TaxTMI 
TaxTMI 
2022 (10) TMI 66
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....guarantor of corporate debtor, aggrieved by the order dated 03.02.2022 passed by the National Company Law Tribunal (Adjudicating Authority), Cuttack Bench in INTERLOCUTORY APPLICATION(IB).No.113/CB/2021 in TP No.255/CTB/2019 in CP (IB) No.593/KB/2017, whereby the INTERLOCUTORY APPLICATION filed by the petitioner for various reliefs was dismissed by the Adjudicating Authority. 2. The factual matrix is as follows: The appellant filed the INTERLOCUTORY APPLICATION before the Adjudicating Authority with a request to direct respondent No.1 to abstain from proceeding with the public auction of properties belonging to the appellant on 11.11.2021 under Section 60 (5) of IBC read with Rule 11 of the NCLT Rules, 2016 in view of the liquidation order dated 06.12.2018 passed by the NCLT admitting Coastal Projects Limited (Corporate Debtor) into liquidation (Liquidation Order). The Corporate Debtor availed loan facility to a tune of Rs.774.12 Crore from respondent No.1 bank, to which the appellant stood as a guarantor for the Corporate Debtor and the appellant's property was taken as collateral security by respondent No.1. Upon default by the Corporate Debtor in repayment of the debt, ....
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..... 258/2021. During pendency of the said appeal, respondent No.1 on the strength of the order passed under Section 14 of SARFAESI Act, issued notice dated 29.09.2021 under Rule 8(6) of the Security Interest (Enforcement) Rules, 2002 to conduct public auction of the Property on 11.11.2021. The said notice was followed by a sale notice dated 06.10.2021 published in the 'Deccan Herald' and 'Prajavani' newspapers on 07.10.2021 at Bengaluru and also on the websites of respondent No. 1 and the Indian Banks Auctions Mortgaged Properties Information ("IBAPI") portal. In the meantime, the appeal of the appellant before the DRT was dismissed on 04.10.2021, confirming the order passed under Section 14 of SARFAESI Act. The appellant filed Interlocutory Application before NCLT, Cuttack challenging the action of the Respondent No. 1 and sought the following reliefs: a) The Respondent No.1 has erroneously sought to proceed against the Appellant, a personal guarantor to the Corporate Debtor's debt, prior to the expiry of the moratorium imposed in terms of the Liquidation Order under Section 33 of the IBC, as any recovery of the Corporate Debtor's debt from the Appellant would re....
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....lvency Act, 1909 (for short "PTA Act") and the Provincial Insolvency Act, 1920 (for short "PIA Act"). The said Notification does not prohibit the financial creditor from proceeding against the personal guarantor of a corporate debtor by instituting recovery proceedings permissible under any other existing and applicable law c) The proceedings initiated by the Respondent No.1 against the Appellant under the SARFAESI Act need not be quashed as such proceedings are not proceedings under the IBC and there is no bar against the Respondent No.1 in continuing the SARFAESI proceedings against the Appellant. 3. The appellant challenged the said findings raising several contentions on various grounds. However, the specific questions of law arise for consideration in the appeal are also formulated by the appellant in Paragraph No.8.2 of the grounds of appal. 4. The main grounds urged before this Tribunal, in the grounds of appeal and in the written submissions are that, the insolvency of the Corporate Debtor that resulted in its inability to meet loan repayment obligation towards its financial creditor, ie, the Respondent No.1. It was only when the Respondent No.1 was unable to....
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....ach other, and have been initiated pursuant to the insolvency of the Corporate Debtor. Accordingly, the Tribunal erroneously dismissed the petition and the Tribunal strongly relied on the law laid down by the Apex Court in "Gujarat Urja Vikas Nigam Limited Vs. Amit Gupta (2021) 7 SCC 209 " (hereinafter referred to as "Gujarat Urja Judgment") and concluded that the Interlocutory Application filed by the appellant under Section 60 (5) was neither maintainable nor sustainable. 8. The Apex Court at paragraph No.69 of the said Gujarat Urja Judgment, relied on its earlier judgment in "Arcelor Mittal (India) (P) Ltd. Vs. Satish Kumar Gupta (2019) 2 SCC 1", wherein the following observations were made: "The non-obstanate clause in Section 60 (5) is designed for a different purpose to ensure that NCLT alone has jurisdiction when it comes to applications and proceedings by or against a Corporate Debtor covered by the Code, making it clear that no other forum has Jurisdiction to entertain or dispose of such applications or proceedings." 9. In view of the principles laid down in the above judgment, Section 60 (2) of the IBC was amended with effect from 06.06.2018. From the readi....
