delineated by Section 97(1) and (2):-

• “97. Appointment of resolution professional. – (1) If the application under section 94 or 95 is filed through a resolution professional, the Adjudicating Authority shall direct the Board within seven days of the date of the application to confirm that there are no disciplinary proceedings pending against resolution professional.

• (2) The Board shall within seven days of receipt of directions under sub-section (1) communicate to the Adjudicating Authority in writing either –

• (a) confirming the appointment of the resolution professional; or

• (b) rejecting the appointment of the resolution professional and nominating another resolution professional for the insolvency resolution process.

• (3) Where an application under section 94 or 95 is filed by the debtor or the creditor himself, as the case may be, and not through the resolution professional, the Adjudicating Authority shall direct the Board, within seven days of the filing of such application, to nominate a resolution professional for the insolvency resolution process.

• (4) The Board shall nominate a resolution professional within ten days of receiving the direction issued by the Adjudicating Authority under sub-section (3).

• (5) The Adjudicating Authority shall by order appoint the resolution professional recommended under sub-section (2) or as nominated by the Board under sub-section (4).

• (6) A resolution professional appointed by the Adjudicating Authority under sub-section (5) shall be provided a copy of the application for insolvency resolution process.”

 

# 7. There cannot be any dispute with the statutory scheme as contained in Section 97 that when Application is filed by the Resolution Professional under Section 95, the Adjudicating Authority shall direct the Board within seven days of the date of the Application to confirm that disciplinary proceedings pending against the Resolution Professional or not and the Board was required within seven days to communicate in writing either confirming the appointment of the Resolution Professional or rejecting the appointment of the Resolution Professional and nominating another Resolution Professional. It is true that the Adjudicating Authority had not asked the Board to confirm the appointment of Resolution Professional as required by Section 97(1). However, looking into the facts of the present case where it is not a case of the Appellants before us that any disciplinary proceedings are pending against the Resolution Professional who has filed the Application, we see no useful purpose in again directing the Adjudicating Authority to send the recommendation to the Board for confirmation. The order having been passed more than three months’ prior to the passing of the order, hence we are of the view that due to this reason the order of the Adjudicating Authority does not need to be interfered with.

 

# 8. Now coming to the second submission of the Learned Counsel for the Appellants that Adjudicating Authority was not required at the stage when report was still to be filed by the Resolution Professional to record a finding regarding default, the said submission is fully supported by the judgment of this Tribunal in the above case namely— “Mr. Ravi Ajit Kulkarni” (supra) in which default has been dealt with in Paragraphs 44 and 47 which is to the following effect:-

• “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.

• xxx xxx xxx

• 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.”

 

# 9. In the impugned judgment, the Adjudicating Authority had made observations to the following effect at page 33:-

• “Based on the submissions made by the Applicant and the documents produced and placed on record before this Bench, the Bench has no doubt in its mind that there is a ‘default’ on the part of the Personal Guarantor by not fulfilling the debt owed to the Corporate Debtor, i.e., Anoushka Medicare & Diagnostics Private Limited as per the Deed of Personal Guarantee entered between the parties through the Deed of Personal Guarantee dated 01.08.2017.”

 

# 10. Learned Counsel for the Respondents submit that those observations are only prima facie observations which did not vitiate the order of the Adjudicating Authority. Be that as it may, in view of the judgment of this Tribunal in the case of “Mr. Ravi Ajit Kulkarni” (Supra), the Adjudicating Authority ought not to have recorded any finding regarding default, which ought to have left for the Resolution Professional to consider and submit a report. We are also not persuaded by the submissions of the Learned Counsel for the Respondents that the observations are only prima facie observations. We thus find substance in the above submissions of the Learned Counsel for the Appellants and we are of the view that the observations as quoted above regarding default deserves to be deleted from the judgment and are hereby deleted. Learned Counsel for the Respondent submits that in the last paragraph, the Adjudicating Authority has given full liberty to the Resolution Professional to make a recommendation with reasons in writing for acceptance or rejection of the Application. The above directions do clearly mention that report has to be submitted as per Section 99, but to avoid any prejudice to any of the parties, we are of the view that the observations as quoted above are required to be deleted from the judgment.

