2025 (11) TMI 1346 - AT - IBC

Personal guarantors' insolvency under Section 95 IBC upheld; co-extensive liability affirmed using Sections 97(6), 99, 128

Mr. B. Nirmal Kumar, B. Kamlesh Kumar, Mr. B. Anand Kumar and Ms. N. Rekha Versus LIC HFL Trustee Company Private Ltd., Vistra ITCL (India) Limited (Formally IL&FS Trust Company Limited) and MR. K.J. Vinod, Chennai

NCLAT upheld the maintainability of proceedings under Section 95 of the IBC against personal guarantors of a corporate debtor. It noted that, after ... Maintainability of proceedings u/s 95 of IBC against personal guarantors of a corporate debtor - calculation of dues amount - Appellants contended that, the Respondents have claimed a total amount of Rs. 98,64,37,800/-, alleged to be due under Section 95(4)(a) of the I&B Code, 2016 and that there are no details in the application as to how the same was arrived at from the principal amount of ₹18.40 crore - HELD THAT:- Following the appointment of the Resolution Professional on 21.03.2022, the Resolution Professional was directed by the Ld. Adjudicating Authority to examine whether the Company Petition complied with Section 97(6) of the I&B Code, 2016, and only thereafter to recommend whether it should be accepted or rejected. These directions under Section 97(6) were issued by order dated 21.03.2022. The Resolution Professional is stated to have submitted his report on 31.03.2022, wherein, in accordance with the observations contained in the report filed under Section 99 of the I&B Code, 2016, the factum of the outstanding claim and the documents establishing liability stood proved and were considered in light of the details of the debts, as observed by the Ld. Adjudicating Authority in the Impugned Order. Based on the findings recorded in the report submitted under Section 99 of the I&B Code, 2016, the Resolution Professional recommended initiation of IRP proceedings against the Personal Guarantors/Respondents, who fall within the class of Corporate Debtors in view of the amendments to the I&B Code, 2016. The learned Tribunal rightly observed that, in light of Section 128 of the Contract Act, since default stood established in view of the report submitted by the Resolution Professional under Section 99 of the I&B Code, 2016, and since issuance and service of notice were not disputed, the liability under Section 128 of the Contract Act, arising from the agreement, is co- extensive with that of the principal debtor. Hence, the initiation of proceedings under Section 95 of the I&B Code, 2016 was correctly held to be within the ambit of the provisions of the I&B Code and the Rules framed thereunder. There are no merits in the appeal - appeal dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether proceedings under Section 95 of the I&B Code, 2016 against personal guarantors of a corporate debtor were maintainable on the material placed, including the demand notice dated 01.03.2021 and the record of default from the Information Utility. 2. Whether the asserted date of default (27.09.2018) and the demand notice were infirm or barred by limitation so as to vitiate initiation of proceedings under Section 95. 3. Whether contractual provisions for automatic conversion of OFCDs/OCPSs on 'event of default' (Clauses 12.1/12.2 and substituted Clause 2.5) operated to extinguish debt such that personal guarantees could not be invoked and Section 95 proceedings could not be maintained. 4. Whether the alleged non-compliance with internal contractual pre-conditions to conversion (Board/shareholder approvals; Clause 16; invocation of Clause 21/Clause 27 arbitration) prevented the creditor from proceeding under Section 95 and whether such issues, not raised before the Adjudicating Authority, could be entertained on appeal. 5. Whether service of the demand notice (Form B) and the definition/role of 'guarantor' under the Rules 2019 affected maintainability of Section 95 proceedings at the appellate stage. 6. Whether the status of OFCDs as hybrid instruments requires determination of the quantum of debt payable by personal guarantors and whether the Adjudicating Authority/RP must assess the true debt amount during further proceedings. 7. Whether the Resolution Professional's report under Section 99 and the prior Section 7/CIRP admission and subsequent liquidation order precluded re-litigation of default and service issues in the Section 95 proceedings. