TaxTMI 
TaxTMI 
2024 (3) TMI 1317
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....al (AT) (Insolvency) No. 1104, 1105, 1107 & 1108 of 2020 filed under Section 61 of the Insolvency & Bankruptcy Code, 2016 ( in short 'Code') in CA No. 1393(PB)/2019 in CP No. (IB) - 50 (PB)/2018 under which the Resolution Plan was approved by the Adjudicating Authority. The Appellants have filed the present Appeals being aggrieved to the extent as it allows recourse to the Financial Creditors against the Personal Guarantors of Asian Colour Coated Ispat Limited (in short 'Corporate Debtor'), the Respondent No. 1 herein. 2. Since the subject matter, the facts of all the four Appeals, the Impugned Order dated 26.10.2020 passed by the National Company Law Tribunal, New Delhi, Principal Bench (in short 'Adjudicating Authority') is common and these four Appeals were conjointly pleaded by Appellants as well as by the Respondents, we shall examine all these four Appeals together and decide by way of one common order covering all four appeals. 3. Heard the Counsel for the Parties and perused the records made available including the cited judgements. 4. It is noted that the Corporate Insolvency Resolution Process (in short 'CIRP') of the Corporate Debtor was initiated on 28.07.2018 ....
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....m the Financial Creditors to the SPV in totality and therefore there could not have been any concept of "Excluded Rights" being part of the Resolution Plan and the approval of the Resolution Plan containing such provisions is illegal and perverse. 11. The Appellants emphasised that the approval of the Resolution Plan by the Adjudicating Authority ought to be within the ambit of the code and anything contravening the provisions of the code is to be treated as illegal. In this connection, the Appellants submitted that the portion of Resolution Plan which permitted the Financial Creditors to retain the rights to pursue their legal remedies against the Appellants as the Personal Guarantor to the Corporate Debtor in absence of any debt, which ceased to exist after assignment of the entire debt to the SPV, such legal remedy in guise "Excluded Rights" could not have been approved and was the not examined properly and such pleadings were not deliberated adequately by the Adjudicating Authority. 12. The Appellants submitted that the Impugned Order is illegal because it seeks to enforce the security interest without the existence of debt qua the Financial Creditor as the same is agains....
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.... debt are integral rights and need to be transported to the third party after signing the deed of assignment. It is the case of the Appellants that no-one can claim that pure debt can be transferred but the right to sue against the Personal Guarantors to the Corporate Debtor would remain with the Financial Creditors. 18. The Appellants submitted that in view of this legal position, if any party who could pursue the legal remedies against the Appellants being the Personal Guarantors to the Corporate Debtor could have been only the SPV and by no way the Financial Creditors could vest themselves the rights under the illegal pretext of "Excluded Rights" which was unlawfully inserted in the Resolution Plan and was illegally approved by the Adjudicating Authority violating the provisions of the Code. 19. The Appellants submitted that the Impugned Order has relied upon three judgments of the Hon'ble Supreme court of Indian, namely, Lalit Kumar Jain vs. Union of India & Ors. [(2021) 9 SCC 321], State Bank of India Vs. v. Ramakrishnan & Anr. Civil Appeal No. 4553 of 2018 and Gauri Shankar Jain Vs. Punjab National Bank & Anr. W.P. No. 10147 (W) of 2019 which are not applicable in the p....
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....al Creditors could have pursued against the Personal Guarantors for remaining debts which is not the case here. 25. The Appellants pleaded this Appellate tribunal to look into the spirit of the Code which is for the revival of the Corporate Debtor and not to be allowed as recovery mechanism by the Financial Creditors which will defeat the very purpose of the Code and will compromise position of various Stakeholders including the Personal Guarantors to the Corporate Debtor. 26. The Appellants submitted that if no outstanding debt is reflected in the books of the Financial Creditors, how such Financial Creditors can contemplate any legal remedy against the Personal Guarantors, simply because the financial debt does not survive in the books of the Corporate Debtor as well as the Financial Creditors and after the assignment such financial debts along with the underlying rights could vest only with the assignee of the debt i.e., SPV in the present case. 27. The Appellants stated that the liabilities towards the guarantees which were directly connected with the debts and therefore become inseparable from the assignment and it has to be exercised only by the party in whose favour....
