TaxTMI 
TaxTMI 
2017 (11) TMI 1697
X X X X Extracts X X X X
X X X X Extracts X X X X
....to Today's Writing Instruments Limited) and (hereinafter referred to as "the principal borrower"), a short term loan of Rs. 4 Crores on the terms and conditions contained in the loan agreement of the same date entered into between the principal borrower and the Plaintiff. Since there was a default in the payment of the short term loan, these Deeds of Guarantee were invoked and it is on this basis that the present Summary Suit has been filed and a decree is sought against the Defendants in the Summons for Judgment. 3. The brief facts giving rise to the present controversy are that the Plaintiff is a non-banking financial institution doing business of advancing finance to its customers. Defendant No. 1 at all material times was a Director of the principal borrower and has also executed a guarantee as mentioned earlier. Defendant No. 2 is also sued as a guarantor who has offered a corporate guarantee in favour of the Plaintiff and guaranteed repayment of the dues of the principal borrower. 4. According to the Plaintiff, on or about 10th December, 2008, the principal borrower, through Defendant No. 1, approached the Plaintiff for sanction of a short term loan of Rs. 4 Crores ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rincipal borrower did not comply with the aforesaid requisitions, the Plaintiff by its advocate's letter dated 10th December, 2009 called upon the Defendants, as guarantors, to pay to the Plaintiff the sum of Rs. 3,44,22,936/- on or before 24th December, 2009 failing which appropriate proceedings would be initiated. Despite this notice, no payment was coming forth and it is in these circumstances that the present Suit is filed. 8. After filing of the present Suit, the writ of summons was served upon the Defendants and thereafter the Defendants filed their appearance. It is thereafter that the Plaintiff has taken out this Summons for Judgment. An affidavit-in-reply dated 20th October, 2011 opposing the Summons for Judgment has also been filed on behalf of the Defendants. The Defendants have also filed an additional affidavit dated 20th November, 2017 seeking to bring on record certain other subsequent developments. 9. The basic defences that have been taken in the affidavit in reply are as under:- (i) the Plaintiff is a 100% subsidiary of SICOM Ltd., and therefore, the Plaintiff ought to have filed proceedings before the Debts Recovery Tribunal which was conferred....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s on these pleadings that the matter has proceeded before me. 11. In this factual backdrop Mr. Jagtiani, the learned counsel appearing on behalf of the Plaintiff submitted that the Defendants have no defence on the merits of the present case. He submitted that admittedly a short term loan was availed of by the principal borrower and which was duly guaranteed by the Defendants by executing two separate Deeds of Guarantee. He submitted that the only defences that are raised in the affidavit in reply are that the Plaintiff being a 100% subsidiary of SICOM, the Debts Recovery Tribunal would have the exclusive jurisdiction to entertain and try the present suit and the second is that the Suit is not maintainable as a Summary Suit because the Plaintiff has got adequate security. The third argument regarding the guarantees being insufficiently stamped is concerned, Mr. Jagtiani submitted that this is not a defence that is taken by the Defendants even though they have filed two affidavits and hence I should not entertain such a defence. Further, even across the bar it has not even been stated as what was the correct stamp duty payable and according to the Plaintiff the deeds of guarantee....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the jurisdiction, powers and authority to entertain appeals against any order made, or deemed to have been made, by a Tribunal under this Act. (2-A) Without prejudice to sub-section (2), the Appellate Tribunal shall exercise, on and from the date to be appointed by the Central Government, the jurisdiction, powers and authority to entertain appeals against the order made by the Adjudicating Authority under Part III of the Insolvency and Bankruptcy Code, 2016." 13. I must mention here that PART III of the IBC, 2016 has not yet been brought into force. "18. Bar of jurisdiction.-On and from the appointed day, no court or other authority shall have, or be entitled to exercise, any jurisdiction, powers or authority (except the Supreme Court, and a High Court exercising jurisdiction under Articles 226 and 227 of the Constitution) in relation to the matters specified in Section 17: Provided that any proceedings in relation to the recovery of debts due to any multi-State co-operative bank pending before the date of commencement of the Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2012 under the Multi-State Co-operative Societies ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n that the present Suit is not maintainable as a Summary Suit merely on the ground that the Plaintiff has got security in the form of pledge of shares. This argument therefore also stands rejected. 