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Maintainability of Section 95 proceedings against personal guarantors Legal framework: Section 95 et seq. I&B Code, 2016 and Rules (2019) permit initiation of insolvency resolution process against personal guarantors where guarantee invoked and unpaid; RP and Adjudicating Authority functions under Sections 97-99. Precedent treatment: The Tribunal relied on statutory scheme that allows financial creditors to apply under Section 95 when conditions in sub-sections (1)-(4) are met; prior Section 7 adjudication establishing default is material. Interpretation and reasoning: The Form B demand dated 01.03.2021, the Information Utility record of default, and the admitted agreements sufficiently met the statutory parameters for initiation. The Appellants did not contest foundational elements (status as guarantors, service) before the Adjudicating Authority; the Tribunal held these elements to be established on the record and corroborated by the Section 7 admission and subsequent liquidation. Ratio vs. Obiter: Ratio - where statutory conditions of Section 95 are satisfied and prior Section 7 determination of default has attained finality, Section 95 proceedings are maintainable against personal guarantors. Conclusion: Section 95 proceedings were rightly initiated and admitted to the extent impugned. Issue 2 - Date of default and limitation Legal framework: Limitation defenses and need to specify date of default in demand notice; interplay with prior Section 7 adjudication which requires proof of default. Precedent treatment: The Adjudicating Authority's earlier Section 7 admission (CIRP initiation) and non-challenge of that order rendered the question of default settled between parties for present purposes. Interpretation and reasoning: The Form B notice recorded date of default as 27.09.2018 (Column IV); the Section 7 order admitting CIRP confirmed default and was not challenged. Appellants waived reliance on limitation before the Appellate Tribunal. Therefore challenge to the notice on the ground that it lacked a default date or was time-barred failed. Ratio vs. Obiter: Ratio - where a prior unchallenged Section 7 adjudication establishes default, the same default cannot be re-opened in Section 95 proceedings on limitation/service technicalities absent specific contest earlier. Conclusion: Limitation and unspecified default date contentions unsuccessful; the date of default was acknowledged on record and the question was final vis-à-vis Section 7. Issue 3 - Effect of contractual conversion clauses (OFCD/OCPS conversion) on existence of debt and invocation of guarantee Legal framework: Contractual conversion on event of default may alter rights (debt vs. equity); characterization of instruments (OFCD) depends on terms; I&B Code treats debentures as financial debt but hybrid instruments require clause-specific analysis. Precedent treatment: Tribunal noted prior jurisprudence distinguishing NCD (financial debt) and CCD (equity) and observed lack of clear authority treating OFCD uniformly; directed factual determination of hybrid character and quantum. Interpretation and reasoning: Clauses 12.1/12.2 and substituted Clause 2.5 provide for automatic conversion into equity on event of default, subject to buyback/exit options. Appellants argued conversion extinguished debt and thereby barred invocation of guarantees. Tribunal held that contractual clauses could not be read piecemeal; even if conversion was envisaged, whether conversion operated in fact (including satisfaction of pre-conditions and approvals) was a factual question giving rise to dispute. Moreover, OFCD being hybrid requires specific determination of portion constituting debt; the Tribunal observed that the Adjudicating Authority should direct the RP to determine actual amount due to PGs during preparation of payment plan and to examine extent of debt vs. equity character of OFCDs. Ratio vs. Obiter: Ratio - contractual conversion provisions do not ipso facto extinguish debt for purposes of Section 95 where factual questions (pre-conditions, actual conversion, quantum) remain; Adjudicating Authority/RP must evaluate the instrument's hybrid character and determine amounts payable. Obiter - commentary on expectation of equity-like returns and need to dissect OFCD components. Conclusion: Conversion clauses raised a dispute of fact; they did not preclude initiation of Section 95 proceedings; factual determination of quantum and character of OFCDs to be undertaken by RP/NCLT during further proceedings. Issue 4 - Effect of contractual pre-conditions (Board approvals, Clause 21 determination, arbitration Clause 27) and availability of contractual dispute-resolution remedies Legal framework: Parties' agreement clauses governing conversion and dispute resolution may require exhaustion of contractual remedies/arbitral fora; but invocation of statutory insolvency remedies under I&B Code is governed by the Code's scheme and by party conduct. Precedent treatment: The Tribunal emphasised that issues constituting factual disputes and contractual contentions not raised before the Adjudicating Authority cannot be first raised on appeal to re-open the factual record. Interpretation and reasoning: Appellants' reliance on the absence of a validly constituted Board under Clause 16, non-invocation of Clause 21, and entitlement to arbitrate under Clause 27 were matters which the Appellants did not pursue before the Adjudicating Authority. The Tribunal held these contentions either gave rise to