TaxTMI 
TaxTMI 
2024 (3) TMI 804
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....iving rise to this Appeal are : (i) Electrosteel Steels Limited (hereinafter referred to as "ESL") was sanctioned a Financial Assistance by SREI Infrastructure Finance Limited (hereinafter referred to as "SREI") for a sum of Rs.500 crores on 26.07.2011. A rupee Loan Agreement was executed between SREI and ESL. Clause (d) of Schedule IV of the Loan Agreement placed an obligation on the Promoter - "to arrange for infusion of funds in a form and manner acceptable to SREI at the end of each financial year to comply with the Financial Covenants in case of breach of such Financial Covenants" (ii) The Respondent - Electrosteel Castings Limited (ECL), Promoter of the ESL, holding 34.40% shareholding in ESL entered into a Deed of Undertaking on 27.07.2011, which was entered between ESL, SREI and ECL, where the ECL was defined as 'Obligor' and Clause 2.2 of the Deed of Undertaking provided that "In the event the Borrower is not in a position to comply with the Financial Covenants provided in the Financing Documents, or has breached such Financial Covenants, the Obligors will arrange for the infusion of such amount of fund into the Borrower such that the Borrower is in a pos....
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.... under the Financing Documents by ESL to SREI) as also all rights, title and interest in respect of Financing Documents. The Respondent ECL after coming to know about the Assignment, wrote the Appellant that entire debt owed by ESL to SREI stood discharges as a result of payment in cash and equity transfer in favour of SREI in terms of the approved Resolution Plan. (viii) On 27.12.2018, the Appellant issued Notice under Section 13 (2) of the SARFAESI Act, 2002 against the ECL. Notice under Section 13(4) was also issued on 19.06.2019. (ix) The ECL filed an Application No.4322 of 2019 before the Madras High Court under Section 12 of the Madras High Court Letters Patent seeking leave to institute a suit against the Appellant; seeking a declaration that the Assignment Agreement is bad, invalid, illegal, void ab initio and no legal effect and seeking permanent injunction restraining the Appellant and SREI from taking any action on the basis of Assignment Agreement. The Learned Single Judge of the Madras High Court on 20.09.2019 rejected the Application filed by Respondent holding that the suit was not maintainable. However, liberty was granted to the Respondent to appr....
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....shnendu Datta, learned Senior Counsel appearing for the Appellant and Shri Mihir Thakur, learned Senior Counsel with Shri Pulkit Deora, learned Counsel appearing for the Respondent. 4. Shri Krishnendu Datta, learned Senior Counsel for the Appellant submits that Adjudicating Authority committed error in holding that Respondent - ECL is not a guarantor of the Financial Facilities extended by SREI to ESL. It is submitted that the Rupee Loan Agreement between SREI and ESL itself made provision for other terms and conditions of the loan, which contemplated undertakings to be provided by the Promoters. One of the undertaking was to arrange for the infusion of funds in the form and manner acceptable to SREI at the end of each financial year to comply with the Financial Covenants in case of breach of such Financial Covenants. One day after the Loan Agreement, ESL, SREI and ECL entered into a Deed of Undertaking, Warranty and Indemnity where the ESL and ECL agreed to various covenants in respect of the loan facility under the Loan Agreement. The ECL was referred to as an Obligor in the Deed of Undertaking. The learned Senior Counsel for the Appellant has referred to and relied on Clause ....
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....cial Forums. The Adjudicating Authority committed error in observing that ECL has clarified that his pleadings in other Forums was to the effect that it acted as a surety by offering its immovable property. There was clear admission in different pleadings by ECL that it is a surety/ guarantor of ESL for the Financial Facilities advanced by SREI. It is submitted that Sanction Letter dated 26.07.2021 does not override the Deed of Undertaking. It is submitted that absence of specific mention of the guarantee in the Information Memorandum is not material, since Information Memorandum is with disclaimer that Information Memorandum is based on information supplied by the Management of ESL. The factum of non-mentioning of guarantee in the Assignment Agreement dated 30.06.2018 is also immaterial. It is submitted that the liability of ECL as a guarantor/ surety does not arise under the Assignment Agreement, but arises under the Financing Documents. The learned Senior Counsel for the Appellant has also referred to NOC issued by SREI to ESL, which no objection was without prejudice to their rights against the guarantors under relevant financial documents executed by such guarantors/ third par....
