2024 (1) TMI 1518 - Tri - IBC

Assigned financial debt and guarantor liability in insolvency: assignee treated as financial creditor; s.7 petition admitted, moratorium imposed.

The NCLT held that an assignee of a financial debt qualifies as a 'financial creditor' under s.5(7) IBC, since assignment is a statutorily recognised mode ... Seeking to initiate CIRP - Corporate Debtor has defaulted to make payment - applicant falls under Financial Creditor or not - challenge to assignment agreement - whether there is a “debt” owed to the Financial Creditor and “default” with respect to such debt as envisaged under Section 3 of the Code, 2016 and whether the Financial Creditor is qualified to initiate Section 7 Application against the corporate Debtor? - Date of default - time limitation. Whether there is a “debt” owed to the Financial Creditor and “default” with respect to such debt as envisaged under Section 3 of the Code, 2016 and whether the Financial Creditor is qualified to initiate Section 7 Application against the corporate Debtor? - HELD THAT:- In the present case, it is observed that the Corporate Debtor has raised an objection on the status of the Applicant as “Financial Creditor” under Section 5(7) of the Code, 2016 on the ground that the Assignment Agreement dated 18.01.2021 executed between the SBI (original borrower) and Applicant is not legally enforceable and there exist no privity of contract between the Applicant and the Corporate Debtor. The assignment of debt essentially being a transaction between the Creditor and the Assignee and assignment being recognized by the Code, 2016 as a valid mode of transfer of rights across the ambit of Section 5(7) of the Code, therefore, the entity who received the said assignment of debt falls within the fold of “Financial Creditor‟ - Further, Hon’ble NCLAT in Lalan Kumar Singh v. Phoenix ARC (P) Ltd., [2018 (12) TMI 1648 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL] observed that the declaration of Assignment Agreement is essentially a civil proceeding. Proceedings under Insolvency and Bankruptcy Code, 2016 are summary proceedings and it is beyond the ambit of this Adjudicating authority to delve into the details regarding the requirement or exemption of registration of the Assignment Agreement dated 18.01.2021. Therefore, the assignment agreement cannot be challenged in the petition under Section 7 of the Code, 2016 - The Corporate Debtor failed to bring on record any document to prove that there exists any such provision in the Guarantee Agreement which provides for discharge of the surety before the entire dues guaranteed under the Guarantee Agreement are repaid. Therefore, the liability of the Corporate Debtor cannot be extinguished simply because CIRP has been initiated against the Principal Borrower. Date of default - time limitation - HELD THAT:- In the Suo Moto Writ Petition (C) No. 3 of 2020 in Re: Cognizance for Extension of Limitation [2021 (3) TMI 497 - SC ORDER], the Hon’ble Apex Court took Suo Motu cognizance of the difficulties that might be faced by the litigants and held that “In cases where the limitation would have expired during the period between 15.03.2020 till 28.02.2022, notwithstanding the actual balance period of limitation remaining, all persons shall have a limitation period of 90 days from 01.03.2022. In the event the actual balance period of limitation remaining, with effect from 01.03.2022 is greater than 90 days, that longer period shall apply”. The present application under Section 7 of the Code, 2016 is filed on 25.09.2021 as per the records, which is well within the extended period of limitation as declared by Hon’ble Supreme Court - the ‘financial debt’ is not barred by limitation and the submissions of the Corporate Debtor as to the present application being barred by limitation is not sustainable. Hence, in all respects the ‘debt' as claimed by the Financial Creditor is well within the period of limitation. It is not denied that the Corporate Debtor has committed 'default' in repayment of the said 'financial debt'. The present petition made by the Financial Creditor is complete is all respects as required by law. The Petition established that the Corporate Debtor is in default of a debt due and payable and that the default is more than the minimum amount stipulated under Section 4(1) of the Code, stipulated at the relevant point of time - since this Petition was filed on 25.09.2021, and even admittedly the debt owed to the Financial Creditor is an amount of Rs. 1025,53,60,198.71/- which meets the threshold of Rs. One Crore. The instant Company Petition filed by the CFM Asset Reconstruction Private Limited, the Financial Creditor, under section 7 of the Code read with Rule 4(1) of the Insolvency & Bankruptcy (Application to Adjudicating Authority) Rules, 2016 for initiating CIRP against M.G. Finvest Private Limited, the Corporate Debtor, stands admitted - moratorium declared. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether the applicant, as assignee of a bank's financial assets, qualifies as a 'financial creditor' entitled to maintain an application under Section 7, despite objections that the assignment agreement was unregistered and allegedly unenforceable. (ii) Whether absence of direct privity with the corporate debtor-guarantor (guarantee stated to be in favour of a security trustee) defeats the assignee's right to proceed under Section 7 against the guarantor. (iii) Whether initiation/admission of insolvency proceedings against the principal borrower and admission of the claim therein bars or renders mala fide a Section 7 application against the corporate guarantor for the same debt/default. (iv) Whether the Section 7 application was barred by limitation, including the Tribunal's determination of the relevant default/acknowledgment events and applicability of limitation exclusion during the Covid period. (v) Whether, upon finding financial debt and default above the statutory threshold, the petition was complete and liable to be admitted, and consequential directions including moratorium and appointment of an interim resolution professional were warranted. 