disputes requiring factual determination or were remedies not invoked earlier; consequently, they could not be entertained in the appeal as an attempt to expand issues beyond those argued below. Ratio vs. Obiter: Ratio - contractual pre-conditions and arbitration clauses, if not invoked before the Adjudicating Authority and where they entail factual enquiry, cannot be used on appeal to nullify statutory insolvency initiation. Obiter - where contract requires prior determination, parties ought to invoke such mechanisms timely. Conclusion: Clauses 16/21/27 did not bar Section 95 initiation as a matter of law; factual and procedural non-compliance by Appellants precluded their reliance at appellate stage. Issue 5 - Service of demand notice and definition of 'guarantor' under Rules 2019 Legal framework: Rules 2019 define 'guarantor' and prescribe modes of service; service is precondition to invocation but is subject to proof and party conduct. Precedent treatment: Tribunal noted the Appellants did not contest service before the Adjudicating Authority and engaged in settlement talks thereafter. Interpretation and reasoning: Form B dated 01.03.2021 was served; Appellants made no contemporaneous non-service plea and actively participated in settlement attempts and in CIRP processes. The Rules' definition confirmed Appellants' status as guarantors. The Tribunal found the non-service contention untenable at this mature stage and concluded there was a deeming presumption of service in light of subsequent actions by Appellants. Ratio vs. Obiter: Ratio - absence of an early contest on service and conduct (settlement attempts, participation) disentitles a party from raising service infirmity belatedly on appeal. Obiter - procedural service modes under Rule 3(g) remain relevant where contested timely. Conclusion: Service and guarantor-status challenges failed; the Appellants' conduct sufficed to treat notice as validly served. Issue 6 - Characterization of OFCDs as hybrid instruments and need to determine quantum payable by personal guarantors Legal framework: Determination of whether a security is debt or equity depends on instrument terms; I&B Code recognizes financial debt but hybrid instruments require case-specific inquiry. Precedent treatment: Tribunal referenced the distinction between NCD and CCD jurisprudence and noted absence of clear-cut judicial treatment for OFCDs; directed factual determination by RP/NCLT. Interpretation and reasoning: The amount claimed (approx. Rs.98.64 crore) on an original investment of Rs.18.40 crore suggested compounded/IRR-like returns resonant of equity; therefore the Tribunal opined the RP/NCLT should assess how much of OFCDs is to be treated as debt and compute actual liability of PGs during payment-plan formulation. Ratio vs. Obiter: Ratio - where instruments are hybrid (OFCD), the Adjudicating Authority/RP should determine the extent of debt versus equity to compute amounts payable by guarantors. Obiter - observations on expected equity rates and securitization of borrowings. Conclusion: Admission of Section 95 application not incorrect, but RP/NCLT must determine actual indebtedness and the debt-equity composition of OFCDs in subsequent proceedings. Issue 7 - Finality of Section 7/CIRP admission, Section 99 RP report and consequences for re-litigation Legal framework: Section 7 admission requires proof of default; RP reports under Section 99 inform the Adjudicating Authority's decision on personal guarantor proceedings under Section 97/95. Precedent treatment: Tribunal treated prior unchallenged orders (CIRP admission, liquidation) as final vis-à-vis foundational facts like default; relied on RP's Section 99 report confirming liability documents. Interpretation and reasoning: The Appellants did not challenge Section 7 or liquidation orders, and the RP's report under Section 99 corroborated outstanding claims and documents establishing liability. Consequently, many issues of default/service/liability were effectively settled for purposes of Section 95 proceedings and could not be reopened on appeal absent challenge to the underlying orders. Ratio vs. Obiter: Ratio - prior unchallenged adjudications under Section 7 and an RP report under Section 99 that establishes liability have preclusive effect on re-litigation of foundational matters in subsequent Section 95 proceedings. Obiter - RP's investigatory role and reports are central to admissibility assessment. Conclusion: Section 7/CIRP finality and Section 99 report supported maintainability of Section 95 proceedings; Appellants' attempts to re-litigate were disallowed. Disposition Having considered statutory scheme, records, RP's report, the contractual disputes raised, and the scope of appellate review, the Tribunal dismissed the appeals and directed the RP/Adjudicating Authority to determine, during further proceedings, the true quantum payable by personal guarantors including appropriate treatment of OFCDs' debt-equity composition.