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....this Tribunal. 13. Respondent No.1 filed reply admitting about the passing of liquidation order, appointment of respondent No.2 as liquidator and also admitted about the proceedings initiated under Section 14 of the SARFAESI Act before Court of XXXVII Additional Chief Metropolitan Magistrate, Bangalore, obtaining order for taking possession, issue of notice etc. 14. The main objection raised by respondent No.1 is that the appellant indulged in "forum shopping" as the appellant lost its remedy both before the XXXVII ACMM, Bangalore and DRT in the appeal filed under Section 17 of the SARFAESI Act. It is further submitted that Section 60 (5) does not permit the Adjudicating Authority to decide such issues which are not between the Corporate Debtor and the Creditor, thereby the petition is not maintainable under Section 60(5) of IBC. 15. Respondent No.1 supported the order passed by the Adjudicating Authority based on the principle laid down in "State Bank of India Vs. V.Ramakrishnan" (referred supra) while accepting the purpose of amending Section 60 (2) enabling the creditor to proceed against the personal guarantor of corporate debtor. 16. It is further contended that wh....
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....orrower from the debt owed by it to its creditor, by an involuntary process, i.e. by operation of law, or due to liquidation or insolvency proceeding, does not absolve the surety/guarantor of his or her liability, which arises out of an independent contract." 19. While coming to the aforesaid conclusion, the Hon'ble Supreme Court of India has referred and relied on the aforesaid judgment of "State Bank of India Vs. V.Ramakrishnan" (referred supra) but also on other judgments. Notably, the Hon'ble Apex Court had also considered the provisions of Section 128 the Indian Contract Act 1872 as well as the rights of the guarantor under Section 140 of the Indian Contract Act 1872 and thereafter held that "the release or discharge of a principal borrower from the debt owed by it to its creditor, by an involuntary process, i.e. by operation of law, or due to liquidation or insolvency proceeding, does not absolve the surety/guarantor of his or her liability, which arises out of an independent contract. In view of the same, it is contended that the submission of the appellant that in view of the liquidation of the corporate debtor, upon auction of the property under the SARFAESI Act....
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....d by them as aforesaid to the Bank. 23. In view of the above agreed terms of contract, the Appellant is now estopped from taking a contrary stand. 24. On the basis of the above grounds, respondent No.1 sought dismissal of the appeal as not maintainable, upholding the order passed by the Adjudicating Authority. 25. Respondent No.2 - Liquidator filed reply admitting his appointment as liquidator, dismissal of applications etc. by the DRT and by the Adjudicating Authority in various proceedings. 26. Respondent No.2 contended that respondent No.1 has initiated proceedings against the appellant under Chapter III of the SARFAESI Act in his capacity as a personal guarantor for the debts owed by the Corporate Debtor to respondent No.1. In terms of the deed of guarantee dated 26.06.2014, (i) the appellant has mortgaged his personal property to secure the debt owed by the Corporate Debtor to respondent No.1; and (ii) the appellant has an independent, co - extensive and primary obligation to pay respondent No.1 to the extent of the value of the mortgaged asset i.e. Rs.164.06 crores. 27. Respondent No.1 initiated insolvency resolution proceedings against the Corporate Debtor und....
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....o.1) and became remediless. But the Tribunal did not consider the conflict between the provisions of the Indian Contract Act and the IBC. 31. It is further contended that while moratorium is in force, Section 14 and 36 prohibits proceeding with any suit or proceedings against the corporate debtor, but without considering the same, the property of the appellant was sold in the public auction as per the provisions of SARFAESI Act, which is illegal and arbitrary. 32. She also submitted written briefs reiterating the contentions urged in the grounds of appeal and mainly contended that the judgment of the Hon'ble Apex Court in "State Bank of India Vs. V.Ramakrishnan" (referred supra) has no application since the amendment was given effect from 06.06.2018, whereas the proceedings against the appellant were initiated on 17.08.2018. The amended Section 60 (2) now included the liquidation or bankruptcy of a personal guarantor. On 15.11.2019, vide notification No.S.O.4126(E) dated 15.11.2019, insolvency proceedings against personal guarantor were now to be instituted under the IBC and not under the Presidency-Towns Insolvency Act, 1909 (for short "PTA Act") and the Provincial Insolvenc....
