2022 (1) TMI 1073 - AT - Insolvency and Bankruptcy

Tribunal upholds Financial Creditor's application under Insolvency Code, affirms guarantor's liability

Mr. Sabbas Winifred Joseph Suspended Director of Wizcraft International Entertainment Private Limited Versus IDBI Bank Limited, Mr. Praveen Bansal AAA Insolvency Professional LLP

The Tribunal dismissed the appeal, upholding the Adjudicating Authority's order to admit the application filed by the Financial Creditor under Section 7 ... Maintainability of application - initiation of CIRP - Corporate Debtor failed to make repayment of its dues - Appellant’ submits that the Appellant/Corporate Debtor is not the Principal Borrower but who issued a Guarantee which stood discharged from all the obligations by operation of Law, in terms of the Indian Contract Act, 1872 - time limitation - Right of Surety - Contract of ‘Guarantee - Indian Contract Act, 1872 - HELD THAT:- This ‘Tribunal’ significantly points out that when a ‘Demand’ is made on the ‘Guarantor’ and when the 1st Respondent/Bank had invoked the ‘Bank Guarantee’ against the ‘Corporate Debtor’ on 08.12.2014 and also issued a ‘Demand Notice’ to the ‘Corporate Debtor’ on 25.08.2017 and a ‘Reply’ was furnished to the 1st Respondent/Bank by the ‘Corporate Debtor’ on 27.09.2017 wherein at paragraph 2, the ‘Corporate Debtor’ had stated in a ‘crystalline and unequivocal term’ that it was required to pay to the Bank, due amount of ₹ 48.39 crores and also at paragraph 6 had made a request to the 1st Respondent/Bank not to initiate any action under IBC etc. and in the teeth of the ‘Debt’ being not time barred against the ‘Principal Debtor’, the ‘Limitation’ begins to run only cementing on the ‘Demand’ made for the repayment of due amount as opined by this ‘Tribunal’. As a matter of fact, in the ‘Reply’ dated 27.09.2017 of the ‘Corporate Debtor’ addressed to the 1st Respondent/Bank, the Corporate Debtor had mentioned ‘GNIC has failed to pay its dues to IDBI, as a result of which IDBI has invoked the abovementioned Guarantees and called upon Wizcraft to pay IDBI their due of ₹ 48.39 crores’. Therefore, the aforesaid contents of Reply dated 27.09.2017 of the Corporate Debtor is ‘an acknowledgement of liability’. Also that a ‘Debt’ liability of a person can be projected and enforced by a ‘Creditor’ through initiation of numerous proceedings known to Law - If an ‘Acknowledgement’ is valid, then, there is no fetter in ‘Law’ whereby the liability against the particular person/entity can be enforced, in accordance with Law. In Law, an ‘Acknowledgement of Liability’ merely extends the limitation period and does not create a’ new right of action’. A ‘Guarantor’ is one who ‘Guarantees’ to ‘perform the promise’ of or ‘discharge the liability of a person’ for whom he stands Guarantee. In regard to any ‘Debt’ incurred by ‘Principal’ during the currency of ‘Guarantee’ the ‘Surety’ is liable as long as the ‘Debt’ is recoverable from ‘Principal’. It does not matter that the ‘Principal’ has kept the ‘Debt’ alive by an ‘acknowledgement’ under Section 19 of the Limitation Act, 1963 or by payments under Section 20 of the Limitation Act for, by these actions, there is no ‘Renewal of Debt’ and no new ‘Debt’ is created, which is not covered by ‘Guarantee’. As a matter of fact, the ‘Debt’ remains the same, viz., the ‘Debt’ ‘Guaranteed’ and only the ‘bar of time’ against recovery is postponed - An Agreement executed by a ‘Guarantor’ is a separate and collateral contract distinct from the contract of debt between ‘Principal Debtor’ and ‘Creditor’. It cannot be brushed aside that an ‘Acknowledgement of Liability’ will save liability only against the person who acknowledges the liability. A ‘Financial Creditor’ is entitled to initiate ‘CIRP’ against a ‘Guarantor’ or ‘Surety’ although the Creditor holds enough security over the assets. A Surety has no right to dictate terms to the ‘Creditor’ as to how he ought to make a ‘recovery’ and pursue his remedies against the ‘Principal Debtor’ at his instance - The ‘Financial