Ramesh Chander Agarwala Vs. State Bank of India & Anr. - Appellate Authority permitted PG to submit representation to RP & subsequently after consideration of representation RP to submit Additional Report under section 99.

NCLAT (22.04.2022) in Ramesh Chander Agarwala Vs. State Bank of India & Anr. [Company Appeal (AT) (Insolvency) No. 230 & 231 of 2022] held that;

• It is true that in Ravi Ajit Kulkarni’s case this Tribunal has in paragraph 44 of the Judgment has laid down that limited notice by the Adjudicating Authority also be given to the Personal Guarantors.

• In view of the facts of the present case, in the interest of justice, we give an opportunity to the Appellant to submit a representation to RP along with relevant materials which the Appellant want to communicate to the RP which he may do so within two weeks from today. 

• The IRP after considering the submissions may submit an ‘Additional Report’ in continuation of his first Report and the Adjudicating Authority before taking a decision for admission or rejection of the Application as contemplated under Section 100 may consider both the reports

Excerpts of the order;

22.04.2022: These two Company Appeals have been filed by two Personal Guarantors of the same Corporate Debtor challenging the Order dated 08th December, 2021 passed by the Adjudicating Authority in the separate Applications filed by the State Bank of India under Section 95 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as ‘Code’). The Advance Copy of the Applications filed under Section 95 of the Code was served on the Appellant however Appellant was not given the limited notice and the Adjudicating Authority by the Impugned Order appointed the Resolution Professional and asked the Resolution Professional to submit a Report. Aggrieved by the said Order, these two Appeals have been filed.

# 2. Mr. Devashish Bharuka, Advocate appearing for the Appellant in both these Appeals contends that limited notice was not issued to the Appellant by the Adjudicating Authority and the Report was already submitted by the Resolution Professional subsequent to passing of the Order dated 08th December, 2021 he has placed reliance on a Judgement of this Tribunal in Company Appeal (AT) Ins. No. 316 of 2021 in the matter of ‘Ravi Ajit Kulkarni Vs. State Bank of India through the Resolution Professional’.

# 3. Learned Counsel for the Respondent refuting the submissions of the Learned Counsel for the Appellant submits that submission of the Report by the Resolution Professional does not cause any prejudice. It is submitted that the Adjudicating Authority has not recorded any finding of default as was the case in Ravi Ajit Kulkarni’s Case. It is submitted that Appellant has already appeared before the Adjudicating Authority and the Adjudicating Authority has granted time to the Personal Guarantors to submit an Objection vide Order dated 16th March, 2022. Learned Counsel for the Respondent has also placed reliance on a Judgement of this Tribunal in Company Appeal (AT) Ins. No. 284 of 2022 decided on 22nd March, 2022 in the matter of ‘Chandresh Jajoo Vs Siemens Financial Services Private Limited & Anr‘.

# 4. We have heard Learned Counsel for the parties and perused the record.

# 5. It is true that in Ravi Ajit Kulkarni’s case this Tribunal has in paragraph 44 of the Judgment has laid down that limited notice by the Adjudicating Authority also be given to the Personal Guarantors. In the present case, although no limited notice as contemplated in Ravi Ajit Kulkarni’s Case was given but the fact of the matter is that Personal Guarantors have appeared before the Adjudicating Authority and have been granted time to file Objections. The Grievance of the Appellant which has been canvassed before us is that Report has already been submitted by the Resolution Professional without obtaining any information from the Appellant. The Letter was issued by the IRP on 20th December, 2021 asking the Appellant to submit the report but since the Appellant has filed this Appeal in this Tribunal, details were not submitted to the IRP. IRP subsequently has submitted a report which report has been taken on record by the Adjudicating Authority and Adjudicating Authority has granted time to file Objections to the Report.

