2024 (3) TMI 804 - AT - Insolvency and Bankruptcy

Section 7 application rejected as respondent not guarantor despite providing property security for corporate debtor

UV Asset Reconstruction Company Limited Versus Electrosteel Castings Limited

NCLAT upheld the Adjudicating Authority's rejection of a Section 7 application filed by a financial creditor against a respondent. The tribunal held that ... Rejection of Section 7 Application filed by the Appellant - initiation of CIRP for default of payment of the Financial Debt owed to the Appellant - guarantor of the Financial Facilities or not - Approval of Resolution Plan lead to debt extinguishment or not. Whether the ECL is a ‘guarantor’ to the SREI for the financial facilities availed by ESL from SREI? - HELD THAT:- The submission of the Appellant cannot be accepted that there was clear and categorical admission of Respondent No.1 in the pleadings before Madras High Court and the Hon’ble Supreme Court that Respondent No.1 stood guarantor of the Financial Facilities extended by SREI to ESL - Admittedly, Respondent No.1 mortgaged its immovable property as per the Supplementary Agreement as noted above and pleadings have to be looked into the background that mortgage was made by Respondent No.1 of his immovable property to secure the Facilities. The issue directly arose in proceeding under Section 7, as to whether Respondent No.1 stood guarantor to SREI in reference to Financial Facilities extended to ESL, which has been answered by the Adjudicating Authority taking into consideration all relevant facts. Neither the issue was decided in proceedings before Madras High Court or by the Hon’ble Supreme Court, nor any such admission can be pressed into service as claimed by the Appellant. The Adjudicating Authority in the impugned order after considering all facts and circumstances of the present case has rightly come to conclusion that Respondent No.1 cannot be held to be guarantor to the Financial Facilities extended by Financial Creditor to the ESL. In paragraph 11 of the judgment of the Adjudicating Authority, detailed consideration and reasons have been given for holding that Respondent No.1 is not guarantor of the Financial Facilities. Whether approval of ESL’s Resolution Plan by the Adjudicating Authority led to extinguishment of entire debt of ESL and no claim would lie against Respondent as guarantor/ third party surety in respect of the financial facilities availed by the ESL? - HELD THAT:- Law on extinguishment of claim against personal guarantor and third party on approval of Resolution Plan has been settled by Hon’ble Supreme Court in its judgment in LALIT KUMAR JAIN VERSUS UNION OF INDIA AND ORS. [2021 (5) TMI 743 - SUPREME COURT], where the Hon’ble Supreme Court held that approval of resolution plan does not ipso facto discharge a personal guarantor (of a Corporate Debtor) of her or his liabilities under the contract of guarantee. There cannot be any dispute to the proposition that after the approval of the Resolution Plan, entire debt of the Corporate Debtor against the Financial Creditor stand discharged and after approval of Resolution Plan, Financial Creditor can have no further recourse against the Corporate Debtor. But the question as to whether debt of personal guarantor or third party which arises out of different contract shall also automatically extinguished after the approval of Resolution Plan is a question to be answered in the present case - The Minutes of the CoC throws light on the true interpretation of Clause 3.2 (ix) and cannot be said to be not relevant. When Clause 3.2 (ix) of the Resolution Plan expressly provides that all the debt shall be extinguished against the Company, but it shall not extinguish against personal guarantor and third party, nothing more is required to be looked into. The Respondent cannot be allowed to raise the submission contrary to above Clause of the Resolution Plan, which has received approval. In view of Clause 3.2 (ix) of the Resolution Plan, when read in the light of the CoC Meeting dated 29.03.2018, which throws considerable light on the meaning and content of Clause 3.2 (ix), the submission of the Respondent cannot be accepted that after approval of Resolution Plan, the entire debt stand extinguished and no recourse can be taken by the Financial Creditor against third party. Whether the approval of the Resolution Plan has led to extinguishment and effacement of the entire debt of ESL (including the liability owed by the CD)? - HELD THAT:- In view of Clause 3.2 of the Resolution Plan, which clearly contemplated that all rights/ remedies of the creditors shall stand permanently extinguished against the Company, except any rights against any third party (including the Existing Promoter) in relation to any portion of unsustainable debt secured or guaranteed by third parties. The finding of the Adjudicating Authority that approval of Resolution Plan has led to extinguishment and effacement of the entire debt of ESL has to be held to be finding qua the Corporate Debtor only. There is no finding recorded by the Adjudicating Authority in the impugned order that after approval of the Resolution Plan, it would lead to extinguishment and effacement of the entire debt of third party including the Corporate Debtor. The order of Adjudicating Authority rejecting Section 7 Application filed by the Financial Creditor upheld - appeal disposed off. Issues Involved:1. Whether the ECL is a 'guarantor' to the SREI for the financial facilities availed by ESL from SREIRs.2. Whether approval of ESL's Resolution Plan by the Adjudicating Authority led to the extinguishment of the entire debt of ESL and no claim would lie against the Respondent as guarantor/third-party surety in respect of the financial facilities availed by the ESLRs.Summary:Issue 1: Whether the ECL is a 'guarantor' to the SREI for the financial facilities availed by ESL from SREIRs.The Tribunal examined the relevant clauses of the Rupee Loan Agreement, Deed of Undertaking, and Supplementary Agreement to determine if ECL stood as a guarantor. The Rupee Loan Agreement required the promoter to arrange for the infusion of funds in case of financial covenant breaches, but did not explicitly state that ECL was a guarantor. The Deed of Undertaking obligated ECL to infuse funds into ESL but did not bind ECL to discharge ESL's liabilities directly. A contemporaneous letter from SREI confirmed no requirement for a corporate guarantee from ECL. The Tribunal noted that the Information Memorandum and the Assignment Agreement did not mention any guarantee by ECL. The Tribunal concluded that ECL was not a guarantor, as the documents only obligated ECL to infuse funds into ESL, not to discharge its liabilities.Issue 2: Whether approval of ESL's Resolution Plan by the Adjudicating Authority led to the extinguishment of the entire debt of ESL and no claim would lie against the Respondent as guarantor/third-party surety in respect of the financial facilities availed by the ESLRs.The Tribunal held that the approval of the Resolution Plan does not ipso facto discharge a personal guarantor of their liabilities under the contract of guarantee. Clause 3.2(ix) of the Resolution Plan specified that while the Company would be discharged of any default, any rights against third parties, including guarantors, would not be extinguished. The Tribunal relied on the Minutes of the CoC Meeting, which preserved the rights of creditors against guarantors and third parties. The Tribunal concluded that the approval of the Resolution Plan did not extinguish the debt against third parties, including ECL.Conclusion:The Tribunal upheld the Adjudicating Authority's order rejecting the Section 7 Application filed by the Financial Creditor, confirming that ECL was not a guarantor for the financial facilities availed by ESL from SREI. Additionally, the Tribunal clarified that the approval of the Resolution Plan led to the extinguishment of the debt only against the Corporate Debtor, not against third parties or guarantors.