Creditor’ has the option of commencing the ‘Insolvency’ proceeding against the ‘Corporate Grantor’ only without even resorting to any legal proceeding against the ‘Corporate Debtor’. Admittedly, there is an ‘undischarged live liability’ and the amount due to the Bank has not been paid by the ‘Corporate Debtor/Guarantor’ of the ‘Principal Debtor’. For the undischarged live liability for which the ‘Guarantor’/Corporate Debtor has obliged by its three ‘Corporate Guarantee Agreements’ dated 26.06.2009, 25.02.2010 and 14.01.2013, it is undoubtedly responsible for the liability of ‘Principal Debtor’ - this ‘Tribunal’ unhesitatingly comes to a consequent conclusion that the ‘Guarantor’ had waived all rights as ‘Surety’ and assumed more liability. As far as the present case is concerned, the ‘Corporate Debtor’ through its Reply/letter dated 27.09.2017 addressed to the 1st Respondent/Bank had mentioned that it understood the ‘GNIC/Principal Borrower’ had failed to pay its dues to IDBI (1st Respondent) of which the IDBI had invoked the ‘Bank Guarantees’ and called upon the ‘Corporate Debtor/Guarantor’, to pay the Bank the dues of ₹ 48.39 crores and also the ‘Corporate Debtor/Guarantor’ had requested the 1st Respondent/Bank not to initiate any action under the I&B Code etc. and this Letter/Reply dated 27.09.2017 is an ‘Acknowledgement’ of the ‘Debt’ which extends the period of ‘Limitation’ in conformity with Section 18 of the Limitation Act, 1963 - In order to sustain an ‘Application’ under Section 7 of the Code, an applicant must satisfy the conscious of the ‘Adjudicating Authority’ about the existence of ‘Debt’ which is due from the ‘Corporate Debtor’. It is true that the ‘Adjudicating Authority’ is to find out whether there is ‘Debt’ and ‘Default’ committed by the ‘Corporate Debtor’. Always it is open to the Corporate Debtor that a ‘Default’ had not occurred. Moreover, it is open to the ‘Corporate Debtor’ to point out that the ‘Debt’ is not payable by it either in Law or in fact. In the instant case, the ‘Corporate Debtor/Guarantor’ had committed ‘Default’, as per the ingredients of Section 3(2) of the Code. The Section 7 Application under the Code was filed before the ‘Adjudicating Authority’ on 01.08.2019 by the 1st Respondent/Bank. Notwithstanding the fact that the ‘Account’ of the ‘Principal Borrower’(Great Indian Nautanki Company Private Limited) was classified as ‘Non-Performing Asset’ by the First Respondent/Bank in the instant case on hand, in regard to the ‘Debt’ incurred by the Principal Borrower for the ‘Loans’ availed by it and that the ‘Corporate Guarantee Agreements’ dated 26.06.2009, 25.02.2009 and 14.01.2013 were executed by the ‘Corporate Debtor’/Promoter Company of the Principal Borrower and since there is an undischarged ‘Live Liability’, in that the ‘Debt’ due and payable to the First Respondent/Bank was not paid by the ‘Principal Debtor’, by virtue of the aforesaid three ‘Corporate Guarantee Agreements’(‘Corporate Guarantee’) , the ‘Corporate Debtor’ is responsible for the liability of the ‘Principal Borrower’/ Great Indian Nautanki Company Private Limited. This ‘Tribunal’ keeping in mind of a primordial fact that the ‘Debt Liability’ is arising from the Guarantee, which is due and payable as per the invocation of ‘Corporate Guarantee’ by the First Respondent/Bank on 08.12.2014 and the ‘Guarantee Agreements’ are ‘Independent Rights’, containing separate and reciprocal obligations and taking note of the fact that the ‘Corporate Debtor’ had issued a Reply on 27.09.2017 to the ‘Demand Notice’ of the First Respondent/Bank dated 25.08.2017, which is an ‘Acknowledgment’ of Liability of the ‘Corporate Debtor’ which extends the period of Limitation from 27.09.2019 to 26.09.2020 under the Limitation Act, 1963 (even though the ‘Account’ of the Principal Borrower was classified as NPA on 29.07.2014) and as such, the Section 7 Application filed by the First Respondent/Bank on 01.08.2019 is well within the period of three year’s Limitation Period as held by this ‘Tribunal’ - the ‘impugned