# 6. In view of the facts of the present case, in the interest of justice, we give an opportunity to the Appellant to submit a representation to RP along with relevant materials which the Appellant want to communicate to the RP which he may do so within two weeks from today. The IRP after considering the submissions may submit an ‘Additional Report’ in continuation of his first Report and the Adjudicating Authority before taking a decision for admission or rejection of the Application as contemplated under Section 100 may consider both the reports. After submission of the ‘Additional Report’, it shall be open for the parties to request the Adjudicating Authority for granting time to file Objection, if any.

We dispose of these two Appeals with the aforesaid directions.

 

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Pramod Kumar Mittal Vs. UCO Bank - Adjudicating Authority shall independently shall consider the question of default while passing order under Section 100 of the I & B Code, 2016

 NCLAT (18.04.2022) in Pramod Kumar Mittal Vs. UCO Bank [Company Appeal (AT) (Insolvency) No. 221 of 2022] held that;

• We are of the view that the Application has not yet been admitted or rejected under Section 100 of I & B Code, 2016. The stage has not yet come therefore it shall be open for the Appellant to raise all the issues regarding the admissibility of the Application.

• Adjudicating Authority shall independently, without any reference to Paragraph 9, shall consider the question of default while passing order under Section 100 of the I & B Code, 2016.

Excerpts of the order;

18.04.2022: Heard Learned Counsel for the Appellant as well as the Respondent.

# 2. This Appeal has been filed against the Order dated 23.09.2021 passed by the Adjudicating Authority (National Company Law Tribunal, Kolkata Bench, Kolkata) on an Application being CP(IB)/23(KB)2021 filed under Section 95(1) of the Insolvency and Bankruptcy Code, 2016 by the UCO Bank against the Appellant. By the Impugned Order, the Adjudicating Authority has appointed a Resolution Professional and observed that Resolution Professional shall exercise all the powers enumerated under Section 99 of the I&B Code, 2016. He was directed to make recommendations with the reason in writing. Aggrieved by the order, the Appellant has come in this Appeal.

# 3. Learned Counsel for the Appellant challenging the Order contends that the Order records a finding of default in paragraph 9 when there was no stage for recording any finding of default. He further submits that the Demand Notice was not served on the Appellant as is required by the statute.

# 4. Learned Counsel for the Respondent refuting the submissions of Learned Counsel for the Appellant submits that Appellant has not filed any Reply before the Adjudicating Authority and without filing any Reply before the Adjudicating Authority this Appeal was filed by the Appellant. Learned Counsel for the Appellant submits that after filing of this Appeal, Reply has already been filed where all the issues have been raised.

# 5. We are of the view that the Application has not yet been admitted or rejected under Section 100 of I & B Code, 2016. The stage has not yet come therefore it shall be open for the Appellant to raise all the issues regarding the admissibility of the Application. In so far as the finding of default as contained in paragraph 9, it is useful to extract the observations in paragraph 9 which is to the following effect

“9. The Applicant has clearly brought it out in its application that the personal guarantor has committed default in making payment of the cash credit facility along with interest to the Applicant for which he has given the personal guarantee to the Applicant on behalf of GPIL.

# 6. Learned Counsel for the Respondent submits that the aforesaid observations in paragraph 9 cannot be read as a finding rather in the paragraph 9 the Adjudicating Authority has only noted the contention of the Respondent. Be that as it may, suffice it to say that any observations in paragraph 9 of the Judgment need not be treated any finding of the default of the Appellant, Adjudicating Authority shall independently without any reference to Paragraph 9 shall consider the question of default while passing order under Section 100 of the I & B Code, 2016. Leaving all the contentions of the parties open, we dispose of this Appeal, accordingly.

 

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State Bank of India & Ors. Vs. Mr. Prashant S. Ruia & Anr. - In the absence of any subsisting underlying debt due from ESIL, the Secured Financial Creditors cannot in law trigger the personal guarantees that have been given by the defendants.

 DRT Ahmedabad-1 (11.03.2022) in State Bank of India & Ors. Vs. Mr. Prashant S. Ruia & Anr.  [Interlocutory Application No.106 of 2022 in Original Application No. 650 of 2018 ] held that;

• It is required to be noted that in the present case, the principal debtor is discharged on account of assignment of the entire debt owed by it to the Applicant Banks. 

