2017 (11) TMI 1697 - HC - Indian Laws

High Court Rules on Jurisdiction & Security in Debt Recovery Case

The High Court held that the Debts Recovery Tribunal (DRT) did not have jurisdiction over the Plaintiff's suit as it was not a bank or financial ... Dishonor of Cheque due to insufficiency of funds - proceedings against the guarantor - Proceedings under IBC has been initiated against the defaulter and NCLT has ordered a moratorium against the defaulter company - a decree is sought against the Defendants in the Summons for Judgment - It is the case of the Plaintiff that even though the principal borrower had agreed to secure the said term loan of ₹ 4 Crores by way of a mortgage of all the assets of the principal borrower, however, the principal borrower failed to execute the same and the Plaintiff as on the date of filing of the suit have security only in the form of a pledge of shares, which according to the Plaintiff, is not sufficient to recover its entire dues. Held that:- It is now well settled that one can initiate proceedings against the guarantor without initiating action against the principal borrower. The defences raised on merits is totally moonshine and illusory. There is no real dispute on the merits of the case. However, purely out of mercy, leave is granted to the Defendants to contest the suit subject to:- (i) The Defendants jointly and/or severally depositing in this Court the sum of ₹ 3.22 Crores within a period of Twelve weeks from today; (ii) If the aforesaid deposit is made, the Suit shall get transferred to the list of Commercial Causes and the Defendants shall file their Written Statement within a period of eight weeks from the date of deposit; and (iii) If the order of deposit is not complied with within the stipulated period as mentioned earlier, the Plaintiff shall be entitled to apply for an ex-parte decree against the Defendants after obtaining a non-deposit certificate from the Prothonotary and Senior Master of this Court. Summons for Judgement disposed off. Issues Involved:1. Jurisdiction of the Debts Recovery Tribunal (DRT) vs. High Court.2. Adequacy of security held by the Plaintiff.3. Sufficiency of stamp duty on Deeds of Guarantee.4. Applicability of the moratorium under Section 14 of the Insolvency and Bankruptcy Code (IBC), 2016 to guarantors.Detailed Analysis:1. Jurisdiction of the Debts Recovery Tribunal (DRT) vs. High Court:The Defendants argued that the Plaintiff, being a 100% subsidiary of SICOM Ltd., should have filed the proceedings before the DRT, which has exclusive jurisdiction over matters involving banks and financial institutions. The Plaintiff contended that it is not a bank or financial institution as defined under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDB Act, 1993). The Court agreed with the Plaintiff, stating that the DRT has limited jurisdiction under Section 17 of the RDB Act, 1993, which does not extend to the Plaintiff. Therefore, the High Court has jurisdiction to entertain the suit.2. Adequacy of Security Held by the Plaintiff:The Defendants claimed that the Plaintiff holds sufficient security in the form of shares of the principal borrower, making the Summary Suit not maintainable. The Plaintiff argued that the pledged shares are insufficient to cover the entire debt. The Court found that the summary procedure under Order XXXVII of the CPC is applicable as the suit is based on written guarantees, and there is no stipulation that the suit would not be maintainable due to the existence of security. Thus, the argument was rejected.3. Sufficiency of Stamp Duty on Deeds of Guarantee:The Defendants argued that the Deeds of Guarantee were insufficiently stamped. The Plaintiff countered that the guarantees were duly franked with a stamp duty of Rs. 100/- each. The Court noted that this argument was not raised in the affidavits and found no evidence to suggest that the stamp duty was insufficient. Hence, this defense was also rejected.4. Applicability of the Moratorium under Section 14 of the IBC, 2016 to Guarantors:The Defendants contended that the moratorium under Section 14, which prohibits suits against the corporate debtor, should also extend to guarantors. The Plaintiff, supported by the Amicus Curiae, argued that the moratorium applies only to the corporate debtor and not to third parties like guarantors. The Court examined various provisions of the IBC, 2016, including Sections 2, 3, 5, 14, 60, 94, 95, and 96. It concluded that the moratorium under Section 14 is specific to the corporate debtor and does not extend to guarantors unless insolvency proceedings are initiated against them under Part III of the IBC, 2016. The Court found that granting such protection to guarantors would reintroduce the mischief that Section 14 aimed to remedy, as seen in the repealed Sick Industrial Companies (Special Provisions) Act, 1985 (SICA).Decision:The Court rejected the Defendants' arguments and found no merit in their defenses. However, out of mercy, the Court granted leave to the Defendants to contest the suit, subject to depositing Rs. 3.22 Crores in the Court within twelve weeks. If the deposit is made, the suit will be transferred to the list of Commercial Causes, and the Defendants must file their Written Statement within eight weeks. Failure to deposit will entitle the Plaintiff to apply for an ex-parte decree. The Summons for Judgment was disposed of with no order as to costs.