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.... would, if parted with, reduce the liability of the personal guarantor. Even if such securities are unknown to the personal guarantor, it is entitled to discharge to the extent of the loss of security. Section 60 (5) (c) of the IBC is only the provision, which permits the Adjudicating Authority to determine such issues, thereby learned Adjudicating Authority failed to appreciate these contentions in proper perspective. 37. Learned senior counsel Sri Ramji Srinivasan, appearing for respondent No.1, vehemently contended that all the questions raised in the present appeal were answered by the Apex Court in "Lalit Kumar Jain Vs. Union of India", "State Bank of India Vs. V.Ramakrishnan" (referred supra). Even otherwise, the High Court of Delhi in "Kiran Gupta Vs. State Bank of India [W.P.(C) No.7230/2020) made it clear that the proceedings under the SARFAESI Act and the IBC are independent, even during subsistence of moratorium none of the provisions of IBC prevent the creditor to proceed against the personal guarantor, since, moratorium protects action against the corporate debtor not against the 3rd party. Therefore, the bar under moratorium has nothing to do with the issue. Theref....
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....curity. Since the corporate debtor failed to repay the loan amount, initiated proceedings under Section 7 of I.B.C, later the same was admitted by the adjudicating authority. However, since the resolution plan was not accepted by the Committee of Creditors, the order for liquidation was passed by the adjudicating authority for realization of the debt due to various creditors by the corporate debtor. At the same time, the creditor initiated proceedings under Section 14 of the SARFAESI Act, 2002, against the appellant and another, before the XXXVII Additional Chief Judicial Magistrate, Bangalore, who in-turn, allowed the application. Accordingly, the creditor took possession of the mortgaged property, but the challenge thereto under Section 17 before the Debt Recovery Tribunal was unsuccessful. Later, the property was brought to sale during pendency of the appeal and bid was knocked down in favour of M/s. Bagmane Developers Private Limited, who was declared as highest bidder in the auction and the confirmation was made subject to the outcome or the result of the present appeal vide letter dated 29.01.2022 bearing No.SAMB/VI/HYD/MNK/2022-23/72 issued by the creditor/first applicant, w....
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.... (referred supra), wherein the Court held as follows: "............we hold that the NCLT was empowered to restrain the appellant from terminating the PPA. However, our decision is premised upon a recognition of the centrality of the PPA in the present case to the success of the CIRP, in the factual matrix of this case, since it is the sole contract for the sale of electricity which was entered into by the Corporate Debtor. In doing so, we reiterate that the NCLT would have been empowered to set aside the termination of the PPA in this case because the termination took place solely on the ground of insolvency. The jurisdiction of the NCLT under Section 60(5)(c) of the IBC cannot be invoked in matters where a termination may take place on grounds unrelated to the insolvency of the corporate debtor....." Though Arcelor Mittal (India)(P) Ltd. was referred, the principle was not completely accepted in "Gujarat Urja Vikas Nigam's case. Hence, the law laid down in "Gujarat Urja Vikas Nigam Limited Vs. Amit Gupta" is binding precedent 45. A perusal of the principle laid down in the above judgment, the Hon'ble Apex Court cautioned NCLT and NCALT to ensure that they do not usu....
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.... of Section 60(5)(c) of I.B.C. The adjudicating authority rightly held that the application under Section 60(5) is not maintainable and even after re-appreciating the law laid down by the Courts and upon consideration of argument, we find no ground to interfere with the finding recorded by the adjudicating authority about maintainability of the application under Section 60(5) of I.B.C. 48. In view of our foregoing discussion, we find no ground, warranting interference with the finding recorded by the adjudicating authority as to the maintainability of the application under Section 60(5) of I.B.C. Accordingly, the finding recorded by the adjudicating authority is hereby confirmed, holding this point in favour of the respondents and against the appellant. POINT No. 2 : 49. The major contention of the learned Senior Counsel for the appellant before this Tribunal is that, when moratorium was imposed during insolvency resolution process or during liquidation process, the proceedings or suits pending before the other Court or Tribunal or Forum shall not be continued. 50. Undoubtedly, there is a bar under Section 14 from proceeding against the corporate debtor in any suits or ....
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....roceeding shall be instituted by or against the corporate debtor: Provided that a suit or other legal proceeding may be instituted by the liquidator, on behalf of the corporate debtor, with the prior approval of the Adjudicating Authority.' 51. Thus, it is clear from both the provisions under Section 14 and Section 33(5) that the proceedings against 'corporate debtor' alone are to be interdicted. There is subtle distinction between Section 14 and Section 33(5). According to Section 14(a), the Adjudicating Authority shall declare moratorium prohibiting the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority. At the same time, Clause (3) incorporated by amendment of Act.26 of 2018 with effect from 06.06.2018, says that, Sub-sections (1) and ((2) of Section 14 have no application to such transactions, as may be notified by the Central Government in consultation with any financial sector regulator or any other authority and a surety in a contract of guarantee to the corporate debtor. 52. It is clear from Su....