16. The third argument that was canvassed before me was that the guarantees executed by the Defendants are insufficiently stamped, and therefore, cannot be looked at for any purpose whatsoever. I am afraid I am unable to accept this argument for more than one reason. Firstly, this argument has never been raised either in the affidavit in reply or the additional affidavit which has been filed on 20th November, 2017. This argument, for the first time was canvassed across the bar by the learned counsel appearing for the Defendants. I would be justified in not entertaining this argument on this count alone. Despite this, I find that these Deeds of Guarantee have been duly franked on 17th December, 2008 with a stamp duty of Rs. 100/-. The Defendants have not brought anything to my notice which would indicate that the stamps put on the Deeds of Guarantee are insufficient or that a larger amount of stamp duty was payable on the Deeds of Guarantee on the date when they were executed. This bei....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... a "corporate guarantor" or "personal guarantor" is not included in the definition of the word "corporate debtor". Only institution of suits or continuation of pending suits against the corporate debtor are prohibited. That prohibition does not extend to the guarantor of the corporate debtor. Further fortifying this argument, Mr. Cama as well as Mr. Jagtiani both brought to my attention the definition of the word "personal guarantor" as defined under Section 5 (22) which states that a "personal guarantor" means an individual who is the surety in a contract of guarantee to a corporate debtor. Relying upon these definitions, Mr. Cama and Mr. Jagtiani both submitted that the Act itself contemplates that the "guarantor" is a separate person from a "corporate debtor", and therefore, cannot be included in the definition of the words "corporate debtor". This would then certainly lead to the irresistible conclusion that the prohibition from instituting any suit or continuing with a pending suit would apply only in relation to the "corporate debtor" who is in insolvency and in whose favour an order of moratorium under section 14 has been passed, and not to any individual who is the surety i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the order of moratorium passed under section 14 in favour of the principal borrower. If the guarantor wanted the benefit of a moratorium then insolvency proceedings had to be initiated in relation to such guarantor as contemplated under Part III and only then would it get such benefit. 19. Over and above this, Mr. Jagtiani as well as Mr. Cama submitted that the wordings of Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985 (for short "SICA, 1985") clearly gave a limited protection to the guarantors of a Sick Industrial Company and which had approached the BIFR for the purposes of revival. This Act was brought into force to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner. Mr. Jagtiani and Mr. Cama placed reliance on the statement of objects and reasons to fortify their argument that since there was not a single law in India that deals with insolvency and bankruptcy, that this particular Code was brought into force. The provisions relating to insolvency and bankruptcy for companies could be found in the Sick Industrial Companies (Special Provis....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he Committee in turn has to approve the Resolution Plan by the vote of not less than 75% of voting shares of the financial creditors. Once the Plan is approved by the Committee of Creditors, the same is submitted to the Adjudicating Authority. 21. Mr. Gordia then drew my attention to Section 31 which deals with Approval of the Resolution Plan. Mr. Goradia submitted that once the Resolution Plan is submitted to the Adjudicating Authority, the Adjudicating Authority has to satisfy itself that the Resolution Plan, as approved by the Committee of Creditors, meets the requirements as referred to in Section 30(2), and if it does, it shall by order, approve the Resolution Plan. This approved Resolution Plan would be binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholders involved in the Resolution Plan. Mr. Goradia submitted that looking to the language of Section 31 and especially considering that any Resolution Plan that is approved by the Adjudicating Authority would be binding on the guarantors would clearly go to show that whilst the Resolution Plan is in its formulation, the order of moratorium passed in favour of the corporate deb....