• The legal effect of such assignment is that the debt as a whole is discharged upon receipt of the amounts under the approved Resolution Plan, whereafter, the debt is totally extinguished leaving nothing for recovery from the guarantors. 

• It is therefore, clear that the sanction of a resolution plan and finality imparted to it by Section 31 does not per se operate as a discharge of the guarantor’s liability. As to the nature and extent of the liability, much would depend on the terms of the guarantee itself.

• In other words, in the absence of any subsisting underlying debt due from ESIL, the Secured Financial Creditors cannot in law trigger the personal guarantees that have been given by the defendants.

• That the present Original Application does not survive as the cause of action for recovery of alleged debt of the Financial Creditors has come to an end on assignment of the entire debt of the Corporate Debtor by the Financial Creditors in favour of AMIPL.

Excerpts of the order;

# 11. It is a settled law that the liability of a guarantor is co-extensive with that of the Principal Borrower as per Section 128 of the Contract Act. The Defendants in the present case admittedly stood as sureties for the financial assistance granted by the Applicants to Essar Steel and therefore they were jointly and severally liable to pay the dues of the Applicants along with the Principal Borrower. Therefore, the Applicants were entitled to file Original Application against the Principal Borrower and/or guarantors for recovery of their debt before this Tribunal u/s 19 of the RDB Act. Under the contract of guarantee executed with the Applicants, the Defendants were liable to pay the dues of the Applicants. It is a different matter that the Applicants later on entered into the Deed of Assignment for its debt with the Resolution Applicant— ArcelorMittal. But the contract of guarantee between the Applicants and Defendants was in existence at the time of filing the present OA and it is still subsisting . Therefore, the Applicants were entitled to recover their debt, if any, from the Defendants. In view of the provisions of Section 2(g) read with Section 19 of the RDB Act, it cannot be said that there was lack of inherent jurisdiction of this Tribunal at the time of filing the OA by the Applicants against the Defendants.

 

# 31. The ratio of law laid down by the Hon’ble Apex Court in Lalit Kumar Jain Vs. Union of India & Ors. is to the effect that the guarantors are not ipso facto absolved from their liability on approval of resolution plan. It is required to be noted that in the present case, the principal debtor is discharged on account of assignment of the entire debt owed by it to the Applicant Banks. The legal effect of such assignment is that the debt as a whole is discharged upon receipt of the amounts under the approved Resolution Plan, whereafter, the debt is totally extinguished leaving nothing for recovery from the guarantors. Moreover, the Applicant Banks have no dues recoverable from the principal borrower after assignment of debt. As stated hereinabove, if the Applicants have nothing to recover on the books of accounts from the principal borrower, the guarantors stand absolved from their liabilities under the guarantees and they stand discharged in spite of the fact that the personal guarantees have been retained and specifically excluded by the Applicant Banks in the approved Resolution Plan. Therefore, the aforesaid judgement would not be helpful to the Applicant Banks in the present case.

 

# 32. Upon a comprehensive reading of the decision of Hon’ble Supreme Court in Lalit Kumar Jain’s Case (Supra), the irresistible conclusion that emerges is that the Hon’ble Supreme Court has only dealt with the validity of the notification in relation to the personal solvency under the IBC and has restricted its analysis as regards the constitutionality of the Notification. While upholding the validity of the said Notification, the Court has not dwelt into individual facts and circumstances of any particular case. The instructive observations of the Hon’ble Supreme Court in Lalit Kumar Jain’s Case (Supra) are reproduced below;- 

• # 108. It is therefore, clear that the sanction of a resolution plan and finality imparted to it by Section 31 does not per se operate as a discharge of the guarantor’s liability. As to the nature and extent of the liability, much would depend on the terms of the guarantee itself. However, this court has indicated, time and again, that an involuntary act of the principal debtor leading to loss of security, would not absolve a guarantor of its liability.

