AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2019 (11) TMI 1169
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.... By an order dated March 13, 2018, the National Company Law Tribunal approved a Resolution Plan in respect of the company in such proceedings. By and under such Resolution Plan, the liabilities of the company as against the creditors of the companies were dealt with. According to him, the personal guarantee given by the petitioner stood extinguished upon such Resolution Plan being approved. It is thereafter that, the first respondent issued a notice dated March 26, 2019 under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) to the petitioner on the basis of the guarantee. The petitioner thereafter came to learn that, the petitioner was posted with CIBIL for an alleged default of Rs. 12,62,11,278/- towards the first respondent. 3. Learned Advocate appearing for the petitioner has submitted that, with the liability of the company to the first respondent being extinguished by virtue of the Resolution Plan sanctioned by the National Company Law Tribunal, and the resolution applicant paying the first respondent in terms of the Resolution Plan, the guarantee of the petitioner to the first respondent stoo....
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....f a guarantee given by such guarantor to secure the claim of a creditor for the credit facilities advanced by such creditor to the company undergoing the resolution process. He has relied upon Sections 128, 133, 134 and 135 of the Act of 1872 as well as Sections 2(e), 5(5A), 5(22), 14(3), 30(4), 60(2) and 238 of the Code of 2016 in support of his contentions. He has submitted that, insolvency resolution process can be invoked at the instance of any creditor of a corporate debtor. Such creditor can also be an insignificant operational creditor. Sanction of a Resolution Plan by the National Company Law Tribunal, does not wipe away the liability of a guarantor. He has submitted that, a Resolution Plan can be approved, if, such plan is accepted by the requisite majority of the class of creditors as stipulated under the Code of 2016. In a given case, a creditor may not have agreed to the Resolution Plan but the same may receive the approval of the National Company Law Tribunal since, such Resolution Plan received the consent of the requisite majority of creditors. In such a situation, the dissenting creditor is bound by the Resolution Plan. According to him, the Resolution Plan is an in....
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....f of the petitioner. 7. In reply, learned Advocate appearing for the petitioner has distinguished the authorities cited on behalf of the first respondent. He has submitted that, on a conjoint reading of the provisions of the Code of 2016, a Resolution Plan covers a guarantee given by a guarantor for the purpose of securing the loan of the corporate debtor. Once a Resolution Plan is sanctioned by the National Company Law Tribunal under the provisions of the Code of 2016, then such plan takes care of such guarantee. Such guarantee cannot be enforced dehors the provisions of the Resolution Plan sanctioned under the Code of 2016. In the facts of the present case, according to him, the petitioner is entitled to the reliefs as prayed for. 8. The issues that have fallen for consideration in the present writ petition are as follows:- (a) Whether the liability of a guarantor of a debt of a corporate-debtor stands reduced/extinguished upon an Insolvency Resolution Plan in respect of the corporate debtor, being approved under the Insolvency and Bankruptcy Code, 2016 ? (b) To what relief or reliefs are the parties entitled to ? 9. The writ petition has been heard after allowing the part....
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.... corporate debtor and itsemployees, members, creditors, guarantors, and other stakeholders involved in the Resolution Plan. 2. The Resolution Plan of the corporate data shall come into force with immediate effect. 3. The moratorium order passed under Section 14 shall cease to have effect. 4. The Resolution Professional shall forward all records relating to the conduct of the Corporate Insolvency Resolution Process and the Resolution Plan to the Insolvency and Bankruptcy Board of India to be recorded on its data base. 5. A copy of this order is to be forwarded to IBBI......." 12. The Resolution Plan approved by the National Company Law Tribunal, Kolkata, in respect of the company, envisaged payment of Rs. 34.25 crores to the secured financial creditors against their entire outstanding claim amount of Rs. 76.21 crores in full and final settlement of all the dues. The Court has been informed that, the resolution applicant had paid the secured financial creditors in terms of such Resolution Plan. 13. Some of the relevant terms and conditions of the Resolution Plan in respect of the company as approved by the National Company Law Tribunal, Kolkata by the order dated March 13, ....
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....the secured financial creditor receiving the payments in terms of a Resolution Plan in respect of a company undergoing a process of Corporate Insolvency Resolution under the provisions of the Code of 2016 ? 15. On a prima facie finding that, the principle that, the liability of the guarantor stood extinguished upon the creditor making a compromise with the principal debtor was applicable, in the facts of the present case, an interim order dated July 4, 2019 was passed in the present writ petition. The first respondent has questioned the applicability of such principle in the facts of the present case. 16. Learned Counsel for the parties have relied upon various provisions of the Contract Act, 1872 as well as the Code of 2016 in support of their respective contentions. The relevant provisions of the Act of 1872 are as follows: - "128. Surety's liability.- The liability of the surety is coextensive with that of the principal debtor, unless it is otherwise provided by the contract. ................. 133. Discharge of surety by variance in terms of contract.- Any variance, made without the surety's consent, in the terms of the contract between the principal debtor and the credi....
