2024 (4) TMI 539 - AT - Insolvency and Bankruptcy

Corporate guarantee remains valid despite potential Companies Act violation when principal borrower and guarantor are family-owned group companies

Shri Prem Prakash Bansal Ex- Director of M/s. B.P. Bansal Agritech Private Limited Versus M/s. IDBI Bank Limited, Shri Keyur Shah

The NCLAT dismissed an appeal challenging CIRP initiation based on a corporate guarantee. The tribunal held that despite the guarantee deed potentially ... Initiation of CIRP based on a corporate guarantee provided to a consortium of lenders- Validity of deed of Guarantee - existence of privity of the contract with the Corporate Debtor in relation to the deed of guarantee, or not - authority given by the trusteeship to the Respondents for initiating section 7 application or not - Deed of Guarantee was void under Section 186 of the Companies Act, 2013 or not. Deed of Guarantee - HELD THAT:- The deed of guarantee dated 10.06.2016 to be treated void in view of Section 186 of the Companies Act, 2013 - it is clearly established that both the principal borrower and the Corporate Debtor are family owned group companies which are owned and controlled by the same set of family member - it will be travesty of justice to even consider the arguments of the Appellant to treat the deed of guarantee as void just in order to avoid the financial obligations towards the consortium of lenders. In any case we also observe that at the best the Corporate Debtor was liable for punishment under Section 186 (13) of the Companies Act, 2013 and the Corporate Debtor is not entitled for any illegal enrichment for its own illegal and malafide acting. Lack of privity of contract between the Respondent No. 1 and the Corporate Debtor - HELD THAT:- Clause F of the deed of guarantee specifically provides that 'the Security Trustee acting for the benefit of the IDBI Consortium has called upon the Guarantor to execute this Guarantee in favour of the Security Trustee in favour of the Banks.' This makes it clear that security trustee was to act for the benefit of IDBI Consortium consisting of all four lenders - when the trust is created for the benefit of the beneficiary parties party, such parties are no more strangers to the contract and can step in shoes, to pursue their legal remedies on their own rights - the corporate guarantor is liable to meet its financial obligations. Initiation of application u/s 7 by guarantor or lender - HELD THAT:- The deed of guarantee and security trust agreement goes hand in hand which primarily provide financial security to the lenders for the credit facilities given to the principal borrower - Thus the lender is entitled to initiate and file application under Section 7 of the Code despite they have been engaged trusteeship. The allegation of the Appellant regarding want of support of other three bankers to the Respondent No. 1 are also found baseless as the proposed intervenors for three other lenders supported the CIRP proceedings of the Corporate Debtor and confirm the same during hearing before us and the same has been mentioned in their intervention applications filed in the present appeal. Thus, the contention of the Appellant on this ground stand rejected. Thus, it become clear that the principal borrower and the Corporate Debtor are group companies which are owned and controlled by the same set of close family members and relatives and the corporate guarantee of Rs. 181.29 Cores was duly given by the Corporate Debtor. Appeal dismissed. Issues Involved:1. Validity of the Deed of Guarantee under Section 186 of the Companies Act, 2013.2. Lack of privity of contract between Respondent No. 1 and the Corporate Debtor.3. Authority to initiate the application u/s 7 of the Insolvency & Bankruptcy Code, 2016.4. Requirement of formal meeting and consent from other lenders for filing the application.5. Financial viability of the Corporate Debtor and its status as a going concern.Summary:Validity of the Deed of Guarantee under Section 186 of the Companies Act, 2013:The Tribunal examined Section 186 of the Companies Act, 2013, which restricts companies from giving guarantees exceeding 60% of their paid-up share capital or 100% of their free reserves and securities premium account. The Corporate Debtor provided a corporate guarantee of Rs. 181.29 Crores against an eligible amount of approximately Rs. 6.80 Crores. Despite this, the Tribunal noted that the Corporate Debtor and the Principal Borrower are family-owned group companies controlled by the same set of family members. The Tribunal concluded that the guarantee could not be treated as void to evade financial obligations, and at best, the Corporate Debtor was liable for punishment u/s 186(13) of the Companies Act, 2013.Lack of privity of contract between Respondent No. 1 and the Corporate Debtor:The Tribunal highlighted the role of IDBI Trusteeship Services Limited as the security trustee acting for the benefit of the IDBI Consortium. It was established that the trust created for the benefit of the lenders allowed them to enforce rights independently. The Tribunal referred to several judgments affirming that a beneficiary could enforce rights under a trust, thereby rejecting the lack of privity argument.Authority to initiate the application u/s 7 of the Insolvency & Bankruptcy Code, 2016:The Tribunal reviewed the relevant clauses of the Security Trustee Agreement and Deed of Guarantee, concluding that the lender (Respondent No. 1) was entitled to initiate and file an application u/s 7 of the Code. The Tribunal cited the judgment in Naresh Kumar Aggarwal Vs. CFM Asset Reconstruction Pvt. Ltd., which supported the lender's right to initiate proceedings despite the existence of a trusteeship.Requirement of formal meeting and consent from other lenders for filing the application:The Tribunal found the Appellant's allegation regarding the lack of support from other lenders to be baseless, as the other lenders supported the CIRP proceedings of the Corporate Debtor. The proposed intervenors confirmed their support during the hearing, thereby rejecting the Appellant's contention.Financial viability of the Corporate Debtor and its status as a going concern:The Tribunal noted that the Corporate Debtor's offers for settlement were meager compared to the outstanding liability of Rs. 181.29 Crores. The Tribunal found that the financial health of the Corporate Debtor could not support its liability, and the judgment in Vidharbha Industries Power Limited Vs. Axis Bank Limited did not aid the Corporate Debtor's case.Conclusion:The Tribunal dismissed the appeal, finding no merit in the Appellant's arguments. The appeal was rejected, and no costs were awarded. Interlocutory applications, if any, were closed.