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....ve shares worth INR 152.38 crores. The Resolution Plan, thus, did not provide Financial Creditors including SREI, the full value of the Unsustainable debt of ESL. It is further submitted that Resolution Plan expressly preserved the rights of Financial Creditors against any third parties, guarantors or security providers in relation to any portion of Unsustainable Debt secured or guaranteed by such third parties, which is reflected by Clause 3.2(ix) of the Resolution Plan. By virtue of Clause 3.2, the Financial Creditor to ESL consciously reserved the liberty of proceedings against third-parties, including the existing Promoters, which includes the ECL in relation to any portion of the Unsustainable Debt. The Adjudicating Authority lost sight of above Clause and has wrongly come to the conclusion that by approval of Resolution Plan entire debt of ESL extinguished and nothing was left to recover from guarantors and third-party security providers of ESL. The Resolution Plan clearly preserved the ability of guarantee/ securityholder lenders to proceed against the guarantors/ mortgagors such as ECL. The learned Senior Counsel for the Appellant submits that order passed by the Adjudicati....
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.... debtor. It is submitted that on the day when Rupee Loan was executed, SREI has sent letter dated 26.07.2011 addressed to ESL, where SREI expressly confirmed that as per the terms or the Sanction Letter and other Financing Documents, no personal guarantee from Mr. Umang Kejriwal or corporate guarantee from Electrosteel Castings Limited is required for securing the Facility. The Undertaking was furnished by ECL as a Promoter entity of ESL and pursuant to the requirement under Clause (d) of Schedule IV of the Loan Agreement dated 26.07.2011. The letter dated 27.07.2011 clearly reflect the SREI's own understanding of the Rupee Loan Agreement dated 26.07.2011. In the Information Memorandum in the CIRP of ESL, there was no mention that any guarantee has been furnished by ECL to SREI. Had there been any guarantee to secure the debts of SREI, the mention of guarantee would have found place in the Information Memorandum. Even in the Assignment Agreement dated 30.06.2018 executed by SREI in favour of UV Asset Reconstruction Company Limited ("UVARC") there is no mention of any guarantee given by ECL. In Schedule 1 to the Assignment Agreement against the column titled "details of the guaranto....
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....bt, up-front payment was made to SREI and with reference to unsustainable debt, the same converted to equity shares of Rs.10/- each, which was duly allotted to SREI under the Resolution Plan. Conversion of balance debt into equity shares is tantamount to repayment / recovery/ retirement of the debt. The entire debt of SREI having extinguished by approval of Resolution Plan, the UVARC cannot initiate any proceeding against Respondent No.1, who was not a guarantor, but had only mortgaged immovable asset. The assets were mortgaged with SREI to ensure the repayment of debt of ESL. The entire debt of ESL having been repaid/ discharged, there is no occasion for initiating any proceedings by UVARC against Respondent No.1. The entire debt of SREI having been satisfied as per the Resolution Plan in the CIRP of the ESL, no right was left to assign the debt to UVARC. The fact that there was reduction in value of equity shares of ESL, does not lead to conclusion that any debt was still outstanding. The reduction of shares to value of equity shares was part of the Resolution Plan under Step 1 and Step 2. The reduction of value of equity share issued to SREI cannot be claimed as financial debt o....
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.... of such Financial Covenant". The Deed of Undertaking, Warranty and Indemnity was executed on the next day, i.e., 27.07.2011 between SREI, ESL and ECL. The Appellant has placed reliance on Clause 2.2 - Financial Covenants, which is as follows: "2. 2. Financial Covenants In the event the Borrower is not in a position to comply with the Financial Covenants provided in the Financing Documents, or has breached such Financial Covenants, the Obligors will arrange for the infusion of such amount of fund into the Borrower such that the Borrower is in a position to comply with the abovementioned Financial Covenants." 12. In reference to Clause 2.2, learned Counsel for the Respondent has also referred to and relied on Clauses 2.3.1 and 2.3.2, which are as follows: "2.3.1. such additional funds as and when provided/ arranged by the Obligors to the Borrower in terms of subclause 2.2 above, shall be in such form i.e. by way of equity capital, unsecured loans, deposits and on such terms and conditions as may be acceptable to SREI; 2.3.2. in the event of such funds being provided/arranged by the Obligors to the Borrower by way of unsecured loans or deposits ....