 

From the judgment of Hon’ble Supreme Court of India, it is clear that both the nature as well as the extent to a guarantor’s liability in any particular case would depend upon the terms of the guarantee itself, which is an independent contract.

 

# 36. A conjoint reading of the clauses of the Deed of Guarantee and the approved Resolution Plan reveals that the Secured Financial Creditors have assigned their entire debt from the Borrower (i.e.ESIL) to the resolution applicant (i.e.Arcelor) under the Resolution Plan and have also accepted the amounts paid to them by Arcelor in discharge of the total debt owed by the ESIL to such Financial Creditors. This factual matrix invariably leads to the singular conclusion that the debt owed by the ESIL to the said Financial Creditors stands fully and finally satisfied.

 

# 39.  . . . . . . In the present case it is not disputed that the personal guarantees executed by the Defendants in favour of the Bank are retained by the assignor (Secured Creditors). However, it is also an admitted fact that the Secured Financial Creditors have under the Resolution Plan accepted the amounts paid to them by Arcelor in discharge of the total debt owed by the ESIL to such Financial Creditors. I am therefore of the view that there is no existing debt which can be claimed against the personal guarantees given by the defendants, for there is no subsisting underlying “debt” due from the Borrower (ESIL) which legally acts as a precondition for the Secured Financial Creditors to invoke the Guarantees. In other words, in the absence of any subsisting underlying debt due from ESIL, the Secured Financial Creditors cannot in law trigger the personal guarantees that have been given by the defendants.

 

# 40. In view of the aforesaid discussion, I am of the opinion that the present Original Application does not survive as the cause of action for recovery of alleged debt of the Financial Creditors has come to an end on assignment of the entire debt of the Corporate Debtor by the Financial Creditors in favour of AMIPL. In this context , it is worthwhile to refer to following observations of the Hon’ble Supreme Court in the case of “Shipping Corporation of India (Supra) ;-

• “Thus it is clear that by the subsequent event if the original proceeding has become infructuous, ex debito justitiae, it will be the duty of the court to take such action as is necessary in the interest of justice which includes disposing of infructuous litigation. For the said purpose it will be open to the parties concerned to make an application under Section 151 of CPC to bring to the notice of the court the facts and circumstances which have made the pending litigation infructuous. Of course, when such an application is made, the court will inquire into alleged facts and circumstances to find out whether the pending litigation has in fact become infructuous or not.”

 

# 41. In the facts and circumstances of the present case, I am inclined to exercise powers u/s 19(25) of the RDB Act (which are analogous to the powers of the Court u/s 151 of the CPC) to dismiss the present Original Application as having become infructuous. Hence, I pass the following order:

1. The present Interlocutory Application filed by the Defendants is allowed.

2. Since no debt is found due and recoverable by the Applicant Banks from the Defendants, the present Original Application is hereby dismissed with no order as to cost.

 

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Bank of Baroda Vs. Ms. Divya Jalan - There is no provision in the code which envisages the concept of legal heirs stepping into the shoes of the deceased Personal Guarantor.

NCLT Kolkata (11.02.2022) in Bank of Baroda Vs. Ms. Divya Jalan [CP (IB) No. 363/KB/2021] held that;

• Firstly, as defined in section 5 (22) – personal guarantor refers to an individual who gives surety in a contract of guarantee on behalf of the Corporate Debtor.

• A personal guarantor to a Corporate Debtor is a person against whom guarantee has been invoked and there is outstanding dues left, partly or fully. The definition does not include the ‘legal heirs’.

• However, there is no provision in the code which envisages the concept of legal heirs stepping into the shoes of the deceased Personal Guarantor.

