TaxTMI 
TaxTMI 
2025 (6) TMI 689
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.... Mr. Prafful Saini, Mr. Suraj Anand, 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....
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....ay the outstanding dues. The debt was acknowledged in the corporate debtor's financial records for the financial year 2016-17, 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 ....
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....al (AT) (Ins.) No. 1837 of 2024 8. This appeal 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). 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 abse....
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....th based on the record and that penalizing him for a legal interpretation is unjustified. Company Appeal (AT) (Ins.) No. 1838 of 2024 12. This appeal 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. 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....
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....ant prays for allowing the appeal and setting aside the impugned order. 18. The counsel for the appellant submits that the NCLT erred in its interpretation of Section 95 of the IBC by holding that only a financial creditor can apply for initiating IRP under the said section. Section 95 permits any "creditor" to file 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....
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....l submits that default occurred on the date of the Consent Decree. The liability of a guarantor crystallized on 05.03.2020, the date of the consent decree, as it explicitly recorded the obligation to pay "as soon as possible." This does not require invocation of the guarantee. In this regard, the counsel placed reliance on Hon'ble SC's decision in Syndicate 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 doe....
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..... 1's authority. 33. Ld. Counsel places reliance on the Judgment of Hon'ble Supreme Court in "Pulavarthi Venkata Subba Rao v. Valluri Jagannadha Rao (1964) 2 SCR 310; AIR 1967 SC 591 wherein the Supreme Court held that a compromise decree is not a decision of the court, to argue that the consent decree cannot operate as a guarantee or extend the limitation period. 34. 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 peti....
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....uments advanced, the following issues arise for determination: 41. Issues for consideration (i) Whether the Consent Decree dated 05.03.2020 constitutes a valid contract of guarantee under Section 126 of the Indian Contract Act, 1872 (ii) Whether the invocation of personal guarantee is a precondition for initiating insolvency proceedings against the personal guarantor. (iii) Whether 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 con....
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....etermines liability after due judicial scrutiny, which is absent in this case. 49. Hon'ble Supreme Court in Pulavarthi Venkata Subba Rao v. Valluri Jagannadha Rao, AIR 1967 SC 591 held that a Consent Decree is merely a formal acknowledgment of an agreement between parties and does not create fresh legal obligations unless explicitly stated. It ruled that limitation periods for enforcing a debt are not automatically extended by a Consent Decree 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 ....
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....hat may suggest that Respondent No. 1 voluntarily assumed the role of a personal guarantor. As we have seen from the relevant clause of the Consent Decree that it is merely a settlement agreement that does not explicitly state that Respondent No. 1 intended to act as a personal guarantor. Additionally, the alleged guarantee was not separately documented nor supported by any communications, correspondences, or other written assurances. Since Hon'ble Supreme 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,....
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.... v. Amitex Polymers Pvt Ltd., 2021 SCC OnLine NCLAT 49 -The appellant relies on this case decided by this Tribunal to argue that a decree holder qualifies as a creditor under Section 95 of the IBC and therefore has the right to initiate insolvency proceedings against the respondent. However, in Ashok Agarwal, the decree in question was a result of a contested court proceeding, where liability was adjudicated and finalized after due process. The decree was not a mere settlement, but a judicial determination 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 ....
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....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. A consent decree was passed on 05.03.2020, signed by Respondent No. 1. The decree obligated the CD and Respondent No. 1 to pay Rs.5,77,85,361/- including interest, to the appellant. At this point also the moratorium was in effect. 59. Respondent No. 2 (State Bank of India) has alleged that the Consent Decree 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 gu....
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....or's insolvency status, was legally unenforceable. Since the Supreme Court held that a decree obtained through misrepresentation is void, the present decree could not be relied upon as evidence of a legally binding personal guarantee under IBC. 66. In the present case, the appellant failed to disclose the CIRP status of the corporate debtor when obtaining the decree. Further, the decree purportedly imposed obligations on mortgaged properties without the consent of SBI, the secured creditor, in violation of contractual terms. Given these 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, Ahm....
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....kkad had agreed to act as guarantor for the debt of M/s Sunrise Ginning Private Limited. However, the Hon'ble NCLT passed adverse remarks and directions against the Appellant merely on the ground of an alleged incorrect interpretation of the Code. The Appellant submits that even if there was any mistake in understanding legal provisions, such errors do not by themselves justify imposition of penalties or harsh observations, particularly when no mala fide intent has been alleged. In this regard, reliance is placed on the Hon'ble Supreme Court's judgment 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 signin....
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....would have been clearly aware that the plaintiffs and defendants in the civil suit were Related Parties, which creates a potential conflict of interest. This fact has also been admitted on record. 82. Further, RP was aware that CD was under going insolvency proceedings and was under moratorium during the decree period. Relevant portion of his report is extracted below: " About the Corporate Debtor- M/s Sunrise Ginning Pvt. Ltd. C.P. (I.B.) No.559/7/NCLT/AHM/2018 under section 7 of the IBC 2016 was filed by the M/s. Bank of Baroda for initiation of CIRP. CIRP Initiated in 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 duri....
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....es, the Tribunal has every right to take corrective action, as it did here, to maintain integrity of the insolvency process. 87. In view of the findings in the main Comp. App. (AT) (Ins.) No. 1694 of 2024 and the aforesaid two appeals, we find no infirmity in the orders of the Adjudicating Authority. 88. Accordingly, Comp. App. (AT) (Ins.) No. 1694 of 2024, Comp. App. (AT) (Ins.) No. 1837 & Comp. App. (AT) (Ins.) No. 1838 of 2024 are dismissed. Pending I.As., if any, are closed. No order as to costs. ============= Document 1 In the Court of Principal Civil Judge at Rajkot Spe.C. Case .No.02/2020 Directors of Shrinathji Spintex Pvt. Ltd. 1/1 Ravibhai Harsukhbhai Lakkad Hindu, Adult, Occupation: Business, At: 3-Pradyuman Park, Plot No.83, Satyasai Heart Hospital Road, Rajkot. 1/2 Jatinbhai Dhirajlal Lakkad Hindu, Adult, Occupation: Business, At: Gitabnagar-1, Ashutosh Apartment, Flat No.2, Dhebar Road, Rajkot. , Vs. .. . Plaintiffs 1) Sunrise Ginning Pvt. Ltd. Company A company registered under the Companies Act .. At: Juna Upleta Road, Bhola Patiya, Dhoraji. 2) Harsukhbhai Parbatbhai Lakkad Hindu, Adult, Occupation: Business, At: 3-Pradyuman Park, Plot N....