 

The Appeals are partly allowed to the extent as indicated above. 

 

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Adarsh Jhunjhunjwala Vs. State Bank of India & Anr. - To stay wilful defaulter proceedings, criminal proceeding or quasi criminal proceeding under any Moratorium under Section 96 would defeat the object and purpose of the part III of the IBC.

HC Calcutta (24.12.2021) in Adarsh Jhunjhunjwala Vs. State Bank of India & Anr.  [WPO 1548 of 2021] held that;.

• It is essentially for this purpose that this Legislature has applied the moratorium under Section 14 to the corporate debtor as a whole and moratorium under Section 96 is restrictively applied only to the debt. The object and purpose of a moratorium is to invite resolution applicants for revival of corporate debtors under Part II. Under Part III however the purpose of moratorium is to facilitate repayment/resolution of the debt to all categories of debtors.

• The object and purpose of the Master Circular for willful default is dissemination credit information of the willful defaulter so that other lenders are cautioned and do not lend any further money. It is also aim at preventing further fraud and loss of public money. A willful defaulter proceeding is not for recovery of debt. The repayment of debt will not ipso facto extinguish the default.

• that the moratorium in respect of debt is restricted to proceedings of recovery of any debt against the respondent “in person”. This is in harmony with dicta at paragraph 20 in the Ramakrishnan Case (supra). 

• To stay wilful defaulter proceedings, criminal proceeding or quasi criminal proceeding under any Moratorium under Section 96 would defeat the object and purpose of the part III of the IBC. 

• Stay of such collateral proceedings would also result in putting a premium on the impropriety and illegality for which the proceedings under Section 95 are initiated.

Excerpts of the Order;

The Court :- The writ petitioner seeks intervention of this Court with an order dated 18th October, 2021 passed by the Reviewing Authority under the Wilful Defaulter proceedings of the State Bank of India. The bank has already communicated the order to RBI and CIBIL and other sites.

 

The brief facts are, inter alia, that M/s. one JVL Agro Industries Ltd was a constituent of the bank and enjoyed diverse credit facilities. The petitioner and his family admittedly controlled the majority shareholding in the JVL Agro Industries Ltd. The latter was accustomed to act as per wishes and dictates of the petitioner. He is also a promoter/ director and was the main person behind the corporate debtor, M/s. JVL Agro Industries Ltd.

 

Insolvency proceedings, being CP (IB) No. 223/ALD/2018 came to be instituted under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) against M/s. JVL. The resolution plan failed and the company was directed to be wound up.

 

The bank issued a show-cause to the petitioner under the Wilful Defaulter Guidelines on 7th November, 2019. During the pendency of the said proceedings, an application under Section 95 of the IBC, being C.P No. (IB) 58/ALD/2021 was filed by the Bank against the writ petitioner around 4th October, 2021. Thereafter the final order of the review committee was passed on18th October, 2021 declaring him a willful defaulter.

 

The writ petitioner submits that he is entitled to stay of the aforesaid order 18th October, 2021, in view of the moratorium under Section 96 of the 2016 Act. Reliance is placed upon a decision dated 04.03.2021 of Co-ordinate Bench in Ayan Mallick & Anr. vs. SBI being WPO No. 23 of 2021, particularly in paragraph 22 thereof.

 

It is further argued that if the order of the Review Committee is at large or given effect to, it would defeat the object and purpose of the IBC proceedings against him. The efforts of the writ petitioner to square off the debt would stand seriously hampered and this would be counter productive for the bank as well.