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....ment. 34. The Appellants assailed the Impugned Order whereby the Resolution Plan has extinguished its statutory rights of subrogation as guarantors of the Corporate Debtor contravening the provisions of Indian Contract Act, 1872 and the Appellant further submitted that since the terms of restructuring of debt are not spelt out in the Resolution Plan, the Appellants automatically get discharged in the capacity of Guarantor under the provision of the Indian Contract Act, 1872. The Appellant stated that after implementation of Resolution Plan of claims against the Corporate Debtor are extinguished except as provided in the Resolution Plan by the SRA and become binding on of Stakeholders including Financial Creditors, Operational Creditors, Corporate Debtor and other Stakeholders in terms of Section 31 of the Code. 35. The Appellants submitted that the RBI guidelines are very clear and are in nature of mandatory directives and cannot be violated by the Stakeholders including the Financial Creditors. 36. Concluding their arguments, the Appellants submitted that the Impugned Order be set aside. 37. Per contra, the Contesting Respondent i.e, JSW Steel Coated Products Limited/ ....
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....ir financial obligations and further submitted that the Resolution Plan also extinguished the rights of the subrogation of the Appellants. The Respondent No. 2 submitted that the similar contentions was earlier discussed by the Hon'ble Supreme Court of India in the matter of Essar Steel India Ltd. Committee of Creditors [(2020) 8 SCC 531], where the Apex Court after considering the similar objections of the Guarantors found no infirmity in the Resolution Plan and refused to make any observation regarding impacting the proceedings regarding the invocation of such guarantees. 43. The Respondent No. 2 submitted that the Stakeholders including the Guarantors of the Corporate Debtor are bound by the approved Resolution Plan in terms of the Section 31 (1) of the Code. The Respondent No. 2 further submitted that it is a settled position of the law that the Guarantor's liabilities are co-extensive with the Corporate Debtor. 44. The Respondent No. 2 reiterated that since the Resolution Plan specifically provided for extinguishment of right of subrogation available to the Appellants as Guarantors, the arguments of the Appellants herein that the Resolution Plan is not in compliance w....
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....d legally against the Personal Guarantors to the Corporate Debtor in order to recover their money not provided in the Resolution Plan. 52. The Respondent No. 3 submitted that the various clauses of the incorporated as part of the final Resolution Plan dated 06.05.2019 r/w Addendum dated 17.06.2019 i.e., Clause 1.3, 1.8, 1.10, 1.12, 1.13, 1.14 read along with relevant definition in Schedule I- List of defined terms, clearly indicate that nothing in the Resolution Plan shall operate or have the effect or assignment, revoking or cancelling or extinguishing the "Excluded Right" as defined and directs the Financial Creditors (DFC) and/or related creditors as applicable, are free to pursue such remedies and exercise such rights as the Financial Creditors may under applicable laws in respect of such "Excluded Rights". 53. The Respondent No. 3 clarified that it was only remaining debt according incorporated as part of the final Resolution Plan dated 06.05.2019 r/w Addendum dated 17.06.2019 which was assigned to the SPV of the Respondent No. 2 in accordance with the Resolution Plan but carved out "Excluded Rights" and financial contracts, except which legal rights of recovery through ....
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....at it was business decisions of the SRA as detailed out in Resolution Plan to revive the Corporate Debtor and has provided the legal rights and liabilities including the rights of the Financial Creditors to carve out the concept of "Excluded Rights" in favour of the Financial Creditors to pursue recoveries against the Personal Guarantors for the remaining unpaid portion of debts not provided in the Resolution Plan. 63. Concluding his arguments the Respondent No. 4 submitted that the Appeals deserves to be dismissed. Findings 64. At the outset, we take into consideration the facts regarding admitted debt and proposed payment by the SRA w.r.t. Financial Creditors and Operational Creditors and therefore following picture emerges :- "Resolution Plan submitted by the Respondent No. 2 proposes the following :- S. No. Parties Admitted Debt (Approx.) (INR) Payment Proposed by Respondent No. 2 (INR) Total 7801,82,87,850 1550,00,00,00 1. Secured Financial Creditors 4864,39,65,599 1499,98,93,253 (Loan Assignment Payment) 2. Unsecured Financial Creditors 1702,60,19,604 25,00,00,000 3. Operational Creditors 507,87....