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....l funds, which were to be provided by the Promoters/ Borrower were by way of equity capital, unsecured loans or deposits. Obligation was on Respondent to arrange the infusion of funds to ESL. No obligation was undertaken by ECL to discharge the liabilities accrued on ESL as per Financial Covenants to the SREI. The SREI had no recourse against the ECL in event of ESL not fulfilling the Financial Covenants. The obligation was taken by Promoters to infuse funds in the ESL, which cannot be read to mean that any guarantee was given to the SREI by ECL to discharge the obligation of ESL. There is a contemporaneous letter dated 26.07.2011 issued by SREI on same day on which Rupee Loan Agreement was executed by SREI and ESL. In the letter, which was issued after sanction letter dated 26.07.2011 to the Respondent, following was stated: "We would like to further confirm that, as on date, as per the terms of the Sanction Letter and other Financing Documents, no personal guarantee from Mr. Umang Kejriwal or corporate guarantee from Electrosteel Castings Limited is required for security the Facility." 16. The above letter clarifies that Sanction Letter does not contemplate any corpor....
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....rd to Financial Facility advanced by SREI was also a relevant fact and how the ESL understood the Financing Document, cannot be said to be irrelevant. The Information Memorandum, which was prepared by RP, an Officers appointed by Adjudicating Authority, after perusal of all the documents did not find any guarantee as is now sought to be contended by the Appellant. We, thus, cannot ignore the Information Memorandum, which does not mention about guarantee of ECL as one of the documents. It is also relevant to notice the Assignment Deed executed by SREI in favour of UVARC, also did not mention any guarantee by ECL in reference to Rupee Loan Agreement between SREI and ESL. The Assignment Agreement dated 30.06.2018 in favour of UVARC is on the record, wherein in Clause (c), following has been stated: (C) The Assignor is desirous of assigning to the Assignee, the Loans disbursed under the aforesaid Financing Documents together with all its rights, title and interest in the Financing Documents and any underlying Security Interests, pledges and/ or guarantees in respect of such Loans. Further, the Assignee on the basis of the Due Diligence Exercise is desirous of acquiring/ purcha....
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.... July 27, 2011 Original Documents w.r.t. the mortgage of Land admeasuring about Acres 96.3 Cents with factory building thereon together with all benefits and advantages accruing thereon at elavur Vilage, Ponneri Taluk, Chinglepet District within the Sub-Registration District and comprised in Patta No.1343, situated at Survey Nos.1218/A1, 1219/A1, 1219/A3, 323/A1, 324, 325, 1220/A1, 1281/16, 1281/1/P, 1281/1/Q, 1281/1/R, 1281/1/N, 326/A1, 1220/A1, 1221/A2, 1275/2 and 1279/2: a) Declaration of mortgage and letter of deposit of title deeds b) Original Title deed dated 22.09.1983 (As per O.P. No. 510 of 1978)" 20. The above Assignment by SREI to UVARC indicate that in Rupee Term Loan and in Deed of Undertaking, ECL was never treated as guarantor of the loan. In the Assignment to which both SREI and UVARC are party, against the Column 'Details of guarantor/ co-borrower' it is mentioned 'Nil'. The Deed of Assignment, which is genesis of birth of Appellant, throws considerable light on nature of transaction between the parties and the Appellant, cannot be heard to contend that non-mention of guarantee in the Deed of Assignment is irrelevant. We, thus, are of the v....
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....f money to the creditor, but an obligation to see to it that another person, the debtor, does something; and that the creditor's remedy for the guarantor's failure to perform it lies in damages for breach of contract only. That this was so, even where the debtor's own obligation that was the subject of the guarantee was to pay a sum of money is clear from the fact that formerly the form of action against the guarantor which was available to the creditor was in special assumpsit and not in indebitatus assumpsit: Mines v. Sculthrope (1809) 2 Camp. 215. The legal consequence of this is that whenever the debtor has failed voluntarily to perform an obligation which is the subject of the guarantees the creditor can recover form the guarantor as damages for breach of his contract of guarantee whatever sum the creditor could have recovered from the debtor himself as a consequence of that failure. The debtor's liability to the creditor is also the measure of the guarantor's. Whether any particular contractual promise is to be classified as a guarantee so as to attract all or any of the legal consequences to which I have referred depends upon the words in which the parties ....
