TaxTMI 
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2025 (6) TMI 689
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....Mr. Deepankar, Advocates for SBI For the Appellant : Mr. Sandeep Bajaj, Mr. Mayank Biyani, Mr. Parijat Singh, Advocates For the Respondents : Mr. Prafful Saini, Mr. Suraj Anand, Mr. Deepankar, Advocates for SBI JUDGMENT INDEVAR PANDEY, MEMBER ( T ) The Company Appeal (AT) (Ins.) No. 1694 of 2024 has been filed under Section 61(1) of the Insolvency and Bankruptcy Code, 2016, challenging the order dated 31.07.2024 passed by the Adjudicating Authority (National Company Law Tribunal, Ahmedabad Bench), in CP (IB) No. 26 (AHM) of 2023. The appellant, Shrinathji Spintex Private Limited, had filed the application under Section 95 of the Code to initiate insolvency resolution proceedings against Respondent No. 1/Mr. Shantilal Parbatbhai Lakkad, the personal guarantor of M/s Sunrise Ginning Private Limited, the corporate debtor. The State Bank of India is the Respondent No.2 in this case and Sh. Rajendra Jain, Resolution Professional (RP) is the Respondent No.3. 2. The Adjudicating Authority (hereinafter referred to as AA) dismissed the application on the ground that no written contract of guarantee existed. The appellant contends that a valid guarantee was provided orally and formaliz....
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....-17, confirming its liability to the appellant. (v) On 02.01.2020, the appellant filed Special Civil Suit No. 02 of 2020 before the Principal Civil Judge, Rajkot, seeking recovery of the dues and an injunction to restrain Respondent No. 1 and other guarantors from disposing of their assets. (vi) A consent decree was passed on 05.03.2020, signed by Respondent No. 1. The decree obligated the corporate debtor and Respondent No. 1 to pay INR 5,77,85,361, including interest, to the appellant. The decree also created a hypothecation on specific immovable properties owned by Respondent No. 1, including: Land at Jamnagar with R.S. No. 1115 and 1116, plots 8, 10-14, and others, admeasuring 3,112.49 sq. mt. Land at Jamnagar R.S. No. 1114 (Paiki 2), plots 78 and 79, totalling 304.55 sq. mt. Land at Moje-Manavdar, Taluka Manavdar, District Junagadh, R.S. No. 5, plot 2, admeasuring 181.155 sq. mt. (vii) The consent decree remained unfulfilled, and no payments were made. On 10.11.2022, the appellant issued a demand notice in Form B under Rule 7(1) of the Insolvency and Bankruptcy Rules, 2019, to Respondent No. 1/ Mr. Shantilal Parbatbhai Lakkad. The notice sought payment of Rs.5,77,8....
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....CP (IB) No. 26 (AHM) of 2023, challenging the order dated 31.07.2024, passed by the NCLT, Ahmedabad Bench. The appeal involves Mr. Shantilal Parbatbhai Lakkad (R1/ Personal Guarantor), along with Shrinath Ji Spintex Private Limited (R2/ applicant seeking insolvency proceedings), and State Bank of India (R3/secured financial creditor). 9. Apart from what has been stated in the facts related to Company Appeal (AT) (Ins.) No. 1694 of 2024, certain additional facts are given below: i. On 01.02.2023, the NCLT appointed Mr. Rajendra Jain (Appellant) as the Resolution Professional (RP) under Section 97 of the IBC, directing him to submit a report under Section 99 within 10 days. ii. On 08.02.2023, the Appellant wrote to both Respondent No. 1 and Respondent No. 2 requesting documents and information relating to the debt, including proof of payment, list of assets, and financial details. However, no response was received from Respondent No. 1. iii. In the absence of cooperation, and relying on the Consent Decree and other records, the Appellant submitted his Section 99 Report on 22.02.2023, recommending admission of the Section 95 application. iv. On 31.07.2024, the AA dismissed th....
