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 ... Admission of Section 7 application filed by the Financial Creditor - invocation of guarantee - application filed by the Financial Creditor is barred by Section 10A of IBC or not - first submission is that notice dated 22.02.2020 was not notice for invoking guarantee of the Corporate Guarantor and guarantee of the Corporate Debtor was only invoked by notice dated 12.02.2021 - non-service of notice dated 22.02.2020 - HELD THAT:- The notice clearly indicates that by the notice Borrower and Guarantors were asked to pay the outstanding amount and the notice clearly mention that in event of failure of payment within seven days, the Financial Creditor shall initiate proceedings under SARFAESI Act including proceedings under the I&B Code - the notice dated 22.02.2020 was notice by which guarantee stood invoked and submission of the Appellant that said notice was not notice of invocation of guarantee, cannot be accepted. In so far as, subsequent notice which was given to the Financial Creditor being notice dated 12.02.2021, it has been submitted by the Financial Creditor that since no payment was made in pursuance of the notice dated 22.02.2020 another letter was issued on 12.02.2021 - Section 7 application filed by the Financial Creditor has been brought on record, which clearly mentioned the notice date as 22.02.2020 which has been referred as Recall Notice issued by the Financial Creditor. When Recall Notice has been issued by the Financial Creditor, the Principal Borrower and Guarantors, liability to pay arises on all and the submission of the Corporate Debtor relying on subsequent notice dated 12.02.2021 cannot affect the right of the Financial Creditor to initiate proceeding on the basis of notice dated 22.02.2020. Even though subsequent notice dated 12.02.2021 was during 10A period but Recall Notice having been issued on 22.02.2020, the Financial Creditor was entitled to initiate Section 7 proceedings against the Principal Borrower as well as the Guarantors. From the facts brought on the record, it is clear that after April, 2018 no payments have been made either by the Principal Borrower or the Corporate Guarantor towards the loan. Certificate issued by NeSL was also brought on the record in support of Application under Section 7 where default has been proved. It is true that date of default i.e. 15.04.2018 was initially date of default of Principal Borrower but Loan Recall Notice had been issued on 22.02.2020 which was addressed to Principal Borrower as well as all Guarantors including the Corporate Debtor – M/s Earthbuild Greencity Private Limited. The application filed by the Financial Creditor cannot be held to be barred by Section 10A. There are no grounds have been made out to interfere with the impugned order passed by the Adjudicating Authority admitting Section 7 application - Appeal is dismissed. 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.