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....d form, contained the following relevant provisions: "2. GUARANTEE AND INDEMNITY 2.1 In return for our lending, agreeing to lend or continuing to lend money, or granting credit facilities, to the Borrower you accept the liabilities set out below. These liabilities are unconditional and you cannot withdraw from them, except as set out in Clause 5. 2.2 You guarantee that all money and liabilities owing, or becoming owing to us in the future, by the Borrower (whether actual or contingent, whether incurred alone or jointly with another and whether as principal or surety) will be paid and satisfied when due. 2.3 Any amount claimed under the Guarantee is payable by you immediately on demand by us. 2.4 As a separate obligation you agree to make good (in full) any losses or expenses that we may incur if the Borrower fails to pay any money owed to us, or fails to satisfy any other liabilities to us, or if we are unable to enforce any of the Borrower's obligations to us or they are not legally binding on the borrower (whatever the reason). 2.5 You will also make good any losses or expenses which we may incur if we take steps to enforc....
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....en noted in the judgment. The terms clearly mentions that guarantee is given as a primary obligor and not merely as the surety. The terms have been noted in paragraph 8 of the judgment, which are to the following effect: "IRREVOCABLE PAYMENT GUARANTEE To: Shanghai Shipyard Co., Ltd... 1. In consideration of your entering into the Shipbuilding Contract with [Reignwood] as the buyer ("the Owner") for the construction of one (1) self propelled drill ship with Shipyard's Hull No. S6030 ("the Drillship"), we, [Reignwood] hereby IRREVOCABLY, ABSOLUTELY and UNCONDITIONALLY guarantee in accordance with the terms hereof, as the primary obligor and not merely as the surety, the due and punctual payment by the OWNER of the Final Instalment of the Contract Price amounting to a total sum of United States Dollar US$170,000,000 as specified in (2) below... . 2. The instalments guaranteed hereunder, pursuant to the terms of the Contract, comprise the Final Instalment in the amount of U.S. Dollars One Hundred and Seventy Million (US$ 170,000,000) payable by the Owner. 3. We also IRREVOCABLY, ABSOLUTELY and UNCONDITIONALLY guarantee, as primary obligo....
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....L, does not amount to guarantee. In paragraph 50 to 53, following was held: "50. Dr Tulzapurkar is right in this much : the form a guarantee takes is immaterial. But that only goes part of the required distance. I put no value to Zee's assertion of there being 'no privity'. This seems to me to be the kind of typically unthinking catch-phrase thrown out when a demand is made. Of course there is some privity; the question is whether there is a privity of a contract of guarantee - for that is the claim. A guarantee creates a very specific type of obligation. It undertakes and assures the repayment of another's debt on the default of that other. Therefore, there must be an unambiguous affirmation that the guarantor assumes or takes on this liability. 51. Returning to (1) the first clause in the LoC and (2) the corresponding security clause in the Facility Letter, this is a confirmation by Zee that it will 'support' ATL. The next part tells us of the form that 'support' is to take : the infusion of equity/debt into ATL. This means that Zee would get some share purchase money into ATL's coffers, or give it a loan. The next part of the clause tells us for wha....
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....al and contractual obligations and this end we will undertake all reasonable steps to ensure that M/s. Dominion Chemical Industries Ltd., conducts its operations efficiently to meet its obligations in the usual course of business. We are convinced that the company concerned has the capabilities to fully cater to its financial commitments." 34. The Letter of Comfort, which was examined by the Karnataka High Court was held not as a guarantee. In paragraph 6, 7 and 9, following was held: "6. The said letter of comfort nowhere reveals that the appellant stood as guarantor for the loan disbursed by respondent No. 1 in favour of respondent No. 2. It merely states that the associate company (debtor company) will meet the financial and contractual obligations and that the appellant herein undertakes all reasonable steps to ensure that the debtor company conducts its operations efficiently to meet its obligations in the usual course of business. The comfort letter is more in the nature of recommendatory letter. If a person has not stood as guarantor or surety, he cannot be treated a guarantor or surety without there being a specific undertaking by him that he would disc....