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....olution Plan Steps). on a pro rata basis to the amount payable to the Direct Financial Creditors. Upon such assignment, the Purchaser shall be entitled to exercise all rights as a creditor in respect of the Remaining Debt, including the right to enforce any security, guarantee or mortgage granted in respect of such debt. 2. Para 1.13 of the Addendum: Definition of "Remaining Debt"- ""Remaining Debt" shall mean all rights, title, interests of the creditors in and to Admitted Financial Debt less the Corporate Guarantee Debt, along with all rights, assets, title, charges, encumbrances, mortgages and guarantees (including the personal guarantees issued by Mr. Pradeep Kumar Aggarwal to the Direct Financial Creditors, to the extent of the Loan Assignment Payment), and any beneficial interest therein, securing such debt. (but excluding the Excluded Rights), which will be assigned/novated to the Purchaser pursuant to this Resolution Plan. The assignment and novation of the personal guarantees issued by Mr. Pradeep Kumar Aggarwal to the Direct Financial Creditors, to the extent of the Loan Assignment Payment is an integral part of the Resolution Plan." 3. Para 1.1....
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.... The implications on the rights and obligations of the Personal Guarantor to the Corporate Debtor in case the entire debt stand transferred or assigned and the Financial Creditors retained rights to peruse legal remedies against such Personal Guarantor by way of "Excluded Rights".. All such issues are inter mingled, inter connected and to some extent depends upon each other, therefore, we shall take up and discuss al above issue in joint manner in subsequent paras. 68. We are of the opinion that the intent of the legislature behind the provisions of the Code is for resolution of the Corporate Debtor and not of the Personal Guarantors of the Corporate Debtor. The financial creditors have a right to proceed against the personal guarantors of the Corporate Debtor, and further, that the personal guarantors, in terms of section 31 of the Code are duty bound by the terms of the Resolution Plan approved by the Adjudicating Authority. We also feel that a Resolution Plan itself can vary and modify the rights of the creditors and guarantors of the corporate debtor and provide for continuation of personal guarantees which do not need any confirmation from Personal Guarantor to the Corpo....
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....ety's right to benefit of creditor's securities.- A surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship is entered into, whether the surety knows of the existence of such security or not; and if the creditor loses, or, without the consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security. Illustrations (a) C, advances to B, his tenant, 2,000 rupees on the guarantee of A. C has also a further security for the 2,000 rupees by a mortgage of B's furniture. C cancels the mortgage. B becomes insolvent and C sues A on his guarantee. A is discharged from liability to the amount of the value of the furniture. (b) C, a creditor, whose advance to B is secured by a decree, receives also a guarantee for that advance from A. C afterwards takes B's goods in execution under the decree, and then, without the knowledge of A, withdraws the execution. A is discharged. (c) A, as surety for B, makes a bond jointly with B to C, to secure a loan from C to B. Afterwards, C obtains from B a further security for....
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....s of the original lenders which have been paid or settled by the guarantors. On the other hand, if such contingencies and uncertainties on account of rights of subrogation is allowed to be continue, the Corporate Debtor even after resolution as a result of approved Resolution Plan, will always be subject to financial uncertainties and vagaries due to such claims by the Personal Guarantors in future. This clearly is not the intent of the code which has been consciously made for the revival of the Corporate Debtor and has adopted the concept of clean slate theory for the reborn corporate entity under new management. 76. Now we will also look into the aspect of Section 140 and 141 of the Indian Contract Act, 1872 vis-à-vis Section 238 of the Code. We note that Section 238 of the Code describes categorically that the code take precedent over any inconsistency contained in any other existing law which includes Indian Contract Act, 1872, therefore, despite provisions of Section 140 and 141 of the Indian Contract Act, 1872 the Personal Guarantors cannot claim any relief in view of clear provisions of Section 238 of the Code. 77. The denial of right of subrogation is no mor....
