2024 (11) TMI 1287 - AT - IBC

Personal guarantors excluded from Committee of Creditors as they lack financial creditor status under Section 5(8)(i) IBC

Mr. Suresh Kumar, Mr. Raj Kumar Versus Central Bank of India

NCLAT dismissed appeal challenging exclusion of personal guarantors from Committee of Creditors. The tribunal held that under Section 5(8)(i) of IBC, ... Re-constitution of the Committee of Creditors (CoC) by excluding Appellants - misinterpretation of provisions of Section 140 of the Indian Contract Act - Application filed by the Central Bank of India, Appellants were not heard - violation of principles of natural justice - whether the Appellant are the Financial Creditor of the Corporate Debtor and they are entitled to be part of the CoC as has been allowed by the RP, which inclusion has been set aside by the Adjudicating Authority by the Impugned Order? HELD THAT:- The plain language of Section 5(8)(i) clearly indicates that any of the Guarantee or indemnity for any of the items referred to in sub-Clauses (a) to (f) may also be Financial Debt. In event, there is any “amount of any liability in respect of”. Thus, by giving Guarantee to a transaction referred to in (a) to (i) will not be covered by Financial Debt unless there is any liability in respect of the Guarantee. Thus, Guarantee given by a Guarantor plain and simple cannot be basis for a Financial Debt, unless there is an amount of any liability in respect of such Guarantee. Thus, a Financial Debt will arise only when in respect to Guarantee as covered by Section 5(8)(i) any liability has arisen which is the Statutory Scheme of the IBC - Personal Guarantors claim which obviously will be ₹10 Crore each is accepted the Bank’s voting share shall be reduced to only 20% and 3 Guarantors shall be given 20% vote shares each and 1 Guarantor against whom ₹25 Lakhs have been realised, his claim shall be entitled to be accepted, and he shall also be entitled for voting shares of 2.5%. The above interpretation shall lead to reducing the Bank’s share to minority, which cannot be the scheme of IBC. The Statutory Scheme is thus clear that for accepting transaction as a Financial Debt, in addition of establishing a Guarantee or indemnity liability in respect of Guarantee has also to be established - The Personal Guarantor while giving the Guarantee for Guarantee of repayment to the loan has guaranteed for repayment of the loan, in event, principal failed to make a payment to the Guarantor. Thus, Guarantor in the present case has to make payment and performance of all that is liable for is payment to the Bank none-else. Personal Guarantors who have not made any payment in discharge of their Guarantee given to the Central Bank of India cannot be accepted as Financial Creditor of the Corporate Debtor, nor any voting share can be allocated to them in the CIRP of the Corporate Debtor.There are no error in the Order of the Adjudicating Authority holding that Appellants who have not made any payment to the Creditor cannot be treated to be a Financial Creditor. There is no infirmity in the Order passed by the Adjudicating Authority allowing I.A. No. 294/2020 filed by the Bank. Appeal dismissed. Issues Involved:1. Whether the Appellants, as Personal Guarantors, can be considered Financial Creditors of the Corporate Debtor.2. Interpretation of Section 140 of the Indian Contract Act regarding the rights of surety.3. The legality of the reconstitution of the Committee of Creditors (CoC) excluding the Appellants.4. Whether the Appellants' claim should be treated as a contingent claim.Detailed Analysis:1. Whether the Appellants, as Personal Guarantors, can be considered Financial Creditors of the Corporate Debtor:The primary issue revolves around whether the Appellants, who are Personal Guarantors for the Corporate Debtor's loan, can be considered as Financial Creditors in the Corporate Insolvency Resolution Process (CIRP). The Adjudicating Authority had excluded the Appellants from the CoC on the grounds that they had not made any payments towards the discharge of their guarantee. The Tribunal examined the statutory scheme under the Insolvency and Bankruptcy Code (IBC), specifically Section 5(8)(i), which defines 'financial debt' to include liabilities in respect of guarantees. The Tribunal concluded that a Financial Debt arises only when there is an actual liability in respect of the guarantee. Since the Appellants had not made any payment, they did not have a right to payment against the Corporate Debtor, and thus could not be considered Financial Creditors.2. Interpretation of Section 140 of the Indian Contract Act regarding the rights of surety:The Appellants argued that under Section 140 of the Indian Contract Act, a surety is invested with the rights of the creditor upon payment or performance of the guaranteed obligation. They contended that their mortgage of immovable assets to secure the loan constituted performance. However, the Tribunal emphasized that the statutory language requires actual payment or performance of the obligation for the surety to assume the creditor's rights. The Tribunal referred to precedents, including a Supreme Court judgment, to affirm that mere provision of a guarantee does not entitle the guarantor to creditor rights unless a liability has been discharged.3. The legality of the reconstitution of the Committee of Creditors (CoC) excluding the Appellants:The Tribunal upheld the Adjudicating Authority's decision to reconstitute the CoC by excluding the Appellants. The Authority had found that the inclusion of the Appellants, who had not paid any amount towards the debt, was improper. The Tribunal supported this view, noting that the inclusion of guarantors without actual payment would lead to an inequitable reduction of the voting share of the Central Bank of India, the primary creditor. This would contradict the statutory scheme of the IBC, which aims to maintain the integrity of the CoC's composition and voting power.4. Whether the Appellants' claim should be treated as a contingent claim:The Appellants argued that their claims should be recognized as contingent claims. The Tribunal observed that if any amount is recovered from the Appellants before the conclusion of the CIRP, they could present this information to the Resolution Professional for consideration. However, as of the Tribunal's judgment, no such payment had been made, and thus the Appellants' claims could not be recognized as contingent claims.In conclusion, the Tribunal dismissed the appeal, affirming the Adjudicating Authority's decision to exclude the Appellants from the CoC and rejecting their claims as Financial Creditors. The Tribunal clarified the statutory interpretation of financial debt and the rights of sureties under the IBC and the Indian Contract Act, reinforcing the requirement for actual payment or liability discharge for claims to be recognized in insolvency proceedings.