NCLAT allows Section 7 application based on second corporate guarantee invocation after COVID moratorium ended

NCLAT allowed appeal challenging dismissal of Section 7 application for CIRP initiation. The case involved corporate guarantee invocations during COVID-19 moratorium period under Section 10A IBC. NCLAT held that multiple invocations of continuing guarantees are permissible where first invocation on 05.03.2021 was limited in scope covering only working capital and term loan facilities. Second invocation on 09.12.2022 included broader liabilities like non-fund based exposures and treasury dues, made after Section 10A period ended. Since Section 7 application filed on 11.01.2023 was based on second invocation with updated computation, it was not barred by Section 10A moratorium provisions.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

(i) Whether the second invocation of the corporate guarantee dated 09.12.2022 constitutes a fresh default and a new cause of action occurring beyond the Section 10A exclusion period under the Insolvency and Bankruptcy Code, 2016 (IBC);

(ii) Whether multiple invocations of continuing corporate guarantees are permissible under the contractual terms and applicable law;

(iii) Whether the Section 7 petition filed by the Financial Creditor based on the second invocation is maintainable despite an earlier invocation within the Section 10A bar period;

(iv) The applicability and interpretation of Section 10A of the IBC, which prohibits filing insolvency applications for defaults occurring during the COVID-19 related moratorium period (25.03.2020 to 25.03.2021); and

(v) The evidentiary sufficiency and pleading requirements for establishing default and invocation of guarantees under Section 7 applications.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Whether the second invocation dated 09.12.2022 reflects a fresh default beyond the Section 10A exclusion periodRs.

The relevant legal framework includes Section 10A of the IBC, which bars initiation of insolvency proceedings for defaults occurring between 25.03.2020 and 25.03.2021, extended by notifications till 25.03.2021. The Appellant's Section 7 petition was dismissed by the Adjudicating Authority on the ground that the date of default was the invocation dated 05.03.2021, falling within the barred period.

The Appellant contended that the petition was not based on the invocation dated 05.03.2021 but on a fresh and independent invocation dated 09.12.2022, which occurred well after the Section 10A period. The invocation on 09.12.2022 was supported by a detailed computation dated 08.12.2022, reflecting continuing default and including additional liabilities not covered in the first invocation.

The Respondent argued that the second invocation was not a valid invocation of the guarantee but merely a demand to maintain a Debt Service Reserve Account (DSRA), which had no contractual basis. They further asserted that the first invocation was full and final and no subsequent invocation was permissible.

The Tribunal examined the pleadings and documents, including the Form-1 application and annexures. It was found that the first invocation dated 05.03.2021 was limited to certain fund-based facilities and occurred within the Section 10A bar period. The second invocation dated 09.12.2022 was a distinct demand based on a comprehensive computation including non-fund-based exposures, DSRA shortfall, and treasury dues, which were not part of the first invocation.

The Tribunal noted that the second invocation was pleaded in Part V of Form-1 and supported by documentary evidence, including the demand letter and computation. The invocation was unconditional and demanded payment within seven days, constituting a fresh default post Section 10A period.

Applying the law to facts, the Tribunal held that the second invocation constituted a new cause of action and default outside the Section 10A exclusion period, making the Section 7 petition maintainable.

Issue (ii): Whether multiple invocations of continuing guarantees are permissibleRs.

The guarantees executed by the Respondent were described as continuing, irrevocable, unconditional, and on-demand. Relevant clauses (Clause 7 of Guarantee II and Clause 18 of Guarantee I) expressly provided that the guarantee would not be exhausted by partial payments or earlier demands and would continue until full repayment of all dues.

Section 129 of the Indian Contract Act, 1872, defines a continuing guarantee as one that remains in force until revoked or the obligation is fully satisfied, allowing multiple successive demands. The Tribunal relied on authoritative precedents, including the Supreme Court's decision in Dena Bank v. C. Shivakumar Reddy, which recognized that repeated defaults under a continuing obligation give rise to fresh causes of action.

The Tribunal further cited Kotak Mahindra Bank Ltd. v. Anuj Kumar, which held that creditors may make successive demands under continuing guarantees as long as the debt remains unpaid.

The Respondent's argument that the first invocation exhausted the right to invoke the guarantee was rejected as unsupported by contract or law. The guarantees' express language and the parties' conduct demonstrated a subsisting liability permitting multiple invocations.

The Tribunal concluded that multiple invocations under the continuing corporate guarantees were permissible and that the second invocation was valid and enforceable.