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.... actions, as may be required or deemed necessary for the release, assignment or novation of (1) the encumbrance over the assets of the corporate debtor, and (ii) the pledge over the shares of the corporate debtor: within 5 (five) business days from the effective date: and - Be deemed to have waived all claims and dues (including interest and penalty, if any) from the corporate debtor arising on and from the insolvency commencement date, until the effective date" 103. Shri Rohatgi, learned Senior Advocate appearing on behalf of Shri Prashant Ruia, also pointed out Section XIII(1)(g) of the resolution plan dated 23-10-2018, in which it is stated as follows: "Upon the approval of the resolution plan by the Adjudicating Authority in relation to guarantees provided for and on behalf of, and in order to secure the financial assistance availed by the corporate debtor, which have been invoked prior to the effective date, claims of the guarantor on account of subrogation, if any, under any such guarantee shall be deemed to have been abated, released, discharged and extinguished. It is hereby clarified that, the aforementioned clause shall not apply in any....
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....ntained in the Rules and Regulation 36(2) referred to above, require information as to personal guarantees that have been given in relation to the debts of the corporate debtor. Far from supporting the stand of the respondents, it is clear that in point of fact, Section 31 is one more factor in favour of a personal guarantor having to pay for debts due without any moratorium applying to save him." (Emphasis Supplied) We note that the ratio emerges from above judgment is that in view of Section 31 of the Code, the Financial Creditors can pursue against the Personal Guarantors to the Corporate Debtor. 81. Lalit Kumar Jain vs. Union of India & Ors. [(2021) 9 SCC 321] "130. The rationale for allowing directors to participate in meetings of the CoC is that the directors' liability as personal guarantors persists against the creditors and an approved resolution plan can only lead to a revision of amount or exposure for the entire amount. Any recourse under Section 133 of the Contract Act to discharge the liability of the surety on account of variance in terms of the contract, without her or his consent, stands negated by this court, in V. Ramakrishnan where it....
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....ate so as to discharge the liabilities of personal guarantors (to corporate debtors)...." (Emphasis Supplied) This judgement paves clear way for the Financial Creditors to pursue their legal remedies against the Personal Guarantor to the Corporate Debtor. Having noted above judgment, it will not be worthwhile to repeat what flows clearly from above judgment. The above judgement of the Apex Court is binding and by a large applicable to the facts of these appeals. 82. It is now well settled law, in light of the Essar Case (Supra) that rights of subrogation that may arise against the Corporate Debtor can be extinguished under the Resolution Plan and therefore the arguments of the Appellant on issue of rights of subrogation's are not convincing. If the rights of subrogation are allowed to continue against the Corporate Debtor under the management of the new SRA, the same would have the effect of putting the SRA and the Corporate Debtor in the same position as prior to its insolvency resolution. The allegation of the Appellant pertaining to differential treatment due to extinguishing their rights of subrogation under the approved Resolution Plan against the Corporate D....
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....ether before or after it has become payable. (g) Stipends allowed to military, 6 [naval], 7 [air-force] and civil pensioners of 8 [the Government] Government] and political pensions cannot be transferred. (h) No transfer can be made (1) in so far as it opposed to the nature of the interest affected thereby, or (2) 9 [an unlawful object or consideration within the meaning of section 23 of the Indian Contract Act, 1872 (9 of 1872), or (3) to a person legally disqualified to be transferee]. [(i) Nothing in this section shall be deemed to authorise a tenant having an untransferable right of occupancy, the farmer of an estate in respect of which default has been made in paying revenue, or the lessee of an estate under the management of a court of Wards, to assign his interest as such tenant, farmer or lessee.]" (Emphasis Supplied) It may be argued that the purpose of stipulating Section 6(e) i.e., non-transferable of mere right to sue or such actionable claims is to prohibit the practice of gambling out of litigation. We observe that right to sue has been preceded by the word "mere" meaning only right to sue but if the right to sue is not simpli....