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....e Personal Guarantor of the same CD viz. Sunrise Ginning Private Limited. 13. In this case, Mr. Rajendra Jain (appellant/ Resolution Professional) has challenged the order dated 31.07.2024, passed in CP (IB) No. 25 (AHM) of 2023. This case involves Mr. Hemantbhai Parbatbhai Lakkad (R1/ another personal guarantor of Corporate Debtor M/s Sunrise Ginning Private Limited), Shrinathji Spintex Private Limited (R2/ applicant seeking insolvency proceedings), and State Bank of India (R3/secured financial creditor). 14. The facts in Company Appeal (AT)(Insolvency) No. 1838 of 2024 are the same as those in Appeal No. 1837 of 2024, except that they involve a different personal guarantor. Since both appeals arise from similar proceedings, orders, and allegations against the same Resolution Professional, the same shall be read as part of the record for both matters. Relevant para 16 of CP (IB) No. 25 (AHM) of 2023 is extracted below: "16. In view of the above we pass the following order:- ORDER I. CP(IB) 25 of 2023 is dismissed and IA 238 of 2023 is disposed off. II. The applicant and RP are directed to pay a penalty of Rs. 1 Lakh each to the Prime Minister's Relief Fund. The Regi....
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....such an application. Furthermore, Section 3(10) of the IBC defines a "creditor" to include a decree holder. 19. The counsel places reliance on the judgment of this Tribunal in 'Ashok Agarwal v. Amitex Polymers Pvt Ltd., 2021 SCC OnLine NCLAT 49', wherein this Tribunal clarified that a decree holder falls within the ambit of the term "creditor" under Section 95 of the IBC. 20. The counsel submits that the Consent Decree, forms a valid contract of Guarantee. In this case, the appellant and the corporate debtor were engaged in business transactions involving the sale and purchase of cotton bales in 2015. The appellant raised invoices during this period, which remained unpaid. 21. The counsel further submits that due to non-payment, the appellant filed Special Civil Suit No. 02 of 2020 before the Principal Civil Judge, Rajkot. On 05.03.2020, a consent decree was executed between the appellant and Respondent No. 1. The decree recorded the assurance of Respondent No. 1, among others, to pay the appellant's legal dues with interest and to refrain from transferring or encumbering their properties until the dues were settled. 22. The counsel further states that under Section 5(22) of th....
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....Bank v. Channaveerappa, (2006) 11 SCC 506, and the decision of this Tribunal in Pooja Ramesh Singh v. State Bank of India, Company Appeal (AT) (Ins) No. 329 of 2023, which held that the liability of a guarantor can arise automatically based on the terms of the guarantee. 28. The counsel for the appellant further submitted that the date of default, therefore, is correctly recorded as 05.03.2020, as also relied upon by the NCLT in initiating CIRP against the corporate debtor in Shrinathji Spintex Pvt. Ltd. v. Sunrise Ginning Pvt. Ltd., CP (IB) 314 (AHM) 2022. 29. Ld. Counsel has submitted that the Respondent No. 2 had no locus standi to object to the initiation of insolvency proceedings under Section 95 of IBC, as it is an admitted fact that no contractual relationship exists between the Appellant and Respondent. The IBC does not allow third-party objections to such proceedings, which can be initiated by a single creditor. Accepting such objections would prioritize one creditor's claim over another, undermining the legal process. Respondent No. 2's objections are baseless, as they do not affect its rights during the insolvency process, while denying the Appellant its legiti....
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.... The respondent submits that no formal deed of guarantee was executed by Respondent No. 1 in favor of the appellant. The appellant's reliance on the consent decree as a contract of guarantee is misplaced, as the decree only created a joint and several obligations for payment, rather than an assurance to discharge the corporate debtor's liability upon default. Furthermore, under the terms of the sanction letter issued by SBI, Respondent No. 1 was prohibited from entering into any guarantee obligations, making the purported assurance invalid. 35. The counsel for Respondent No. 2/ SBI argued that under Rule 3(e) of the IBBI (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019, invocation of a guarantee is necessary for a Section 95 petition. However, the appellant never invoked the alleged guarantee before filing the petition. The appellant's assertion that the date of default was 05.03.2020 is unfounded, as this was merely the date of the consent decree and not an invocation of a guarantee. 36. Ld. Counsel has stated that this application has been filed to delay the recovery proceedings initiated by SBI a....