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....ts such as the Specific Relief Act, 1963. The Act of 1872 is divided into 11 chapters. The sections under Chapters VII and XI of the Act of 1872 stands repealed. Chapter VIII of the Act of 1872 deals with indemnity and guarantee. The issues raised in the writ petition revolves around a contract of guarantee executed by the petitioner in favour of the first respondent. Although the parties were allowed at least twice to file affidavits, the parties have not placed the contract of guarantee existing between the petitioner and the first respondent on record. The parties however have proceeded on the basis that, the petitioner executed a guarantee, in writing, in favour of the first respondent guaranteeing repayment of the credit facilities enjoyed by the company from the first respondent. 18. Section 126 of the Act of 1872 defines a contract of guarantee to be a contract to perform the promise, or discharge the liability of a third person in case of his default. It goes on to stipulate that, the person who gives the guarantee is called the surety, the person in respect of whose default the guarantee is given is called the principal debtor, and the person to whom the guarantee is give....
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....d the eventual remedy of the surety against the principal debtor is thereby impaired, the surety is discharged. 21. The Act of 1872 recognises that, the surety has a right to recover from the principal debtor any sum which the surety paid rightfully under the guarantee. Sections 69, 140 and 145 of the Act of 1872 recognise such principle. 22. The petitioner has contended that, the liability of a guarantor being coextensive with that of the principal debtor, in the facts of the present case, when, the first respondent, as the creditor, accepted the payment under the Resolution Plan as full and final settlement, of the claim of the first respondent against the principal debtor, the liability of the principal debtor stood extinguished and consequently, in view of the provisions of section 128 of the Act of 1872, the liability of the petitioner stood extinguished. 23. In the facts of the present case, the first respondent initiated a Corporate Insolvency Resolution process of the company under section 7 of the Code of 2016 before the National Company Law Tribunal, Kolkata. The Code of 2016 was enacted to consolidate and amend the laws relating to reorganisation and Insolvency Resolu....
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....her from the records of an information utility or on the basis of the evidence furnished by the financial creditor when the Adjudicating Authority is considering an application under section 7 of the Code of 2016. 25. When a financial creditor approaches the Adjudicating Authority under the provisions of the Code of 2016 and applies under section 7 thereof for initiation of Corporate Insolvency Resolution process in respect of a corporate debtor, the financial creditor is trying to recover the defaulted amount from the corporate debtor. It cannot be said that, the financial creditor when it applies under section 7 of the Code of 2016, does so with the view to enter into any compromise or composition with the corporate debtor in respect of the claim. In a given situation, the Resolution Plan submitted with the resolution professional and accepted by the committee of creditors and ultimately approved by the Adjudicating Authority, may provide for payment of the entirety of the claim of the financial creditor applying for initiation of the Corporate Insolvency Resolution process. In such a situation, no compromise takes place. In a given situation, the financial creditor applying for....
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....e of 2016, when an order under Section 14 is passed, then also only the statutory right of a financial institution to proceed under the SARFAESI Act, 2002 remains suspended for a limited period. The existing contracts between the surety, principal debtor and the creditor remains unaffected. 28. The Supreme Court in Maharashtra State Electricity Board, Bombay (supra) has held that, a discharge which the principal debtor may secure by operation of law in bankruptcy or in liquidation proceedings in the case of a company does not absolve the surety of his liability. In such case, the Supreme Court has considered the interplay of sections 128 and 134 of the Act of 1872. In the facts of that case, a company in respect of which a bank issued a guarantee in favour of the Electricity Board, went into liquidation. The Supreme Court has held that, the fact that the company which is the principal debtor has gone into liquidation would not have any effect on the liability of the guarantor. 29. The Division Bench of this Hon'ble Court in Modern Stores (India) Ltd. (supra) has considered the interplay of sections 134 and 137 of the Act of 1872. It has applied the ratio laid down in Maharashtra ....
