2024 (3) TMI 290 - AT - Insolvency and Bankruptcy

Financial creditor can proceed against corporate guarantor when guarantee invoked before Section 10A moratorium period

The NCLAT Principal Bench dismissed an appeal challenging admission of a Section 7 application filed by a financial creditor against a corporate ... Invocation of corporate guarantee - maintainability of Section 7 application under the Insolvency and Bankruptcy Code - bar under Section 10A of the Insolvency and Bankruptcy Code - recall notice as notice of invocation - substituted service and ex parte proceedings - proof of default by NeSL certificateInvocation of corporate guarantee - recall notice as notice of invocation - bar under Section 10A of the Insolvency and Bankruptcy Code - maintainability of Section 7 application under the Insolvency and Bankruptcy Code - proof of default by NeSL certificate - Validity of the Financial Creditor's Section 7 claim against the corporate guarantor founded on the Loan Recall Notice dated 22.02.2020 and whether the subsequent notice dated 12.02.2021 (during the Section 10A period) barred the Section 7 application. - HELD THAT: - The Tribunal held that the Loan Recall Notice dated 22.02.2020 was addressed to the borrower as well as the mortgagors and guarantors and expressly called upon the guarantors to pay the outstanding amount within seven days, warning of initiation of proceedings under SARFAESI and the IBC in case of non-payment; consequently, the recall notice operated as notice of invocation of the guarantee. The fact that a subsequent notice was issued on 12.02.2021 (during the Section 10A period) did not erase or supersede the recall notice of 22.02.2020, and therefore did not render the Section 7 application barred. The Section 7 application itself pleaded the recall notice of 22.02.2020 as the basis of claim and relied upon supporting material including a NeSL certificate proving default. The Tribunal concluded that the claim against the corporate guarantor was maintainable and not hit by the Section 10A bar. [Paras 9, 10, 11, 12, 13]The Loan Recall Notice dated 22.02.2020 constituted invocation of the corporate guarantee and the Section 7 application based on that notice was maintainable and not barred by the Section 10A period.Substituted service and ex parte proceedings - maintainability of Section 7 application under the Insolvency and Bankruptcy Code - Whether substituted service effected by publication and the corporate debtor's non-appearance justified ex parte admission of the Section 7 petition. - HELD THAT: - The Tribunal noted that the Adjudicating Authority permitted substituted service by order dated 07.12.2022 directing publication in one Hindi and one English newspaper circulating in the locality of the corporate debtor's registered office. Affidavits of service were filed showing publication in Amar Ujala and Times of India in January 2023. Despite substituted service and further opportunities, the corporate debtor did not appear or file any reply or raise any defence to the recall notice or the Section 7 petition. In those circumstances the Adjudicating Authority was entitled to proceed ex parte and admit the application. [Paras 6, 7, 8, 12]Substituted service by newspaper publication was properly ordered and proved, and the corporate debtor's failure to appear or contest warranted ex parte admission of the Section 7 petition.Final Conclusion: The appeal is dismissed: the Tribunal upheld the Adjudicating Authority's admission of the Section 7 petition against the corporate guarantor, holding that the recall notice dated 22.02.2020 invoked the guarantee (precluding a Section 10A bar) and that substituted service and the corporate debtor's non-appearance justified ex parte admission. ISSUES PRESENTED AND CONSIDERED 1. Whether the Section 7 application against the corporate guarantor is barred by operation of Section 10A due to invocation of the guarantee during the Section 10A moratorium period. 2. Whether the Loan Recall Notice dated 22.02.2020 constituted a valid invocation of the guarantee against the corporate guarantor and thereby fixed the liability prior to the Section 10A period. 3. Whether service (including substituted service by newspaper publication) of the recall/notice upon the corporate guarantor was adequate for proceeding under Section 7 and whether the corporate guarantor's failure to appear or to file a reply precludes reliance on defects in service or on the date of invocation. 4. Whether the Financial Creditor proved default sufficient to sustain admission under Section 7 against the corporate guarantor. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Whether Section 7 is barred by Section 10A because the guarantee was invoked during the Section 10A period Legal framework: Section 10A imposes a moratorium on initiation of certain insolvency proceedings during specified period(s). Section 7 permits a financial creditor to initiate corporate insolvency resolution process where default is proved. The interplay requires examining the date on which liability arose and whether invocation of guarantee occurred within the Section 10A moratorium. Precedent treatment: The Court relied on the statutory scheme distinguishing recall/notice dates that fix liability from subsequent correspondence; it treated established recall notices as operative for determination of whether proceedings were initiated before or after the Section 10A moratorium. Interpretation and reasoning: The Court found that the Loan Recall Notice dated 22.02.2020, addressed to the borrower and to guarantors, called upon payment within seven days and expressly warned of initiation of proceedings under the IBC in case of non-payment. The subsequent notice of 12.02.2021 did not affect the prior recall notice. Since the recall notice fixed liability on 22.02.2020 (well before Section 10A period), the Section 7 application was not barred by Section 10A even though a later notice was issued during the 10A period. Ratio vs. Obiter: Ratio - where an initial recall/recall-like notice fixing the liability against borrower and guarantor is issued before the