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....r the insolvency application under Section 95 of IBC is maintainable, given the allegations of fraud in obtaining the Consent Decree. 42. We would deal with issue 1 and 2 together as the appellant has pleaded for treating consent decree as contract guarantee document and date of passing of decree as date of invocation. 43. Section 126 of the Indian Contract Act defines a "contract of guarantee" as an agreement where a guarantor undertakes to discharge the liability of a third party upon default. The appellant contends that the Consent Decree itself is a contract of guarantee. The Section 126 of the Indian Contract Act is reproduced below: "Section 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 called the principal debtor", and the person to whom the guarantee is given is called the "creditor. A guarantee may be either oral or written." 44. Further, Section 126 mandates that a guarantee must be cl....
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....cree unless it contains a clear acknowledgment of liability. The respondent cited this case to argue that the Consent Decree dated 05.03.2020, relied upon by the appellant, was only a recorded settlement and did not establish fresh liability against Respondent No. 1 as a personal guarantor. Just as the Supreme Court in this case ruled that a Consent Decree cannot extend the limitation period, the present decree cannot serve as conclusive proof of debt under the Insolvency and Bankruptcy Code (IBC). 50. In the Code the definition of Term "Personal Guarantor" means an individual whose is the surety in a contract of guarantee to a Corporate Debtor. In this case there is no written contract of guarantee qua the CD and there is no invocation of guarantee by the Creditor. 51. Under Rule 3(e) of the IBBI (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019, a guarantor is liable only when the guarantee has been invoked and remains unpaid. The appellant has not produced any evidence that the alleged guarantee was ever invoked. Instead, the appellant's application under Section 95 directly treats date of Con....
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....Court has consistently held that a contract of guarantee requires clear and explicit evidence of consent, the absence of such evidence in the present case the ratio of Judgment supra does not apply. (ii) Mir Niyamath Ali Khan v. Commercial and Industrial Bank Ltd., 1967 SCC OnLine AP 48 -The appellant cites this case of Andhra Pradesh High Court to argue that the Consent Decree constitutes a valid guarantee under the Indian Contract Act, 1872. However, in the matter of Mir Niyamath Ali Khan (supra), the guarantee in question was a properly executed contract with express acknowledgment of liability, and the guarantor's consent was unambiguous and supported by a pre- existing written agreement. In the present case, there is no independent contract of guarantee apart from the disputed Consent Decree. The decree was not the result of a contested court proceeding, where liability was determined but only a private compromise. Moreover, the respondent has challenged the decree's validity on the grounds that it was obtained without disclosing the CIRP proceedings of the Corporate Debtor, which further undermines the appellant's reliance on this case. The ratio of the aforesai....
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....termination of liability, making it enforceable under IBC. In contrast, in the present case, the Consent Decree dated 05.03.2020, was not an adjudicated decree, but a compromise between parties recorded by the civil court. The court did not examine or decide upon the merits of the claim or the alleged guarantee before passing the decree, making it fundamentally different from the facts in Ashok Agarwal (supra). The appellant's reliance is misplaced on the aforesaid case as it applies only to cases where the decree conclusively establishes an undisputed financial liability, which is not the situation in the present case. (vi) Laxmi Pat Surana v. Union Bank of India, (2021) 8 SCC 481 - The appellant has cited Laxmi Pat Surana (supra) to argue that the default date should be considered as the date of the Consent Decree. However, in Laxmi Pat Surana (supra), the liability of the guarantor was based on a valid and enforceable contract, whereas in this case, the alleged guarantee is based solely on the disputed Consent Decree, which is not an independent guarantee agreement. Without a separate, enforceable guarantee, the appellant's reliance on this case is misplaced. 54. It i....
