TaxTMI 
TaxTMI 
TaxTMI 
2024 (3) TMI 804
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....trosteel 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 position to comply with the abovementioned Financial Covena....
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....spect 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 approach the Tribunal for suitable reliefs. The ECL filed an Appeal being OSA No.292 of 2019 assailing the or....
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.... 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 2.2 of Deed of Undertaking. The learned Senior Counsel for the Appellant has also referred to the Supplementary Agreement executed on 21.....
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.... 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 party security documents/ deed of guarantee/ undertakings for due repayment of the entire dues by your Company to SREI Infrastructure Financ....
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....nsustainable 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 Adjudicating Authority is unsustainable and deserves to be set aside and CIRP by commenced against the ECL for default of payment of the Financial ....
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....xpressly 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 guarantor/ co-borrower" mentions 'Nil', which indicates that both the parties to the Assignment understood that there is no guarantee in existence.....
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....s 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 of ECL. Reduction in value of equity shares is credited to the capital reserve of ESL in terms of the approved Resolution Plan. 7. Coming to ....
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....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 to the Borrower as Company Appeal (AT) (Insolvency) No.975 of 2022 19 stated above, the Obligors shall not, without the prior written approval of SREI, demand or withdraw such funds or any part....
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....y 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 corporate guarantee from Respondent. The letter was issued on the same day and clearly reflects the interpretation of Rupee Loan Agreement. It is also relevant not to notice that the Rupee Loan Agreement dated 26.07.2011 in Schedule IV ....
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....ting 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/ purchasing the Loans together with all the rights, title and interest of the Assignor in the Financing Documents and any underlying Security Interests, pledges and/or guarantees in respect of such Loans, upon the terms and subject to the conditions he....
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....rised 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 view that Assignment Agreement, Schedule-1, did not mention name of ECL as guarantor in reference to Rupee Loan Agreement is a relevant fact and proves that ECL was not the guarantor to the Rupee Loan Agreement. 21. The learned Counsel for both the parties in support of their submissions have placed re....
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....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 have expressed the promise. Even the use of words "guarantee" is not in itself conclusive. It is often used loosely in ordinary commercial dealings to mean an ordinary warranty. It is sometimes used to mis-describe what is in law a contract of indemnity and not a guarantee. Where the contractual promise can be correctly classified a....
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.... 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 enforce this Guarantee or if we try to do so...." "4.2 Your obligations under this Guarantee are those of principal, not just as surety. We will not be obliged to make any demand on, or take any steps against, the Borrower or any other person before enforcing this Guarantee."" 26. When we look into the clauses which came for consideration in the above case, it is clear that obli....
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.... 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 obligor and not merely as surety, the due and punctual payment by the Owner of interest on the Final Instalment guaranteed hereunder at the rate of five percent (5%) per annum from and including the first day after the default until the date of full payment by us of such amount guaranteed hereunder. 4. In the event that the Owner fails to punctually pay the Final instalment guaranteed hereunder in accordance with the Contract o....
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....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 what, and this has a string of purposes. Of these, the 'honouring put options' is the clause that concerns us. Thus, the LoC did not in any way, on the face of it, result in Zee assuming, assuring or guaranteeing the repayment of YES Bank's loan to LELM. Instead, it provided for a means to facilitate the enforcement of security that YES Bank took, and, specifically, the assignment of the put option. 52. Rogers CJ's admonition against using 'finely-tuned linguistic f....
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....tter 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 discharge the liability of the third person, in case of his default. In this context, it is relevant to note the provisions of section 126 of the Indian Contract Act, 1872, which read thus : "126. 'Contract of guarantee', 'surety', 'principal debtor' and 'creditor'.-A 'contract of guarantee' is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the 'surety'; the person in respect of whose default the guarantee is given is ca....
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....nce 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 Court examined the said letter and in paragraphs 237 and 238 returned the following findings: "237. In the case in hand, on perusal of the letters dated June 26, 2018, it can be seen that there is no assurance in the letters that respondent Nos. 2 and 3 shall pay the credit facility to the petitioner on the failure of respondent No. 1 to repay the petitioner. In the absence of such stipulation the letters do not meet the requirement of Section 126 of the Indian Contract Act, 1872. This I say so because the letter only states that the respondent Nos. 2 and 3 shall assur....