Issue (iii): Maintainability of Section 7 petition based on second invocation despite earlier invocation within Section 10A bar period

The Respondent contended that since the first invocation was within the Section 10A bar period, the Section 7 petition was barred. They relied heavily on the decision in IDBI Bank Ltd. v. Zee Entertainment Enterprises Ltd., where a single invocation during the bar period rendered the petition non-maintainable.

The Appellant distinguished that case, emphasizing that unlike Zee Entertainment, where only one invocation was made during the bar period, here a fresh invocation was made after the expiry of Section 10A. The Tribunal noted that the Zee Entertainment decision itself granted liberty to file a fresh petition if default continued after the bar period.

The Tribunal examined the pleadings and evidence and found that the second invocation was properly pleaded and supported by documents. It held that the Section 7 petition filed on 11.01.2023 was based on this second invocation and was therefore maintainable.

Issue (iv): Interpretation and applicability of Section 10A of the IBC

Section 10A prohibits filing insolvency applications for defaults occurring during the COVID-19 moratorium period. The Adjudicating Authority had held that the invocation dated 05.03.2021 fell within this barred period, rendering the petition non-maintainable.

The Tribunal clarified that Section 10A applies only to defaults occurring within the specified period. Defaults arising after the expiry of this period are not barred. The second invocation dated 09.12.2022 was a fresh default and thus not barred by Section 10A.

The Tribunal relied on precedents including NuFuture Digital (India) Ltd. v. Axis Trustee Services Ltd. and SIDBI v. Sambandh Finserve Pvt. Ltd., which recognized that fresh invocations and defaults post Section 10A period are legally permissible.

Issue (v): Pleading and evidentiary sufficiency of default and invocation in Section 7 application

The Respondent argued that the second invocation was not pleaded in the original application and that the Appellant could not improve its case on appeal. The Appellant countered that the invocation was pleaded in Part V of Form-1 and supported by documentary evidence.

The Tribunal referred to its earlier judgment in Manmohan Singh Jain v. State Bank of India, which held that omission to mention the date of default in Part IV of Form-1 is not fatal if sufficient documentary evidence is placed on record in Part V. The Tribunal found the pleadings and evidence sufficient to establish default and invocation.

The Tribunal rejected the Respondent's contention that the second invocation was merely a request to maintain DSRA, holding that the language of the letter was clearly a demand for payment and invocation of guarantee.

3. SIGNIFICANT HOLDINGS

The Tribunal made the following crucial legal findings and principles:

"The second invocation dated 09.12.2022 was valid, independent, and enforceable. The Adjudicating Authority failed to take cognizance of letter dated 09.12.2022 and did not examine its relevance to the CIRP proceedings. Accordingly, we find that the second invocation constitutes a distinct cause of action, and the Section 7 application filed by IDBI Bank on 11 January 2023 based on this default is legally maintainable."

"A demand for payment under a corporate guarantee need not be limited to a one-time or all-inclusive invocation, unless the guarantee contract itself provides such a restriction. Here, the guarantees are described in express terms as 'continuing,' 'irrevocable,' and 'on demand.' Clause 18 of Guarantee-I and Clause 7 of Guarantee-II provide that the liability of the guarantor continues until full repayment of all dues, and that the obligation shall not be discharged by partial payments or earlier demands."

"It is clear from the language of both the letters that both involved invocation of corporate guarantee by the financial creditor. The first invocation made in March 2021 was limited in scope. It was based only on a part of the total liability... The Appellant invoked the Corporate Guarantee covering these items vide the letter dated 09.12.2022."

"Section 10A bars absolutely and forever, the filing of any application under Sections 7, 9 and 10 of the Code, for defaults committed on or after 25th March, 2020 upto 25th March, 2021. However, defaults occurring after this period are not barred."

"The guarantees in question are continuing guarantees, and the Appellant was legally entitled to issue a second invocation on 9 December 2022."

"The second invocation dated 09.12.2022 was a fresh default supported by proper demand and documentation, and therefore an application under Section 7 is maintainable."

"The Respondent has not produced any evidence to show that the guarantee was discharged or that the debt was fully paid."

Final determinations:

(i) The second invocation dated 09.12.2022 constitutes a fresh default and cause of action occurring after the Section 10A exclusion period;

(ii) Multiple invocations of continuing corporate guarantees are permissible and valid under the contractual terms and applicable law;

(iii) The Section 7 petition filed on the basis of the second invocation is maintainable and the dismissal of the petition on the ground of Section 10A bar was erroneous;

(iv) The Adjudicating Authority's failure to consider the second invocation was a material error;

(v) The appeal is allowed, the impugned order is set aside, and the Section 7 petition is restored for adjudication.

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