 

Mr. Om Narayan Rai, learned Counsel appearing for the State Bank of India submits that firstly, proceedings under wilful defaulter guidelines are not those that are covered under the moratorium under Section 96 of the Act. It is submitted that moratorium in Section in 96 operates only against the “debt” of a respondent co-obligant. In Ayan Mallick decision (supra) the scope of a moratorium under Section 14 of the IBC was being considered. A moratorium under Section 14 applies to a “corporate debtor”, as opposed to a moratorium under Section 96 which is against the “debt”.

 

Reliance is placed on a decision of the Supreme Court in the case of SBI vs. V. Ramakrishnan & Ors. reported in (2018) 17 SCC 394. Paragraph 26 is placed where the distinction between a moratorium under Section 96 and the moratorium under Section 14 have been clearly indicated. Therefore, the petitioner cannot get the benefit of the decision of the Ayan Mallick in the facts of the case. The distinction between the two categories of moratorium and was not subject matter of the said decision.

 

It is further submitted that given their object and purpose, Wilful Defaulter Proceedings, have got nothing to do with the recovery of debt. Reference is made to a decision of this Court in Suresh Kumar Patni & Ors. vs. SBI reported in AIR 2021 Calcutta 249, particularly paragraphs 25,26 and 29 thereof.

 

In reply, Mr. Rajarshi Dutta, learned Counsel appearing for the petitioner would refer to paragraphs 18 and 20 of the Ramkrishnan decision (supra) where it was held that a guarantor co-obligant is not entitled to the benefit of the moratorium. It is submitted that the said judgment cannot be applied in the instant case since it was rendered at the time when the Part III of the IBC 2016 was not notified.

 

This Court has carefully considered the rival contentions of the parties. The argument that the bank having instituted proceedings under the wilful defaulter guidelines could not and/or should have instituted proceedings under Section 95 of the IBC is fallacious. There is, in fact, no bar to proceed parallelly under the two laws. The purpose of the two proceedings is completely different. It is essentially for a creditor to take a call when and what proceedings it wants to take against a borrower constituent.

 

Let us now address the moot question whether the scope of Moratorium U/s. 14 is the same as Section 96 of the IBC. Sections 14 and 96 of the IBC are set out hereinbelow:-

• “14. Moratorium – (1) Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the adjudicating authority shall by order declare moratorium for prohibiting all of the following, namely-

• (a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;

• (b) transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein;

• (c) any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002);

• (d) the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.

• (2) The supply of essential goods or services to the corporate debtor as may be specified shall not be terminated or suspended or interrupted during moratorium period.

• (3) The Provisions of sub-section (1) shall not apply to such transactions as may be notified by the Central Government in consultation with any financial sector regulator.

• (4) The order of moratorium shall have effect from the date of such order till the completion of the corporate insolvency resolution process:

• Provided that where at any time during the corporate insolvency resolution process period, if the adjudicating authority approves the resolution plan under sub-section (1) of Section 31 or passes an order for liquidation of corporate debtor under Section 33, the moratorium shall cease to have effect from the date of such approval or liquidation order, as the case may be.”

• “96. Interim–moratorium. – (1) When an application is filed under Section 94 or Section 95 –

• (a) an interim moratorium shall commence on the date of the application in relation to all the debts and shall cease to have effect on the date of admission of such application; and

• (b) during the interim-moratorium period –

• (i) any legal action or proceeding pending in respect of any debt shall be deemed to have been stayed; and

• (ii) the creditors of the debtor shall not initiate any legal action or proceedings in respect of any debt.

• (2) Where the application has been made in relation to a firm, the interim-moratorium under sub-section (1) shall operate against all the partners of the firm as on the date of the application.

• (3) The provisions of sub-section (1) shall not apply to such transactions as may be notified by the Central Government in consultation with any financial sector regulator.”

 

A plain reading of the two Sections would clearly indicate that the Moratorium U/s. 14 aims at protecting the “Corporate Debtor” and none else. The object and purpose is to protect the image of the juristic person to enable smooth passage of a Resolution Plan. The value of the Corporate Debtor must be protected and kept away from the acts and omissions of its promoters and shareholders. This would make the CD more attractive and would generate more interest in prospective suitors. The distinction between the two Sections has been dealt with in the decision of the Supreme Court in the case of SBI Vs. Ramakrishnan reported in (2018) 17 SCC 394 Paragraphs 20, 26, 26(1) and 26(2) are set out herein below.