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....liability. 36. The learned Counsel for the Respondent has also relied on Delhi High Court judgment in Aditya Birla Finance Limited vs. Siti Networks Limited and Ors. - (2023) SCC OnLine Del 1290. In paragraph 26 of the judgment, the letter, which was claimed to be a guarantee has been extracted, which is as follows: "26. It is stated that pursuant to this, the respondent Nos. 2 and 3 issued the alleged Letters of Guarantee dated June 26, 2018 to the petitioner, inter alia stating the following: a. "We are aware that Aditya Birla Finance Limited (ABFL) has sanctioned and disbursed a Rupee Term Loan Facility of INR150,00,00,000 (Rupees One Hundred and Fifty Crore) [-Facility"] to our group company, Siti Networks Limited, pursuant to Credit Arrangement Letter dated January 16, 2017 bearing reference number ABFL/PFSG/ CAL/000894, Facility Agreement dated February 23, 2017 and other transaction documents in connection therewith. b. Pursuant to our discussions, we hereby assure you and confirm that we shall ensure that Siti Network Limited services and repays the Facility on the relevant due dates." ( Emphasis Supplied ) " 37. The Delhi High Cour....
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....rt has been relied as admission. It is submitted that Respondent in the affidavit has mentioned that Plaintiff/ Applicant stood guarantee for the financial assistance. Reliance has been placed on paragraphs (II) and (III) of the affidavit filed before the Madras High Court in C.S.(D) No.18962 of 2019, which are as follows: (II) Plaint filed on behalf of CD before the Madras High Court in C.S(D) No. 18962 of 2019 on or around June 2019 "20. The Plaintiff, being a surety, its liability is only accessory and secondary. The provisions of the Contract Act, dealing with discharge of a surety are not exhaustive. A voluntary quantification and crystallization of the balance as between creditor and principal debtor undoubtedly discharges the creditor pro tanto." (para 20 @ 13 of IA (I 8) No. 104/C8/2022) ( emphasis supplied ) (iii) Application filed u/s 17(1) of the SARFAESI Act, 2002 by CD before ORT Chennai on 17.07.2019 Ground A .... When once the liability in respect of Mis ESL came to be extinguished, the 2nd defendant ceased to have any independent right against the Applicant herein. Further, a reading of Section 5 (1 J of the SARFAESI Act would sho....
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.... were made in context of proceedings initiated by UVARC under SARFAESI Act. It is admitted that under SARFAESI Act, immovable property was mortgaged by Respondent No.1 and proceedings were initiated for enforcing the said security under SARFAESI Act. Hence, pleadings made by Respondent No.1 have to be looked in the background that proceedings were initiated by UVARC for enforcement of security. Admittedly, a mortgage was made of the immovable property by Respondent No.1, hence, the said pleadings were in reference to mortgage of the immovable property. The learned Counsel for the Respondent has also relied on certain affidavits filed before Madras High Court, where as per the Respondent, the pleadings were explained. Reliance has been placed on the rejoinder affidavit filed on behalf of Respondent No.1 to the counter of UVARC wherein in paragraph 17, following has been stated: "17. With reference to paragraph 16 of the Reply, it is submitted that the obligations of the 1st Respondent towards the Appellant under the Declaration is that of a guarantor without personal recourse. In other words, the only recourse available to the 2nd Respondent against the Appellant is that in....
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....stood 'guarantor' to the Financial Facilities extended by SREI to ESL was neither gone into, nor decided. The learned Counsel for the Respondent has rightly referred to following observations of the Hon'ble Supreme Court in the SLP, which was filed against the order of the Madras High Court, refusing to institute the suit, where the Hon'ble Supreme Court observed following in paragraph-9: "It is made clear that we have not expressed anything on merits in favour of either of the parties" 46. In view of the above, we are of the considered opinion that the submission of the Appellant cannot be accepted that there was clear and categorical admission of Respondent No.1 in the pleadings before Madras High Court and the Hon'ble Supreme Court that Respondent No.1 stood guarantor of the Financial Facilities extended by SREI to ESL. As noted above, the pleadings made in those proceedings have to be looked into the background that Application for Leave was filed in the Madras High Court seeking leave to institute a suit, challenging the proceedings initiated by UVARC under SARFAESI Act. Admittedly, Respondent No.1 mortgaged its immovable property as per the Supplementary Agreement....