Section 10A moratorium, a subsequent notice during Section 10A does not oust the Financial Creditor's right to initiate proceedings under Section 7 based on the earlier recall. Obiter - remarks on the irrelevance of subsequent notices to resurrect or displace earlier invoked obligations in different circumstances. Conclusion: Section 10A did not bar the Section 7 application because the guarantee was invoked by the Loan Recall Notice dated 22.02.2020, prior to the Section 10A period; thus the application was maintainable. Issue 2 - Whether the Loan Recall Notice dated 22.02.2020 constituted valid invocation of the guarantee Legal framework: The invocation of a guarantee requires communication placing the guarantor on notice of demand and consequences; insolvency proceedings under Section 7 can be predicated on such invocation where default exists. Precedent treatment: The Court treated the language of the recall notice and its addressees (borrower, mortgagors, guarantors) as determinative; prior decisions recognizing that a notice calling upon guarantors to pay and threatening IBC proceedings suffices as invocation were followed. Interpretation and reasoning: The recall notice explicitly addressed borrowers and guarantors, demanded payment within seven days, and warned of initiation of proceedings under the SARFAESI Act and the IBC. The Court concluded the notice unequivocally invoked the guarantee and fixed liability of the corporate guarantor on 22.02.2020. The existence of a subsequent notice did not negate or replace the earlier invocation. Ratio vs. Obiter: Ratio - a recall notice addressed to guarantors demanding payment and warning of IBC proceedings constitutes invocation of guarantee for purposes of initiating Section 7 proceedings; subsequent correspondence does not negate such earlier invocation. Obiter - none significant beyond emphasising ordinary meaning of such notices. Conclusion: The Loan Recall Notice dated 22.02.2020 validly invoked the guarantee against the corporate guarantor and therefore established a pre-Section 10A basis for the Section 7 application. Issue 3 - Adequacy of service (including substituted service) of the recall/notice and consequence of corporate guarantor's non-appearance Legal framework: Procedural requirements permit substituted service where personal service cannot be effected; affidavit of service of substituted publication satisfies service requirements for adjudicatory proceedings; failure to appear after adequate service permits ex parte consideration. Precedent treatment: The Court applied settled principles allowing substituted service by publication in newspapers where the registered office address is defective and evidence of such publication in specified newspapers is filed as affidavit of service; the Court emphasised opportunity to appear and to file reply following substituted service. Interpretation and reasoning: The Adjudicating Authority ordered substituted service after a report of incomplete address. The Financial Creditor published notices in two newspapers (Hindi and English editions) prevalent in the locality and filed affidavit of service. Despite being afforded further opportunity, the corporate guarantor did not appear or file any reply. The Court held that the corporate guarantor's failure to contest the recall notice or service before the Adjudicating Authority undermined its present contention that the 22.02.2020 notice was not served or did not invoke guarantee. Ratio vs. Obiter: Ratio - where substituted service is ordered and publication is effected in accordance with the order and proved by affidavit, service is adequate; failure of the corporate guarantor to appear or file a reply after such service precludes belated challenges to service or to the content of the recall notice in the appellate forum. Obiter - emphasis that opportunities given by the Adjudicating Authority must be availed by the addressee to raise defenses. Conclusion: Substituted service by newspaper publication as directed was adequate; the corporate guarantor's non-appearance and failure to file defenses before the Adjudicating Authority preclude reliance on alleged non-service or late invocation in this appeal. Issue 4 - Whether default was proved to sustain admission under Section 7 against the corporate guarantor Legal framework: Section 7 requires proof of default by the financial creditor, typically by records and certificates (e.g., NeSL certificate), and demonstration that the debtor is unable to meet its liabilities. Precedent treatment: The Court relied on documentary evidence filed in the Section 7 application, including the Loan Recall Notice and NeSL certificate, and on the admitted proceedings against the principal borrower where the same recall notice was operative. Interpretation and reasoning: The record showed no payments after April 2018 by either the principal borrower or the corporate guarantor. The Financial Creditor produced a NeSL certificate evidencing default. The Section 7 application expressly relied on the 22.02.2020 recall notice and indicated an earlier date of default (15.04.2018). Given these materials and the guarantor's failure to contest, the Court concluded the default was established sufficiently for admission. Ratio vs. Obiter: Ratio - documentary proof including a recall notice and NeSL certificate, together with absence of rebuttal by the guarantor, suffice to establish default for admission under Section 7. Obiter - none material beyond reaffirming evidentiary sufficiency where uncontested. Conclusion: Default was adequately proved as to both the principal borrower and the corporate guarantor; therefore admission under Section 7 was proper. Overall Conclusion Given that the guarantee was invoked by the Loan Recall Notice dated 22.02.2020 (prior to Section 10A), that substituted service was effected as ordered and remained uncontested, and that default was established by documentary evidence (including NeSL certificate), the Section 7 application was maintainable and the Adjudicating Authority's admission of the application and appointment of the IRP required no interference.