Corporate Debtor held liable for financial debt as co-borrower under Insolvency and Bankruptcy Code

The Tribunal found the Corporate Debtor liable for the financial debt claimed by the Petitioner due to default in loan repayment as a co-borrower/pledgee. Pledging shares was considered a financial debt under the Insolvency and Bankruptcy Code, with the invocation of the pledge not reducing the debt. Consequently, the Corporate Insolvency Resolution Process was initiated against the Corporate Debtor, appointing an Interim Resolution Professional to manage the proceedings.

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Issues Involved:

1. Whether the Corporate Debtor is liable for the financial debt claimed by the Petitioner.
2. Whether the Corporate Debtor's pledge of shares constitutes a financial debt under the Insolvency and Bankruptcy Code (IBC).
3. Whether the invocation of the pledged shares reduces the outstanding debt.
4. Whether the Corporate Insolvency Resolution Process (CIRP) can be initiated against the Corporate Debtor.

Issue-Wise Detailed Analysis:

1. Liability of the Corporate Debtor for the Financial Debt:

The Petitioner, a Non-Banking Financial Company, extended loans to Premier Limited and the Corporate Debtor under multiple Loan cum Pledge Agreements. The Corporate Debtor was a co-borrower and pledged shares to secure the loans. The Petitioner claimed that the Corporate Debtor defaulted in repaying Rs. 8,35,25,398/-, including interest. The Corporate Debtor argued that it was not liable to pay the debt as the amounts were disbursed to Premier Limited and not to it. However, the Tribunal found that the Corporate Debtor, as a co-borrower/pledgee, had defaulted in repaying the loan, making it liable for the debt.

2. Pledge of Shares as Financial Debt:

The Corporate Debtor contended that pledging shares does not constitute a financial debt under Sections 5(7) and 5(8) of the IBC. The Tribunal disagreed, stating that the Corporate Debtor's liability as a co-borrower/pledgor is co-extensive with the principal borrower under Section 128 of the Indian Contract Act, 1872. The Tribunal referred to the Hon'ble NCLAT's judgment in SBI vs. Athena Energy Ventures Pvt. Ltd., which held that CIRP can proceed against both the principal borrower and the guarantor.

3. Invocation of Pledged Shares and Reduction of Debt:

The Corporate Debtor argued that the debt stood reduced upon the invocation of the pledged shares and that the Petitioner wrongfully chose not to sell the shares, claiming there were no buyers. The Tribunal noted that the Corporate Debtor's liability remains, and the invocation of the pledge does not absolve it from repaying the debt. The Tribunal emphasized that the liability is co-extensive and joint, and the default in repayment is established.

4. Initiation of CIRP Against the Corporate Debtor:

The Tribunal found that the Petitioner had reasonably established the existence of debt and default, fulfilling the requirements of Section 7 of the IBC. The Tribunal admitted the Petition, initiating the CIRP against the Corporate Debtor and prohibiting certain actions against it during the moratorium period. The Tribunal appointed an Interim Resolution Professional to carry out the functions under the IBC.

Conclusion:

The Tribunal concluded that the Corporate Debtor, as a co-borrower/pledgor, defaulted in repaying the loan, making it liable for the debt. The pledge of shares constituted a financial debt, and the invocation of the pledge did not reduce the outstanding debt. Consequently, the Tribunal admitted the Petition and initiated the CIRP against the Corporate Debtor.

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