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....es gets reduced from Rs.10/- to Rs.0.20. However, this Tribunal notes that such capital reduction has been effected in terms of the approved resolution plan. Step 2 is a subsequent step which can be effected only after completion of Step 1 and at Step 1 level only all the sustainable as well as unsustainable debt of the financial creditors including that of SREI gets discharged. Therefore, once the sustainable and unsustainable debts have been discharged as aforesaid at Step 1 level only, FC cannot make a claim based on capital reduction implications, which is a subsequent step in terms of the approved resolution plan. Since, without implementing step 1, the step 2 cannot be implemented in terms of the Resolution Plan, therefore, the claim of FC that on conversion of the balance debt of ESL into enquiry shares under the Resolution Plan on 06.06.2018, SREI did not receive any equity shares of Rs.10/- for its entire share of the balance debt being Rs.336.18 Crore is not true as is evident from the documents and relevant details produced by the CD. Accordingly, based on the aforesaid terms of the resolution plan we agree with the contention of the CD that approval of the Resolution Pl....
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....unsel for the Appellant has relied on Clause 3.2 of the Resolution Plan, under heading 'Proposal for Workmen and Financial Creditor'. Sub-clause (ix) of Clause 3.2 has been relied, which clearly mentions that Company shall stand discharged of any default, but on the same time it has been mentioned that any rights against any third party shall not be extinguished. It is relevant to extract following relevant part of sub-clause (ix) : "... Furthermore, the Company shall stand discharged of any default or event of default under any loan documents or other financing agreements or arrangements (including any side letter, letter of comfort, letter of undertaking etc.) and all rights/ remedies of the creditors shall stand permanently extinguished except any rights against any third party (including the Existing Promoter) in relation to any portion of Unsustainable Debt secured or guaranteed by third parties. Furthermore, it is hereby clarified that upon approval of the Resolution Plan by the NCLT,...." 52. The learned Senior Counsel for the Appellant has also referred to the Minutes of the 9th Meeting of the Committee of Creditors ("CoC") dated 29.03.2018, where the CoC while ....
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.... contention, following was held in paragraph 16 and 18 of the judgment: "16. The view which was taken by the Adjudicating Authority both in the Order dated 03.02.2022 approving the Resolution Plan and Clarification Order was that in view of the fact that unpaid debt shall stand converted into non-convertible redeemable preference share hence the excluded securities are no longer enforceable. The Adjudicating Authority held that excluded securities are subsumed under Clause 3.3.(iii). The Adjudicating Authority obviously referred to Paragraph 3.3. (e) (H) which provided that balance Financial Debt forming part of the Admitted Debt shall stand converted into non-convertible redeemable preference shares of the company which shall be issued to the Financial Creditors upon conversion of the unpaid debt. The above provision in the Plan for conversion into nonconvertible redeemable preference shares of the balance financial debt has no bearing on specific provisions in the plan by 3.3.(iii)(g) which clearly provided that excluded securities shall not be extinguished or waived under this Resolution Plan. When the Resolution Plan itself states that excluded securities shall not be ....
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....t make any difference and any objection by the Respondent, cannot be allowed to sustain, in view of the clear and categorical Clause 3.2 (ix) of the Resolution Plan. The judgment support the submission of the Appellant that even if the debt was converted into non-convertible redeemable preference shares, like equity shares in the present case, securities can be excluded. 56. We, thus, are of the view that in view of Clause 3.2 (ix) of the Resolution Plan, when read in the light of the CoC Meeting dated 29.03.2018, which throws considerable light on the meaning and content of Clause 3.2 (ix), the submission of the Respondent cannot be accepted that after approval of Resolution Plan, the entire debt stand extinguished and no recourse can be taken by the Financial Creditor against third party. 57. As noted above in Question (C), which was framed by the Adjudicating Authority was 'Whether the approval of the Resolution Plan has led to extinguishment and effacement of the entire debt of ESL (including the liability owed by the CD)...'. Although, the Adjudicating Authority has returned the finding in paragraph 15 as noted above that "approval of Resolution Plan has led to extinguis....