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....taken by the counsel for the petitioner that all proceedings against the petitioner, who is only a guarantor, ought to be stayed under the SARFESI Act during the continuation of the Insolvency Resolution process qua the Principal Borrower, is rejected as meritless. The petitioner cannot escape her liability qua the respondent/Bank in such a manner. The liability of the principal borrower and the Guarantor remain co-extensive and the respondent/Bank is well entitled to initiate proceedings against the petitioner under the SARFESI Act during the continuation of the Insolvency Resolution Process against the Principal Borrower." 54. In view of the law laid down by the Division Bench of the Delhi High Court, Moratorium under Section 14 or restriction under Section 33(5) of I.B.C is not a bar to proceed against this appellant herein under SARFAESI Act for recovery of debt based on mortgage created in favour of 1st Respondent executing agreement of guarantee. 55. In "Rakesh Kumar Gupta v. Mahesh Bansal" Company Appeal (AT) (Insolvency) No. 1408 of 2019 decided on 20- 02-2020 (NCLAT)], the NCLAT held that the pending proceedings under SARFAESI Act shall not hinder the proceedings tri....
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....BC, the provision of IBC will prevail over the provision of the enactments that the legislature promised to have taken cognizance of provision of other enactments which were passed in IBC. In "P.R. Commissioner of Income Tax vs Monnet Ispat & Energy Limited", n this case Supreme Court in quite clear terms observed that "given Section 238 of the IBC, 2016, it is obvious that the Code will override anything inconsistent contained in any other enactment, including Income Tax Act." 61. In March 2018 "Report of the Insolvency Committee" was published in which committee on para 5.11 of its report stated following: "The Committee concluded that section 14 does not intend to bar actions against assets of guarantors to the debts of the corporate debtor and recommended that an explanation to clarify this may be inserted in section 14 of the Code. The scope of the moratorium may be restricted to the assets of the corporate debtor only." 62. Finally, this matter came before the the Apex Court in the case of "State Bank of India vs V. Ramakrishnan & Anr." (referred supra). The Hon'ble Apex Court differentiated between moratorium mentioned u/s 14 of the code and interim moratorium....
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.... Act says that, the liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract. 67. Section 140 of the Indian Contract Act deals with rights of surety on payment or performance. Where a guaranteed debt has become due, or default of the principal debtor to perform a guaranteed duty has taken place, the surety, upon payment or performance of all that he is liable for, is invested with all the rights which the creditor had against the principal debtor. 68. A guarantor will get invested with all the rights which the creditor had only "upon payment or performance of all that he is liable for". A guarantor is liable for any payment or performance of any obligation only to the extent the principal debtor has defaulted (vide C.K.Aboobacker v K.P.Ayishu AIR 2000 Ker 29 ( NOC ) ). In any view of the matter, in view of Section 140 of the Indian Contract Act, the appellant herein, on payment of debt due under the guranteed debt, is entitled to recover the same as if he is a creditor. Taking advantage of Section 140 of the Indian Contract Act, Smt. Menaka Gyuruswamy, learned Senior Counsel contended that, in case the entire a....
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....fit of all the creditors. Subject to sub-section (4), the liquidation estate shall comprise all liquidation estate assets which shall include the following:- "(a) any assets over which the corporate debtor has ownership rights, including all rights and interests therein as evidenced in the balance sheet of the corporate debtor or an information utility or records in the registry or any depository recording securities of the corporate debtor or by any other means as may be specified by the Board, including shares held in any subsidiary of the corporate debtor; (b) assets that may or may not be in possession of the corporate debtor including but not limited to encumbered assets; (c) tangible assets, whether movable or immovable; (d) intangible assets including but not limited to intellectual property, securities (including shares held in a subsidiary of the corporate debtor) and financial instruments, insurance policies, contractual rights; (e) assets subject to the determination of ownership by the court or authority; (f) any assets or their value recovered through proceedings for avoidance of transactions in accordance with this....
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....ubmit a claim to the liquidator in such form and in such manner and along with such supporting documents required to prove the claim as may be specified by the Board. A creditor who is partly a financial creditor and partly an operational creditor shall submit claims to the liquidator to the extent of his financial debt in the manner as provided in sub-section (2) and to the extent of his operational debt under sub-section (3). A creditor may withdraw or vary his claim under this section within fourteen days of its submission. Section 39 of I.B.C obligates the liquidator to verify the claims submitted under section 38 within such time as specified by the Board. In any view of the matter, the appellant cannot claim as a secured creditor to include his claim in the list of secured creditors in the claims list prepared under Section 38 as no security interest is created in his favour. 73. The main endeavour of the learned Senior Counsel for the appellant is that, the proceedings were initiated prior to Amendment Act No.26 of 2019 came into force and the judgment of the Apex Court in "State Bank of India Vs. V.Ramakrishnan" (referred supra) has no application. This similar contentio....