• In this instant case the petitioner can take appropriate steps to recover the guaranteed amount from the assets/estates of the deceased Personal Guarantor rather than the personal assets of the legal heirs of the Personal Guarantor

Excerpts of the order;

# 1. The Court convened via video conference.

 

# 2. Under consideration is a Petition CP (IB) No. 363/KB/2021 filed under section 95(1) of the Insolvency and Bankruptcy Code, 2016 (‘Code’) read with rule 7(2) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution process for Personal Guarantors to Corporate Debtor) Rules, 2019 (‘Personal Guarantors Rules’) and regulation 4(2) of IBBI (Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Regulations, 2019 (‘Personal Guarantors Regulations’) filed by Bank of Baroda, Stressed Asset Management Branch (SAMB) (‘Petitioner’) a Body Corporate constituted under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, for initiating the Insolvency Resolution Process (‘IR Process’) against viz., Ms. Divya Jalan, legal heir of Personal Guarantor, late Sandeep Kumar Jalan, residing at Saket 14, Dover Park, Kolkara – 700019 (‘Respondent).

 

# 3. Kilburn Chemicals Limited [CIN L24117WB1990PLC199409] (‘Corporate Debtor’) had approached the Petitioner to provide credit facilities for setting up of Rutile Grade Titanium Dioxide manufacturing plant. Thereafter, a term loan consortium Agreement was executed on 14 January, 2016, further amended on 05 November, 2016, was executed between the Corporate Debtor, Petitioner and State Bank of India (‘SBI’)

 

# 4. At the request of the Corporate Debtor, the Petitioner extended the credit facilities by way of working capital cash credit. Subsequently, an Agreement dated 27 April, 2018 was executed the Corporate Debtor, Petitioner and SBI (‘Agreement’). The Petitioner had sanctioned total credit facilities to a sum of Rs.103,90,00,000/- (Rupees One Hundred Three Crore Ninety Lakh only). The details of the Credit Facilities are as follows:

 

SL. No	Particulars of the Credit Facilities availed by the Corporate Debtor	Limit (in crores)
1)	Term Loan	Rs.83.00
2)	Working Capital by way of Cash Credit	Rs.20.00
3)	Bank Guarantee	Rs.0.90
	TOTAL	Rs.103.90

 

# 5. The Petitioner has filed this Petition through Mr. Gauri Shankar Bhaiya, Chief Manager, Bank of Baroda, Stressed Asset Management Branch (SAMB). In this factual conspectus, the Petitioner prays for initiation of Insolvency Resolution Processof the Personal Guarantor on failure to pay a sum of Rs.112,35,09,310/- (Rupees One Hundred Twelve Crore Thirty Five Lakh Nine Thousand Three Hundred Ten only) including unapplied interest, legal charges and others as on 30 October, 2021, against the personal guarantee.

Ld. Counsel appearing on behalf of the Petitioner submits as follows:

 

# 6. To avail the service of Credit Facilities two guarantees were executed by the Corporate Debtor. One of the guarantees was executed by the deceased Personal Guarantor, viz., Mr. Sandeep Kumar Jalan, residing at Saket, 14 Dover Park, Ballygunge, Kolkata –700019, vide dated 14 January, 20164 (Personal Guarantee Agreement).

 

# 7. The Petitioner had issued a demand notice on 13 August, 2021 under rule 7(1) of theCode, which was delivered to the legal heir of the deceased Personal Guarantor on 14December, 2020 as per tracking information placed at page 335 of the Petition.

 

# 8. Clause 21 and clause 24 (k) of the Personal Guarantee Agreements dated 14 January, 2016 and April 24, 2018 provides an exhaustive list of legal heirs of the Personal Guarantors. Further, the clause also states that in case of demise of the Personal Guarantor the Petitioner is entitled to recover dues of the Corporate Debtor from the legal heirs of the Personal Guarantors.

 

# 9. The Corporate Debtor has also executed security documents in favor of the Petitioner by way of 1st Pari-passu charge on the fixed assets of the project including land and building and hypothecation of all plant and machinery and other fixed assets and collateral security of property.