X X X X Extracts X X X X
X X X X Extracts X X X X
....itution of India, the President, on 23rd November, 2017 was pleased to promulgate The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017 (for short "the Ordinance"). I therefore asked the learned counsel to even address me on this Ordinance, which they have done today. I shall also deal with the Ordinance in so far it relates to the issue before me. 24. Before I proceed to analyze the relevant provisions of the Code and the Ordinance, it would be apposite to refer to the statement of objects and reasons as to why this Code was brought into force. The statements of objects and reasons state that there was no special law in India that deals with insolvency and bankruptcy. Provisions relating to the insolvency and bankruptcy for companies could be found in SICA 1985, the Recovery of Debts and Bankruptcy Act, 1993, SARFAESI Act, 2002 and the Companies Act, 2013. These statutes provided for creation of multiple fora such as the BIFR, DRT, NCLT as well as their respective appellate tribunals. Over and above this, liquidation of companies was handled by the High Courts and individual bankruptcy and insolvency was dealt with under the Presidency Towns Insolvency Act, 1909 and th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....that would need to be adopted with respect to such companies and for enforcement of the measures considered appropriate with utmost practicable dispatch. Keeping these objects in mind SICA, 1985 was enacted. In other words, SICA, 1985 was enacted with the avowed object of identifying sick and potentially sick companies and then try to revive and rehabilitate them. 26. However, as time went by, the Government felt that BIFR and AAIFR (the authorities under SICA, 1985 entrusted with the object to ensure revival of sick companies) had not been able to fulfill the purpose and mandate as envisaged under SICA, 1985. It is in this light that in the year 1999, the Government constituted a Committee under the Chairmanship of Justice V. Balakrishna Eradi, ("the Eradi Committee") a retired Judge of the Supreme Court, to review the law relating to Insolvency and Winding up of Companies. This Committee presented a Report on 31.7.2000, under the caption "Report of The High Level Committee on Law Relating to Insolvency and Winding up of Companies". This Committee, after hearing all the parties and analysing the statistical data made available to it, opined that the facts and figures spoke for ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Partnerships) and comprises of Sections 78 to 187. Part IV deals with Regulation of Insolvency Professionals, Agencies and Information Utilities and comprises of Sections 188 to 223. Part V deals with the Miscellaneous Provisions and comprises of sections 224 to 255 along with 11 Schedules. 29. Section 2 of the IBC, 2016 (and which falls in Part I) deals with its application and reads as under:- "2. The provisions of this Code shall apply to- (a) any company incorporated under the Companies Act, 2013 or under any previous company law; (b) any other company governed by any special Act for the time being in force, except in so far as the said provisions are inconsistent with the provisions of such special Act; (c) any Limited Liability Partnership incorporated under the Limited Liability Partnership Act, 2008; (d) such other body incorporated under any law for the time being in force, as the Central Government may, by notification, specify in this behalf; and (e) partnership firms and individuals, in relation to their insolvency, liquidation, voluntary liquidation or bankruptcy, as the case may be." (emphasis supplied)....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... person" has been defined which reads thus:- "(7) "corporate person" means a company as defined in clause (20) of section 2 of the Companies Act, 2013, a limited liability partnership, as defined in clause (n) of sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008, or any other person incorporated with limited liability under any law for the time being in force but shall not include any financial service provider;" 34. Similarly, the words "corporate debtor" has been defined in Section 3(8) and reads thus:- "(8) "corporate debtor" means a corporate person who owes a debt to any person;" 35. What is clear from the aforesaid definition is that a "corporate debtor" means a "corporate person" who owes a debt to any person. A "corporate person" has also been defined which means the company as defined in clause 20 of Section 2 of the Companies Act, 2013, a limited liability partnership as defined in clause (n) of sub-section (1) of Section 2 of the Limited Liability Partnership Act, 2008 or any other person incorporated with limited liability under any law for the time being in force but shall not include any financial service provider. On a plai....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... and supervision over the financial affairs of the corporate debtor; (7) "financial creditor" means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to; (8) "financial debt" means a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes- (a) money borrowed against the payment of interest; (b) any amount raised by acceptance under any acceptance credit facility or its de-materialised equivalent; (c) any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument; (d) the amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed; (e) receivables sold or discounted other than any receivables sold on non-recourse basis; (f) any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....use (A) of sub-section (2) of section 25;'; (b) in clause (26), for the words "any person", the words "resolution applicant" shall be substituted." 