2. ISSUE-WISE DETAILED ANALYSIS (i) Status of assignee as 'financial creditor' and objection based on non-registration of assignment Legal framework (as discussed): The Tribunal examined the Code's recognition that a 'financial creditor' includes a person to whom a financial debt has been legally assigned or transferred, and considered the SARFAESI mechanism enabling banks to assign financial assets to an asset reconstruction company, including the statutory exemption from stamp duty for documents executed for such acquisition. Interpretation and reasoning: The Tribunal held that assignment of debt is a transaction between the original creditor and the assignee and is a valid mode of transfer recognized under the Code for conferring 'financial creditor' status. It rejected the corporate debtor's attempt to defeat maintainability by challenging enforceability of the assignment agreement on the basis of alleged non-registration. The Tribunal reasoned that, in view of SARFAESI's enabling provision for assignment to an asset reconstruction company and the statutory exemption for such documentation, the contention that the assignment was unenforceable merely because it was unregistered was not accepted. It further treated any challenge to validity of the assignment agreement as falling outside the scope of Section 7 summary jurisdiction. Conclusion: The applicant, having acquired the debt by assignment, was held to fall within the fold of 'financial creditor' and was entitled to maintain the Section 7 application; objections founded on alleged non-registration/enforceability were repelled for purposes of Section 7 adjudication. (ii) Privity/guarantee in favour of security trustee and assignee's entitlement to proceed against corporate guarantor Interpretation and reasoning: The Tribunal held that assignment does not alter the corporate debtor's subsisting liability and obligations to discharge the guaranteed debt. Upon assignment, the assignee 'steps into the shoes' of the original lender and can enforce the transferred rights, including rights arising from the financing documents and related security/guarantees. The corporate debtor's plea that the guarantee was in favour of a security trustee and therefore only the trustee could proceed was not accepted as a bar to the assignee's Section 7 remedy, particularly since the applicant's rights flowed from the original lender's assigned rights. Conclusion: Lack of alleged privity with the assignee was not a valid defence; the corporate debtor's guarantee liability remained enforceable by the assignee in Section 7 proceedings. (iii) Alleged duplicate/mala fide claims due to insolvency proceedings against the principal borrower Legal framework (as applied): The Tribunal applied the principle that the liability of a surety is coextensive with that of the principal debtor, unless otherwise provided by contract. Interpretation and reasoning: The Tribunal rejected the argument that commencement of insolvency proceedings against the principal borrower (and admission of the claim there) extinguished or barred proceedings against the corporate guarantor. It noted that the corporate debtor failed to produce any contractual term providing for discharge of the surety prior to repayment of the guaranteed dues. Accordingly, the guarantor's liability could not be avoided merely because proceedings were initiated against the principal borrower. Conclusion: The Section 7 application against the corporate guarantor was maintainable and not defeated as a 'duplicate claim' merely because insolvency proceedings were pending/admitted against the principal borrower for the same debt. (iv) Limitation and date of default/acknowledgment Legal framework (as discussed/applied): The Tribunal considered acknowledgment principles under limitation law and also applied the Supreme Court's Covid-related extension/exclusion of limitation periods. It assessed whether the debt was time-barred on the filing date. Interpretation and reasoning: While the corporate debtor disputed the applicant's stated default date (being linked to a demand notice), the Tribunal examined records indicating acknowledgment events attributable to the corporate debtor, including execution of revival letters and later pleadings in recovery proceedings. The Tribunal also treated the account's classification as non-performing asset as a relevant reference point for limitation analysis. Importantly, even on a limitation computation starting from the NPA date, the Tribunal held that the filing fell within the period saved by the Supreme Court's Covid limitation orders, and therefore the application filed on 25.09.2021 was within limitation. Conclusion: The Tribunal conclusively held that the financial debt was not barred by limitation and the limitation objection was unsustainable. (v) Existence of financial debt, default, completeness of application, admission, moratorium, and consequential directions Legal framework (as applied): The Tribunal applied the Section 7 admission test: existence of a financial debt, occurrence of default, and completeness of the application, along with the statutory threshold amount. It also applied the moratorium consequences under Section 14. Interpretation and reasoning: On the material placed, the Tribunal found that the applicant established a financial debt owed by the corporate debtor (as guarantor) and a continuing default. It held the petition to be complete in all respects and that the amount in default exceeded the then-applicable minimum threshold. Consistent with the Section 7 framework, once debt and default were shown, admission followed. Upon admission, the Tribunal directed commencement of the corporate insolvency resolution process, appointed an interim resolution professional (subject to filing of required authorization/consent documentation), ordered public announcement within the prescribed period, and required an upfront deposit towards initial process expenses. The Tribunal also imposed a moratorium with the stated statutory prohibitions and clarified the stated exclusions/limitations to moratorium as set out in the order. Conclusion: The Section 7 application was admitted; CIRP was commenced with appointment of an interim resolution professional, declaration of moratorium, directions for public announcement, and ancillary cooperation/protection directions to enable conduct of the process.