 

# 10. As per the Agreements, the Corporate Debtor and its guarantors were mandated to repay the outstanding sums for Term Loan facility and Cash Credit facility and Bank Guarantee. However, the Corporate Debtor and its guarantor failed to adhere to the terms of the Agreement and committed breach of terms and conditions. Hence, the account of the Corporate Debtor was declared as Non-Performing Assets (‘NPA’) on 31 December, 2018, as per the Reserve Bank of India guidelines. Subsequently, the account of the Corporate Debtor was transferred to Stressed Asset Management Branch (SAMB).

 

# 11. Thereafter, a Petition under Section 7 of the Insolvency and Bankruptcy Code was filed before this Adjudicating Authority and vide order dated 10 August, 2020 the Corporate Debtor was admitted into Corporate Insolvency Resolution Process. The Petitioner being one of the Creditor submitted its claim before the Interim-Resolution Professional amounting to Rs.1,05,03,75,271.85P and the same was admitted.

 

# 12. Further, Resolution Professional invited plans from the prospective Resolution Appllicant and the plan of Meghmani Organics Limited was approved by the Committee of Creditors with 100% voting rights.

 

# 13. In the meantime, due to the demise of the personal guarantor Mr. Sandeep Kumar Jalan, the Petitioner issued a demand notice dated 13 August, 2021, under rule 7(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution process for Personal Guarantors to Corporate Debtor) Rules, 2019, to the legal heirs of Mr. Sandeep Kumar Jalan.

 

# 14. On receiving such notice the legal heir of Mr. Sandeep Kumar Jalan replied vide letter dated 08 September, 2021, which is not tenable in the eye of law. Hence, this Application. 

Analysis and Findings

 

# 15. Upon perusal of the record, the question arising before this Adjudicating Authority is that ‘Whether Petitioner is entitled to recover dues of the Corporate Debtor from the legal heirs of the Personal Guarantors?’

 

# 16. With regard to the above contention it is pertinent to throw light on the following provisions/regulations from the Code:

• (a) Firstly, as defined in section 5 (22) – personal guarantor refers to an individual who gives surety in a contract of guarantee on behalf of the Corporate Debtor.

• (b) Secondly, as per regulation 3 (1)(a)(e) of Application to Adjudicating Authorty for Insolvency Resolution Process for Personal Guarantors to Corporate Debtor Regulation, 2019, clearly defines that a personal guarantor to a Corporate Debtor is a person against whom guarantee has been invoked and there is outstanding dues left, partly or fully. The definition does not include the ‘legal heirs’.

• (c) Last but not the least as envisaged in section 238 of the Code and opined by Hon’ble Apex Court in a catena of Judgments. It is apparent that section 238 has over riding effects on laws inconsistent with the Code or any instrument having effect by virtue of such laws.

 

# 17. When a section 95 application is filed the assets of the Personal Guarantor is hit by moratorium and if we put the legal heirs of the deceased Personal Guarantor into the shoes of the Personal Guarantor then their personal assets will also get automatically hit by moratorium, which will cause grave prejudice to the rights of the third party. However, there is no provision in the code which envisages that the concept of legal heirs stepping into the shoes of the deceased Personal Guarantor.

 

# 18. In this instant case the petitioner can take appropriate steps to recover the guaranteed amount from the assets/estates of the deceased Personal Guarantor rather than the personal assets of the legal heirs of the Personal Guarantor. Further, the legislature is very much clear in defining the term ‘Personal Guarantor’, the Code talks about the estate/assets of the Personal Guarantor only.

 

# 19. Therefore, we hold that the instant application cannot be maintained against the legal heirs of the Personal Guarantor under the Code, and the remedies may lie elsewhere. Hence, clause 21 and clause 24 (k) of the Personal Guarantee Agreements dated 14 January, 2016 and April 24, 2018 is inconsistent with the definitions of the Personal Guarantor as defined in the Code.

 

# 20. In this view of the matter, C.P. (IB) No.363/KB/2021 is dismissed. The Petitioner is, however, at liberty to pursue other recovery measures available means under the law.

 

# 21. A certified copy of this order may be issued, if applied for, upon compliance with all requisite formalities.

 

# 22. File to be consigned to the records. 

 

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