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....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 show that there cannot be an assignment of rights against the surety alone de hors the rights against the original borrower. more so when the rights against the original borrower has been extinguished by mutual consent and full satisfaction."(@ Ground A @38 of IA (18) No. 104/C8/2022) ( emphasis supplied } " 41. Similarly, learned Senior Counsel for the Appellant has relied on order dated 30.09.2019 of the Madras High Court, where submission of Respondent No.1 was noticed in following words: "Order dated 30.09.2019 passed by the Ld. Single Judge before the Madras High Court in IA.No. 4322 of 2019 in C.S (....
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....here 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 the event of 3rd Respondent failed to repay the Credit Facilities to the 2nd Respondent, then the 2nd Respondent **** **** enforce the security interest created over the Scheduled Properties. However, as set out hereinabove the Credit Facilities availed by the 3rd Respondent have been discharged and extinguished in full. Accordingly, there is no question of 1st Respondent or the 2nd Respondent asserting any claims against the 1st Respondent in the alleged capacity as a guarantor and/ or otherwise." 44. Another affidavit relied by the Respondent is the rejoinder affidavit to the counter filed by SREI, wherein in paragraph 5, following has been pleaded : 5. With re....
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....leadings 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 as noted above and pleadings have to be looked into the background that mortgage was made by Respondent No.1 of his immovable property to secure the Facilities. 47. The issue directly arose in proceeding under Section 7, as to whether Respondent No.1 stood guarantor to SREI in reference to Financial Facilities extended to ESL, which has been answered by the Adjudicating Authority taking into consideration all relevant facts. Neither the issue was decided in proceedings before Madras High Court or by the Hon'ble Supreme Court, nor any such admission can be pressed into service as claimed by the Appellant. The Adjudicating Authority in the impugned order after considering all facts an....
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....esolution 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 Plan has led to extinguishment and effacement of the entire debt of ESL. 16. With the aforesaid discussions we conclude on this aspect that all debts owed by ESL, the principal borrower, stood paid and all liabilities stood extinguished by virtue of an approved and binding resolution plan under which such payment has been made by the successful resolution applicant Vedanta, through a combination of cash and equity. SREI having accepted the payment in cash and having been allotted equity proportionate to its balance debt, all debt owed to SREI (and consequently to FC) stood satisfied/ extinguished." 50. Law on extinguishment of claim against personal guarantor and third party on approval of Resolution ....
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....ermanently 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 putting the Resolution Plan submitted by Vedanta for voting, put a caveat in following words: "The members took note of the final Restated Resolution Plan submitted by Vedanta to the RP and placed by the RP before the COC and agreed to vote on the same as part of Agenda Item No.15, but without prejudice to all the claims and rights of the CoC against the guarantors of Electrosteel Steels Limited and their respective assets and relevant securities provided by such Guarantors, or any other person, over their relevant assets, if any under the relevant existing Financing Documents." 53. The learned Counsel for the Respondent has submitted that the above Minutes of the CoC are not relevant and it is the Resolution Plan, which i....
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....ed 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 extinguished under the Resolution Plan which is the provisions in the plan made in 3.3.(iii)(h). Further as noted in 3.3.(v) there was again clear provision that excluded securities shall continue to survive. When the plan is ready as a whole it is clear that excluded securities were to continue and no contrary intention is reflected in the plan. It is due to the above contents of the plan that Learned Counsel for the Resolution Applicant also does not dispute that the Plan never contemplated for extinguishment of excluded securities. Both the parties had argued that plan never contemplated for extinguishment of the excluded securities. The Adjudicating Authority thus committed error in making observation in issuing direction no. 1 of the Impu....
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....he 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 extinguishment and effacement of the entire debt of ESL", but no finding has been returned as to the liability owed by the Corporate Debtor also stood extinguished or not. In view of our observation as above specially in view of Clause 3.2 of the Resolution Plan, which clearly contemplated that all rights/ remedies of the creditors shall stand permanently extinguished against the Company, 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. The finding of the Adjudicating Authority that approval of Resolution Plan has led to extinguishment and effacement of the entire debt of ESL has to be held to be finding qua the Corporate Debtor only. We hold that t....