• “20. Section 14 refers to four matters that may be prohibited once the moratorium comes into effect. In each of the matters referred to, be it institution or continuation of proceedings, the transferring, encumbering or alienating of assets, action to recover security interest, or recovery of property by an owner which is in possession of the corporate debtor, what is conspicuous by its absence is any mention of the personal guarantor. Indeed, the corporate debtor and the corporate debtor alone is referred to in the said section. A plain reading of the said section, therefore, leads to the conclusion that the moratorium referred to in Section 14 can have no manner of application to personal guarantors of a corporate debtor.

• 26. We are also of the opinion that Sections 96 and 101, when contrasted with Section 14, would show that Section 14 cannot possibly apply to a personal guarantor. When an application is filed under Part III, an interim-moratorium or a moratorium is applicable in respect of any debt due. (Emphasis added) First and foremost, this is a separate moratorium, applicable separately in the case of personal guarantors against whom insolvency resolution processes may be initiated under Part III. Secondly, the protection of the moratorium under these sections is far greater than that of Section 14 in that pending legal proceedings in respect of the debt and not the debtor are stayed. The difference in language between Sections 14 and 101 is for a reason.

• 26.1. Section 14 refers only to debts due by corporate debtors, who are limited liability companies, and it is clear that in the vast majority of cases, personal guarantees are given by Directors who are in management of the companies. The object of the Code is not to allow such guarantors to escape from an independent and co-extensive liability to pay off the entire outstanding debt, which is why Section 14 is not applied to them. However, insofar as firms and individuals are concerned, guarantees are given in respect of individual debts by persons who have unlimited liability to pay them. And such guarantors may be complete strangers to the debtor — often it could be a personal friend. It is for this reason that the moratorium mentioned in Section 101 would cover such persons, as such moratorium is in relation to the debt and not the debtor.

• 26.2. We may hasten to add that it is open to us to mark the difference in language between Sections 14 and 96 and 101, even though Sections 96 and 101 have not yet been brought into force. This is for the reason, as has been held in State of Kerala v. Mar Appraem Kuri Co. Ltd. [State of Kerala v. Mar Appraem Kuri Co. Ltd., (2012) 7 SCC 106 : (2012) 4 SCC (Civ) 69] , that a law “made” by the legislature is a law on the statute book even though it may not have been brought into force. The said judgment states : (SCC pp. 141-42, paras 79-81)

 

The very purpose of separation of corporate insolvency under Part II of the IBC from individual insolvency under Part III must be understood. They are separate and distinct and aim to achieve different ends. The principles applied in the corporate insolvency cannot be applied to personal insolvency. It is essentially for this purpose that this Legislature has applied the moratorium under Section 14 to the corporate debtor as a whole and moratorium under Section 96 is restrictively applied only to the debt. The object and purpose of a moratorium is to invite resolution applicants for revival of corporate debtors under Part II. Under Part III however the purpose of moratorium is to facilitate repayment/resolution of the debt to all categories of debtors.

 

The object and purpose of the Master Circular for willful default is dissemination credit information of the willful defaulter so that other lenders are cautioned and do not lend any further money. It is also aim at preventing further fraud and loss of public money. A willful defaulter proceeding is not for recovery of debt. The repayment of debt will not ipso facto extinguish the default. This has to be assist and applied in the facts of the instant case. Like a moratorium is under the IBC is not aimed at letting a wrong doer to get away as held by the Supreme Court in the case of Manish Kumar vs. Union of India reported in 2021 SCC OnLine page 38.