40. I must mention here that as clearly stated in Section 5, these definitions apply only to Part II of the Code and not to the entire Code itself. As far as the definitions for Part III are concerned, the same are contained in Section 79 and which I shall advert to later. Be that as it may, as can be seen from these definitions, the "financial creditor" means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to. In turn, "financial debt" has been defined to mean a debt along with interest, if any, which is disbursed against consideration for the time value of money and includes nine items mentioned in Clauses (a) to (i) in Section 5(8). On the other hand, an "operational creditor" means a person to whom an "operational debt" is owed and includes any person to whom such debt has been legally assigned or transferred. In turn, the word "operational debt" has been defined to mean a claim in respect of the provision of goods or services including empl....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... not really concerned with this section at this stage. 42. Thereafter, Section 12 sets out the time-limit for completion of the insolvency resolution process. Section 12 reads thus:- "12. Time-limit for completion of insolvency resolution process.- (1) Subject to sub-section (2), the corporate insolvency resolution process shall be completed within a period of one hundred and eighty days from the date of admission of the application to initiate such process. (2) The resolution professional shall file an application to the Adjudicating Authority to extend the period of the corporate insolvency resolution process beyond one hundred and eighty days, if instructed to do so by a resolution passed at a meeting of the committee of creditors by a vote of seventy-five per cent of the voting shares. (3) On receipt of an application under sub-section (2), if the Adjudicating Authority is satisfied that the subject-matter of the case is such that corporate insolvency resolution process cannot be completed within one hundred and eighty days, it may by order extend the duration of such process beyond one hundred and eighty days by such further period as it thinks fi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002); (d) the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor. (2) The supply of essential goods or services to the corporate debtor as may be specified shall not be terminated or suspended or interrupted during moratorium period. (3) The provisions of sub-section (1) shall not apply to such transactions as may be notified by the Central Government in consultation with any financial sector regulator. (4) The order of moratorium shall have effect from the date of such order till the completion of the corporate insolvency resolution process: Provided that where at any time during the corporate insolvency resolution process period, if the Adjudicating Authority approves the resolution plan under sub-section (1) of Section 31 or passes an order for liquidation of corporate debtor under Section 33, the moratorium shall cease to have effect from the date of such approval or liquidation order, as the case may be." 46. Section 14(1) clearly stipulates that subject to th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....st the corporate debtor in insolvency and not a third party such as a guarantor, be it an individual or a corporate guarantor. 49. This is further fortified when one peruses the provisions of Part III of the IBC, 2016. Part III deals with Insolvency Resolution and Bankruptcy for Individuals and Partnership Firms (other than Limited Liability Partnerships). Chapter III of Part III deals with the Insolvency Resolution Process. Chapter III (which deals with Insolvency Resolution Process) consists of Section 94 to Section 120. Sections 94, 95 and 96 of Part III reads as under:- "94. Application by debtor to initiate insolvency resolution process.- (1) A debtor who commits a default may apply, either personally or through a resolution professional, to the Adjudicating Authority for initiating the insolvency resolution process, by submitting an application. (2) Where the debtor is a partner of a firm, such debtor shall not apply under this Chapter to the Adjudicating Authority in respect of the firm unless all or a majority of the partners of the firm file the application jointly. (3) An application under sub-section (1) shall be submitted only in respect of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....companied by such fee as may be prescribed. (7) The details and documents required to be submitted under sub-section (4) shall be such as may be specified." "96. Interim-moratorium.- (1) When an application is filed under Section 94 or Section 95- (a) an interim-moratorium shall commence on the date of the application in relation to all the debts and shall cease to have effect on the date of admission of such application; and (b) during the interim-moratorium period- (i) any legal action or proceeding pending in respect of any debt shall be deemed to have been stayed; and (ii) the creditors of the debtor shall not initiate any legal action or proceedings in respect of any debt. (2) Where the application has been made in relation to a firm, the interim-moratorium under sub-section (1) shall operate against all the partners of the firm as on the date of the application. (3) The provisions of sub-section (1) shall not apply to such transactions as may be notified by the Central Government in consultation with any financial sector regulator." 50. Section 94 deals with an application filed by the debtor to initia....
X X X X Extracts X X X X
X X X X Extracts X X X X
....om the aforesaid provisions of Part III (and which I might hasten to add have not yet been brought in force) is that for an individual, be it a guarantor or otherwise, the benefit of the moratorium would be available to such individual only if the insolvency resolution process has been initiated either by or against such individual. It would make no difference whether that individual was a "personal guarantor" of a "corporate debtor" as contemplated under Part II of the Code. In these circumstances, I do not think that a personal guarantor of a "corporate debtor" or even a corporate guarantor of a "corporate debtor" can contend that the benefits granted to the corporate debtor under the order of moratorium under section 14 can be availed of by the personal guarantor or the corporate guarantor of the "corporate debtor". 