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....uable substantive rights. But, the Court did not agree with the contention and various paragraphs, concluded as follows: 104. All creditors and other classes of claimants, including financial and operational creditors, those entitled to statutory dues, workers, etc., who participate in the resolution process, are heard and those in relation to whom the CoC accepts or rejects pleas, are entitled to vent their grievances before the NCLT. After considering their submissions and objections, the resolution plan is accepted and approved. This results in finality as to the claims of creditors, and others, from the company (i.e. the company which undergoes the insolvency process). The question which the petitioners urge is that in view of this finality, their liabilities would be extinguished; they rely on Sections 128, 133 and 140 of the Contract Act to urge that creditors cannot therefore, proceed against them separately. 105. In Vijay Kumar Jain v. Standard Chartered Bank67, this court, while dealing with the right of erstwhile directors participating in meetings of Committee of Creditors observed that: "we find that Section 31(1) of the Code would make it cle....
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....ion to the debt and not the debtor." 107. In Committee of Creditors of Essar Steel (I) Ltd. v. Satish Kumar Gupta68 (the "Essar Steel case") this court refused to interfere with proceedings initiated to enforce personal guarantees by financial creditors; it was observed as follows: "106. Following this judgment in V. Ramakrishnan case [SBI v. V. Ramakrishnan, (2018) 17 SCC 394], it is difficult to accept Shri Rohatgi's argument that that part of the resolution plan which states that the claims of the guarantor on account of subrogation shall be extinguished, cannot be applied to the guarantees furnished by the erstwhile Directors of the corporate debtor. So far as the present case is concerned, we hasten to add that we are saying nothing which may affect the pending litigation on account of invocation of these guarantees. However, NCLAT judgment being contrary to Section 31(1) of the Code and this Court's judgment in V. Ramakrishnan case [SBI v. V. Ramakrishnan, (2018) 17 SCC 394], is set aside." 108. It is therefore, clear that the sanction of a resolution plan and finality imparted to it by Section 31 does not per se operate as a discharge of th....
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....Shivnarayan Bhagirath [AIR 1940 Bom 247; see also In re Fitzgeorge Ex parte Robson [(1905) 1 KB 462] )." 75. Finally, In Re Kaupthing Singer and Friedlander Ltd. the UK Supreme Court reviewed a large number of previous authorities on the concept of double proof, i.e. recovery from guarantors in the context of insolvency proceedings. The court held that: "The function of the rule is not to prevent a double proof of the same debt against two separate estates (that is what insolvency practitioners call "double dip"). The rule prevents a double proof of what is in substance the same debt being made against the same estate, leading to the payment of a double dividend out of one estate. It is for that reason sometimes called the rule against double dividend. In the simplest case of suretyship (where the surety has neither given nor been provided with security, and has an unlimited liability) there is a triangle of rights and liabilities between the principal debtor (PD), the surety (S) and the creditor (C). PD has the primary obligation to C and a secondary obligation to indemnify S if and so far as S discharges PD's liability, but if PD is insolvent S may not enforce tha....
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....itor in terms of Section 140 of the Indian Contract Act, is entitled to recover the debt irrespective of sale of assets of corporate debtor in liquidation process in any of the recognized modes. Therefore, he cannot be included in the list of secured creditors, as no security interest was created in favour of the guarantor and he would not fall within the definition of 'Secured Debtor' as defined under Section 3(31) of I.B.C consequently, cannot be included in the list of secured creditors in the liquidation process, so as to claim share. 80. The Hon'ble Apex Court made certain observations in para-99 of Judgment in "Lalit Kumar Jain Vs. Union of India", referred supra, in paragraph-111 of the same Judgment held that approval of a Resolution Plan does not ipso facto discharge a personal guarantee of a Corporate Debtor of her or his liabilities under the contract of guarantee as it arises out of independent contract. At the same time, based on the principles laid down in "Innoventive Industries Ltd. Vs. ICICI Bank Ltd. and Anr.", "P.R. Commissioner of Income Tax vs Monnet Ispat & Energy Limited", Hon'ble Apex Court is of confirmed view that the provisions of IBC will prevail over....