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....ecree was obtained fraudulently, without disclosing the ongoing Corporate Insolvency Resolution Process (CIRP) against M/s Sunrise Ginning Private Limited. It is undisputed that at the time the decree was executed, the moratorium under Section 14 of IBC was in force, rendering any settlement involving the corporate debtor legally impermissible. 60. We have already seen that the plaintiffs and dependents in the aforesaid civil suit before the Principle Civil Judge Rajkot are related to one another. We are also aware that the properties of the several defendants including Respondent No.1 were already mortgaged to Respondent No.2 for which the mortgage deed and guarantee documents are on record. 61. It is clear from the above that the CD was in moratorium from 20.11.2019 to 12.03.2020 during which period initiation of any suit against the CD was barred under Section 14 of IBC. The IRP was in control of the CD during this period and the Directors of the CD were not authorised to sign any documents relating to CD during the moratorium. However, this fact was not brought to the notice of Ld. Principal Civil Judge, Rajkot in whose court the consent suit was filed and subsequently decree....
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....ese facts, the Consent Decree is prima facie vitiated by fraud and cannot be the basis for insolvency proceedings. 67. We, therefore, hold that the consent decree was vitiated by fraud and is ab-initio void and unenforceable in IBC proceedings. Thus, all three issues are decided against the appellants. Company Appeal (AT) (Ins) No. 1837, 1838 of 2024 68. The Comp. App. (AT) (Ins.) No. 1837 of 2024 also assails the order passed by AA in CP (IB) No. 26 (AHM) of 2023. The appeal has been filed by Mr. Rajendra Jain, who is the Resolution Professional in CP (IB) No. 26 (AHM) of 2023, challenging the order dated 31.07.2024, passed by the NCLT, Ahmedabad Bench. The appeal involves Mr. Shantilal Parbatbhai Lakkad (R1/ Personal Guarantor), along with Shrinath Ji Spintex Private Limited (R2/ applicant seeking insolvency proceedings), and State Bank of India (R3/secured financial creditor). 69. The Comp. App. (AT) (Ins.) No. 1838 of 2024 arises from the order passed by Ld. AA in the CP (IB) No. 25 (AHM) of 2023, in which Mr. Hemantbhai Parbatbhai Lakkad is the Personal Guarantor of the same CD viz. Sunrise Ginning Private Limited. In this case, Mr. Rajendra Jain (appellant/ Resolution Pro....
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....nt in Krishna Prasad Verma (D) through LRs v. State of Bihar & Ors., [Civil Appeal No. 8950 of 2011]. 73. He further submitted that the Tribunal failed to consider that a Consent Decree can form the basis for initiating insolvency proceedings against a personal guarantor. In Urgo Capital Ltd. v. Bangalore Dehydration and Drying Equipment Co. (P) Ltd., [2020 SCC OnLine NCLAT 149], it was held that a decree holder is treated as a creditor under the Code, and a petition under Section 7 based on a decree is maintainable. 74. The Appellant also submits that a contract of guarantee is not necessarily required to be in writing. By signing the Consent Decree, Respondent No. 1 agreed to act as guarantor, thereby creating a valid guarantee obligation under law. 75. Ld. Counsel further submitted that the Impugned Order lacks proper reasoning and has imposed disproportionate punishment on the Appellant. The penalty was imposed and directions were issued without any detailed findings or justification. The Appellant was only performing his duties under the Code and cannot be faulted for any alleged misinterpretation of law. Therefore, the findings and directions against the Appellant in the I....
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....n C.P. (I.B.) No. 559/7/NCLT/AHM/2018 on 20.11.2019. Hon'ble NCLAT set aside the order of admission of CIRP vide order dated 12.03.2020 in company appeal (AT) (Insolvency) 32/2020" 83. However, despite knowing this, the RP recommended the initiation of insolvency proceedings based on the aforesaid consent decree which was obtained during the moratorium period, in express violation of Section 14 (1) of IBC. The main role and duty of Resolution Professional is to implement the provisions of IBC in insolvency proceedings. How could he recommend a consent decree obtained during the moratorium period to be used as a guarantee is beyond comprehension. It prima facie reflects either incompetence or collusion with Shrinathji Spintex Pvt. Ltd and CD to save the guarantors from ongoing legal proceedings by SBI. 84. The Appellant has relied on the Judgment in Krishna Prasad Verma (D) through LRs v. State of Bihar & Ors., Civil Appeal No. 8950 of 2011, to argue that even if he made a legal mistake, it should not lead to penalties unless there was bad intention. However, that case was about land matters and not insolvency law. It was decided in a completely different context. In the pr....