 

In the backdrop of the above this Court is inclined to accept the argument of Mr. Rai for the bank that the moratorium in respect of debt is restricted to proceedings of recovery of any debt against the respondent “in person”. This is in harmony with dicta at paragraph 20 in the Ramakrishnan Case (supra). To stay wilful defaulter proceedings, criminal proceeding or quasi criminal proceeding under any Moratorium under Section 96 would defeat the object and purpose of the part III of the IBC. Stay of such collateral proceedings would also result in putting a premium on the impropriety and illegality for which the proceedings under Section 95 are initiated. The argument of Mr. Rajarshi Dutta that the continuation of the wilful defaulter proceedings would seriously hamper and impede his client’s ability to make good repay or come up with; a scheme to satisfy creditors is fallacious. Such stay would also amount to permitting a wrong doer to commit a further wrongs for the purpose of remedying an existing wrong. All lenders are required to be put on notice of the willful default who to prevent further erosion of public finances. The observation in Para 22 do not apply in this instant case as have not been applied in the conclusion of the said decision. It appears to this Court that the Ramakrishnan decision has not been placed before the Coordinate Bench in the Ayan Mallick case (supra). As already stated earlier any moratorium under the IBC cannot permit a wrong doer to continue to such doing.

 

This Court in the Patni decision (supra) has addressed the right/responsibility of the bank to take criminal action against a defaulter borrower who has been identified as a defaulting borrower. The purpose behind the said clause 4.3 of the wilful defaulter guidelines, as dealt with in the Patni decision (supra) is essentially to put the public at large on notice of the financial conduct of the petitioner. Paragraph 61 of the decision of the Supreme Court reported in (2013) 7 SCC 369 is set out hereinbelow.

• “61. We do not also find any force in the submission of Mr Bhaskar P. Gupta that the Master Circular has penal consequences and, therefore, has to be literally and strictly construed. Clause 4.3 of the Master Circular, which contemplates criminal action by banks/financial institutions, is extracted hereinbelow:

• “4.3. Criminal action by banks/financial institutions.—It is essential to recognise that there is scope even under the exiting legislations to initiate criminal action against wilful defaulters depending upon the facts and circumstances of the case under the provisions of Sections 403 and 415 of the Penal Code, 1860 (IPC), 1860. Banks/Fls are, therefore, advised to seriously and promptly consider initiating criminal action against wilful defaulters or wrong certification by borrowers, wherever considered necessary, based on the facts and circumstances of each case under the above provisions of IPC to comply with our instructions and the recommendations of JPC.

• It should also be ensured that the penal provisions are used effectively and determinedly but after careful consideration and due caution. Towards this end, banks/Fls are advised to put in place a transparent mechanism, with the approval of their Board, for initiating criminal proceedings based on the facts of individual case.”

 

All that the aforesaid Clause 4.3 of the Master Circular states is that there is scope even under the exiting legislations to initiate criminal action against wilful defaulters depending upon the facts and circumstances of the case under the provisions of Sections 403 and 415 of the Penal Code, 1860 and the banks and financial institutions are strictly advised to seriously and promptly consider initiating criminal action based on the facts and circumstances of each case under the above provisions of IPC. Thus, the Master Circular by itself does not have penal consequences, whereas Sections 403 and 415 IPC have penal consequences. The provisions of Sections 403 and 415 IPC obviously have to be strictly construed as these are penal provisions and will get attracted depending on the facts and circumstances of each case, but the provisions of the Master Circular need not be strictly construed. As we have held, the Master Circular has to be construed not literally but in its context and the words used in the definition of “wilful defaulter” in the Master Circular have to draw their meaning from the context in which the Master Circular has been issued.”

 

The same is more of a responsibility and obligation than a right. Recovery proceedings or proceedings under Section 96 of the IBC, 2016, or the borrower’s success therein, would not absolve the borrower who has been found to be a wilful defaulter. The willful defaulter proceedings only aims at dissemination of information. The bank’s responsibility to institute criminal proceedings would also be interfered with if the arguments of the petitioners are accepted.

 

For the reasons stated hereinabove, this Court is not inclined to entertain the writ petition.WPO 1548 of 2021 shall stand dismissed.

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