53. I am further fortified in this view when one looks at the objects and reasons as to why the IBC, 2016 was brought into force. As mentioned earlier, the Eradi Committee had clearly taken note of the fact that SICA, 1985 had miserably failed in achieving the objects for which it was enacted. One of the primary reasons that the Eradi Committee came to the aforesa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rotection, I would be re-introducing the same mischief that was sought to be done away with by the Legislature. For all these reasons, I am clearly of the view that the order of moratorium passed under Section 14 in relation to a corporate debtor can never enure to the benefit of the guarantor of that corporate debtor. I may hasten to add that this would not be the case if the guarantor, be it an individual or a corporate entity, has been brought before the Adjudicating Authority for the purpose of insolvency resolution. Different considerations would arise in such a case as discussed earlier. However, that is not the situation in the facts and circumstances of the present case. 54. This now only leaves me to deal with Sections 31 and 60, as well as the decision of the Single Judge of the Allahabad High Court in the case of Sanjeev Shriya v. State Bank of India and Others reported in 2017 (9) ADJ 23 and on which heavy reliance was placed by Mr. Goradia, the learned advocate appearing on behalf of the Defendants. Before I deal with Section 31 it would be apposite to refer to certain other provisions. Section 29 contemplates Preparation of an information memorandum. Once this is d....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan. This, by no stretch of the imagination can be relied upon to contend that the moratorium order passed under section 14 for the benefit of the corporate debtor would also extend to the guarantor. Section 31 statutorily only provides that once the resolution plan has been approved, it would be binding on all the parties including the guarantors and nothing further. I, therefore, do not see how Section 31 can be relied upon to contend that the guarantor also gets the benefit of an order of moratorium passed in favour of the corporate debtor. 56. As far as Section 60 is concerned, the same falls under Chapter VI of Part II of the IBC, 2016. Section 60 deals with the Adjudicating Authority for Corporate Persons and reads as under:- "60. Adjudicating Authority for corporate persons.- (1) The Adjudicating Authority, in relation to insolvency resolution and liquidation for corporate persons including corporate debtors and personal guarantors thereof shall be the National Company Law Tribunal having territorial jurisdiction over the place where the registered office of the cor....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s that when a personal guarantor [as defined in section 5(22)] is in insolvency/bankruptcy, then in relation to his insolvency resolution and bankruptcy, the Adjudicating Authority would be the NCLT having territorial jurisdiction over the place where the registered office of the corporate person is located. This provision has been enacted simply for the reason that otherwise the Adjudicating Authority for the personal guarantor (being an individual), would be the DRT under Section 79 (1) which falls in Part III of the IBC, 2016. Section 60 (2) stipulates that without prejudice to sub-section (1) and notwithstanding anything to the contrary contained in the Code, where a corporate insolvency resolution process or liquidation proceedings of a corporate debtor are pending before the NCLT, then an application relating to the insolvency resolution or bankruptcy of a personal guarantor of such corporate debtor shall be filed before such NCLT. In other words, when a corporate debtor is either in liquidation or in the insolvency resolution process, then notwithstanding anything contained in the Code the insolvency resolution or bankruptcy of its personal guarantor shall be filed before th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r subject of-course to the other provisions of the IBC, 2016. This being the case, I find that the reliance placed on Section 60 to establish that the guarantor automatically gets benefit of the moratorium order passed in favour of the corporate debtor under Section 14, is wholly misplaced. 60. This now only leaves me to deal with the decision of the Allahabad High Court in the case of Sanjeev Shriya (supra). I have given my careful consideration to the decision of the Allahabad High Court. On carefully going through this decision, I find that the Allahabad High Court reproduces several provisions of the IBC, 2016 but gives no real reasoning as to how the order passed under Section 14 in favour of the corporate debtor automatically enures to the benefit of the guarantor without any insolvency resolution process being initiated by or against the guarantor. Paragraph 29 of this decision and which is the only reasoning I could find, reads as under:- "29. In the present matter, it has been urged that while passing the impugned order the DRT has failed to take notice of Part-III of IBC, 2016, which prevails over the provisions of the Act of 1993. It has also been urged that ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... IBC, 2016 are in relation to the corporate debtor whereas the present suit is for recovery of money against the guarantor. It is now well settled that one can initiate proceedings against the guarantor without initiating action against the principal borrower. If one requires any authority on this subject, it would be apposite to reproduce paragraphs 37 to 40 of the decision of the Supreme Court in the case of United Bank of India v. Satyawati Tondon and Others reported in (2010) 8 SCC 110. The relevant paragraphs read as under:- "37. The question whether the appellant could have issued notices to Respondent 1 under Sections 13(2) and (4) and filed an application under Section 14 of the Sarfaesi Act without first initiating action against the borrower i.e. Respondent 2 for recovery of the outstanding dues is no longer res integra. In Bank of Bihar Ltd. v. Dr. Damodar Prasad AIR 1969 SC 297 : (1969) 1 SCR 620] this Court considered and answered in affirmative the question whether the Bank is entitled to recover its dues from the surety and observed: (AIR p. 299, para 6) "6. ... It is the duty of the surety to pay the decretal amount. On such payment he will be subr....