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....ee appearing for the appellant, that in each of the agreement it is provided that nothing done or omitted by the appellant in pursuance of any of the powers, provisions, or authorities contained in this guarantee shall in any way, affect or discharge the liability of the surety. It is also settled that if the creditor expressly reserves his remedy against the surety or generally his securities and remedies against persons other than the principal-debtor, then the release of the principal debtor either by act or omission on the part of the creditor or by operation of law will not discharge the surety. As commented upon by Mulla in his Commentaries on the Contract Act, 10th Edition, page 742, the surety's right to indemnify against a principal-debtor is a necessary result of such a reservation. It is also the opinion of the learned Author that if a creditor without ceasing to hold the principal debtor liable, prefers to sue the more solvent of two sureties for the debt, this still more obviously, does not discharge the other Surety. 20. It will appear from Section 137 of the Contract Act that mere forbearance on the part of the creditor to sue the principal debtor or to enforce....
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....he outcome of the proceedings under Section 7 of the Code of 2016 is a product of statute. The financial creditor cannot be said to have voluntarily discharged the principal debtor, in the event, the Resolution Plan sanctioned by the Adjudicating Authority under the Code of 2016, ultimately results in the financial creditor not receiving any part or portion of its claim. 33. Kundanmal Dabriwala (supra) has considered a show cause notice issued by a State Financial Corporation, acting under the provisions of the State Financial Corporation Act, 1951, to a surety for the defaults committed by the borrower/principal debtor. In the facts of that case, it was found that, a scheme sanctioned by the Court under Sections 391 and 394 of the Companies Act, 1956 was binding on the creditors whether such creditors assented to it or not. It has taken note of Section 135 of the Act of 1872 and held that, a contract between the creditor and the principal debtor by which the creditor compounds with the principal debtor, discharges the surety. 34. In the facts of the present case, most respectfully, I am unable to accept and apply the ratio of Kundanmal Dabriwala (supra). Firstly, Kundanmal Dabri....
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....rms of the contract between the principal debtor and the creditor, without the consent of the surety, discharging the surety as to transaction subsequent to the variants or at all. Similarly, the action of a financial creditor applying under Section 7 of the Code of 2016 cannot be construed to be an action of creditor in terms of Section 134 of the Act of 1872. When, the financial creditor approaches the National Company Law Tribunal under Section 7 of the Code of 2016, it approaches the Tribunal for the purpose of recovering its claim. An application under Section 7 of the Code of 2016 cannot be construed to be a discharge of the surety in terms of Section 134 of the Act of 1872. On the same analogy, an application under Section 7 of the Code of 2016 cannot be construed to be a discharge of the surety under Section 135 of the Act of 1872. An application under Section 7 of the Code of 2016 and the consequential orders that may be passed under the Code of 2016 cannot also be construed to be a discharge of the surety in terms of Section 139 of the Act of 1872. The implied promise recognised under Section 145 of the Act of 1872 is not impaired by any order that may be passed under the....
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....ance with the Presidency Towns Insolvency Act, 1909 or the Provincial Insolvency Act, 1920, as the case may be. It is clear that sub-section (4), which states that the Tribunal shall be vested with all the powers of the Debt Recovery Tribunal, as contemplated under Part III of this Code, for the purposes of sub-section (2), would not take effect, as the Debt Recovery Tribunal has not yet been empowered to hear bankruptcy proceedings against individuals under Section 179 of the Code, as the said Section has not yet been brought into force. Also, we have seen that Section 249, dealing with the consequential amendment of the Recovery of Debts Act to empower Debt Recovery Tribunals to try such 22 proceedings, has also not been brought into force. It is thus clear that Section 2(e), which was brought into force on 23.11.2017 would, when it refers to the application of the Code to a personal guarantor of a corporate debtor, apply only for the limited purpose contained in Section 60(2) and (3), as stated hereinabove. This is what is meant by strengthening the Corporate Insolvency Resolution Process in the Statement of Objects of the Amendment Act, 2018. 22. Section 31 of the Act was a....
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....ns who have unlimited liability to pay them. And such guarantors may be complete strangers to the debtor - often it could be a personal friend. It is for this reason that the moratorium mentioned in Section 101 would cover such persons, as such moratorium is in relation to the debt and not the debtor. We may hasten to add that it is open to us to mark the difference in language between Sections 14 and 96 and 101, even though Sections 96 and 101 have not yet been brought into force. This is for the reason, as has been held in State of Kerala and Ors. v. Mar Appraem Kuri Co. Ltd. and Anr., (2012) 7 SCC 106, that a law 'made' by the Legislature is a law on the statute book even though it may not have been brought into force. The said judgment states: "79. The proviso to Article 254(2) provides that a law made by the State Legislature with the President's assent shall not prevent Parliament from making at any time any law with respect to the same matter including a law adding to, amending, varying or repealing the law so made by a State Legislature. Thus, Parliament need not wait for the law made by the State Legislature with the President's assent to be brought into force a....