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....ges for tort. An assignment of a mere right of litigation is bad... The reason behind the rule is that a bure right of action for damages is not assignable because the law will not recognise any transaction which may savour of maintenance of champerty. It is only when there is some interest in the subject matter that a transaction can be saved from the imputation of maintenance. That interest must exist apart from the assignment and to) that extent must be independent of it. 15...A bare right of action is not assignable. When however the right of action is one of the incidents attached to the property or contract assigned it will not be treated as a bare fight of action." It is submitted that the same has been reiterated by Supreme Court as well as high courts in various judgments, for instance in Agri Marketing Co. vs. Imperial Exports Limited, 2001 SCC OnLine Bom 841, by the Hon'ble Bombay High Court. Thus, the survival of guarantees is clearly in contravention of Section 6(e) of the Transfer of Property Act, 1882 and as such in violation of Section 30(2)(e) of the Code. (Emphasis supplied) 90. We also look into the cited judgment about Section 6....
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....ch provisos for continued rights of the Financial Creditors against the Personal Guarantors and that there has been no assignment of such rights to proceed against the Personal Guarantors to the SPV of the Successful Resolution Applicant/ Respondent No. 2. This was in fact proposed by the SRA in finally approved Resolution Plan and seems to be have done after due deliberations with the CoC. In such eventuality there is no applicability of transfer of "mere rights to sue", as the said rights were never assigned and have been retained by the Financial Creditors all along. The Appellants cannot seek undue benefits on account of the Resolution Plan and avoid their huge financial liabilities accrued based on the Personal Guarantees given by the Personal Guarantors to the Corporate Debtor. 92. We are of clear opinion that the financial creditors have reserved the rights to proceed against the personal guarantors like the Appellant herein in terms of the "Excluded Rights" in approved Resolution Plan. There is no question of transfer of a "mere right to sue" and in such circumstances, we feel that it is a structured financial deal in form of Resolution Plan exercised based on the commer....
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....ng the judgment of Hon'ble High Court in the matte of Vikas Aggarwal Vs. Reserve Bank of India (Supra) regarding extinguishment of debts. We have already recorded the relevant para of the said judgment while discussing the averments made by the Appellants in our earlier discussion. On this judgement, during the hearing, one specific query was put by the bench as whether any final decision has been taken by the Hon'ble High Court on these observations, however, it was stated that the Hon'ble High Court only noted but did not give any ruling and left to the DRT to look into. Thus, the averments of the Appellants in citing the Vikas Aggarwal (Supra) cannot give any rescue to the Appellants. 98. Now we will take issue regarding alleged non existing of debts in the books of the Financial Creditors and regarding treatment in the books of the financial creditors with respect to such continuing rights of the financial creditors against the personal guarantors of the Corporate Debtor after the approval of the Resolution Plan. We feel that it the prerogative and within the purview of such Financial Creditors (within the applicable regulatory framework as applicable ) and it does not come ....
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....luate the commercial decision of CoC much less to enquire into the justness of the rejection of the resolution plan by the dissenting financial creditors. From the legislative history and the background in which the I&B Code has been enacted, it is noticed that a completely new approach has been adopted for speeding up the recovery of the debt due from the defaulting companies. In the new approach, there is a calm period followed by a swift resolution process to be completed within 270 days (outer limit) failing which, initiation of liquidation process has been made inevitable and mandatory. In the earlier regime, the corporate debtor could indefinitely continue to enjoy the protection given under Section 22 of the Sick Industrial Companies Act, 1985 or under other such enactments which has now been forsaken. Besides, the commercial wisdom of CoC has been given paramount status without any judicial intervention, for ensuring completion of the stated processes within the timelines prescribed by the I&B Code. There is an intrinsic assumption that financial creditors are fully informed about the viability of the corporate debtor and feasibility of the proposed resolution plan. They ac....