order’ of admitting the Application filed by the First Respondent/Bank (under Section 7 of the I & B Code, 2016) against the ‘Corporate Debtor’, by the ‘Adjudicating Authority’ is free from legal flaws. Application dismissed. Issues Involved:1. Limitation Period for Filing the Application2. Invocation of Corporate Guarantee3. Acknowledgment of Debt4. Liability of the Corporate Debtor as a Guarantor5. Jurisdiction and Validity of the Adjudicating Authority's Order6. Rights and Obligations under the Indian Contract Act, 1872Detailed Analysis:1. Limitation Period for Filing the Application:The primary issue was whether the application filed under Section 7 of the Insolvency and Bankruptcy Code (IBC) by the Financial Creditor was time-barred. The Adjudicating Authority held that the limitation period could be extended under Section 18 of the Limitation Act, 1963, due to the acknowledgment of debt by the Corporate Debtor through a letter dated 27.09.2017. The Tribunal upheld this view, stating that the acknowledgment of liability extended the limitation period, making the application filed on 01.08.2019 within the permissible period.2. Invocation of Corporate Guarantee:The Corporate Debtor argued that the invocation of the guarantee on 08.12.2014 could not be the date of default. The Tribunal clarified that the guarantee was an independent contract, and the liability of the guarantor arises upon the invocation of the guarantee. The Tribunal emphasized that the invocation date is crucial for calculating the limitation period against the guarantor.3. Acknowledgment of Debt:The Corporate Debtor's letter dated 27.09.2017 was deemed an acknowledgment of debt under Section 18 of the Limitation Act, 1963. The Tribunal noted that this acknowledgment extended the limitation period, allowing the Financial Creditor to file the application within the extended period. The letter explicitly mentioned the Corporate Debtor's understanding of the dues and requested the Financial Creditor not to initiate insolvency proceedings, which constituted an acknowledgment of liability.4. Liability of the Corporate Debtor as a Guarantor:The Tribunal reiterated that a guarantor's liability is co-extensive with that of the principal debtor, as per Section 128 of the Indian Contract Act, 1872. The guarantor's obligation to pay arises upon the principal debtor's default and the creditor's demand. The Tribunal upheld that the Corporate Debtor, as a guarantor, was liable for the principal debtor's dues, which were not time-barred.5. Jurisdiction and Validity of the Adjudicating Authority's Order:The Corporate Debtor challenged the jurisdiction and validity of the Adjudicating Authority's order. The Tribunal found no legal flaws in the Adjudicating Authority's decision to admit the application under Section 7 of the IBC. The Tribunal emphasized that the Financial Creditor had the right to initiate insolvency proceedings against the guarantor without exhausting remedies against the principal debtor.6. Rights and Obligations under the Indian Contract Act, 1872:The Corporate Debtor argued that the Financial Creditor's actions, such as granting further time to the principal borrower without the guarantor's consent, discharged the guarantor's liability under Sections 135 and 139 of the Indian Contract Act, 1872. The Tribunal rejected this argument, citing clauses in the guarantee agreements that allowed the Financial Creditor to vary the loan terms without affecting the guarantor's liability. The Tribunal concluded that the guarantor had waived all suretyship rights and assumed more liability.Conclusion:The Tribunal dismissed the appeal, upholding the Adjudicating Authority's order to admit the application filed by the Financial Creditor under Section 7 of the IBC. The Tribunal found that the application was filed within the extended limitation period due to the acknowledgment of debt by the Corporate Debtor. The Tribunal also confirmed the guarantor's liability and the validity of the Adjudicating Authority's jurisdiction and order.