2023 (5) TMI 817 - AT - Insolvency & Bankruptcy

Maintainability of application - initiation of CIRP - Corporate Debtor failed to make repayment of its dues - Corporate Guarantor - assignment of debt to an Asset Reconstruction Company - CIRP against the Principal Borrower, already commenced - initiation of two applications under Section 7 for same set of claim amount and default simultaneously - Validity of unregistered Assignment Agreement.

Whether the Assignment Agreement being unregistered document could not have been relied by the Adjudicating Authority for admitting Section 7 application? - HELD THAT:- The Assignment Agreement dated 18.01.2021 was relied by the Financial Creditor and has been referred to by the Adjudicating Authority in Para 5 of the order. The Order dated 11.05.2022 initiating Section 7 application has not been reversed or modified and still in force. Secondly, the Assignment Agreement dated 18.01.2021 being in accordance with Section 5 of the SARFAESI Act, 2002, the Respondent No.1 has to be deemed to be lender and is thus entitle to exercise all rights which were vested in the lender.

Section 5 is an enabling provision to empower the Asset Reconstruction Company to acquire financial assets in the manner provided in Sub-section (1). The Assignment Agreement dated 18.01.2021 was in accordance with Section 5(1)(b) i.e. by entering agreement with State Bank of India. Sub-section (2) of Section 5 contains a deeming clause. Sub-section (2) provides that Asset Reconstruction Company on such acquisition be deemed to be the lender and all the rights of such bank or financial institution shall vest in such company. When the legislature uses the deeming fiction it is always for purpose and object.

Hon’ble Supreme Court had occasion to consider provision of Section 43 of the Indian Contract Act, 1872 which contains the deeming provision and on fulfilling the ingredients as provided in the statute, legal fiction will come into play, irrespective whether the transaction was in fact intended or even anticipated to be so - Hon’ble Supreme Court in Anuj Jain, Interim Resolution Professional for Jaypee Infratech Limited vs. Axis Bank Ltd. & Ors. [2020 (2) TMI 1259 - SUPREME COURT] held that Applying the principles to the provision at hand i.e., Section 43 of the Code, it could reasonably be concluded that any transaction that answers to the descriptions contained in sub-sections (4) and (2) is presumed to be a preferential transaction at a relevant time, even though it may not be so in reality. In other words, since sub-sections (4) and (2) are deeming provisions, upon existence of the ingredients stated therein, the legal fiction would come into play; and such transaction entered into by a corporate debtor would be regarded as preferential transaction with the attendant consequences as per Section 44 of the Code, irrespective whether the transaction was in fact intended or even anticipated to be so.

Following the law laid down by the Hon’ble Supreme Court, when acquisition of assets by Asset Reconstruction Company is made as per Section 5(1), deeming provision contained in Sub-section (2) of Section 5 shall come into play and the Asset Reconstruction Company shall be deemed to be Lender for all purposes. As a Lender, the Respondent No.1 was fully entitled to exercise its right to initiate proceeding under Section 7.

Assignment of financial debt has to be by registered document, or not - HELD THAT:- Reliance placed on judgment of this Tribunal in Palm Products Pvt. Ltd. vs. T.V.L. Narsimha Rao and Anr., [2021 (3) TMI 304 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL , NEW DELHI]. In the above case, a Non-Banking Financial Company (NBFC) after being held to be related party under Section 29A was kept out of the CoC which action was challenged before this Tribunal. When the NBFC made an application before the Resolution Professional on the basis of Assignment Deed, the said deed was unregistered and that is the reason given by the Resolution Professional for not accepting the claim. The Adjudicating Authority has observed in the order that applicant was non-financial institution, which findings were challenged before this Tribunal. This Tribunal held that there being NBFC certificate, the applicant was NBFC and the said observation have to be ignored.

A perusal of the above observation indicate that although the application was held to be NBFC, however, there was no case that applicant was Asset Reconstruction Company. Assignment in the above case was not in favour of any Asset Reconstruction Company. Hence, the observation made in the judgment upholding the view of the Adjudicating Authority that document was unregistered hence the Resolution Professional rightly ignored the claim, does not lend any support to the case of the Appellant in the present case - The present is a case of an Asset Reconstruction Company where for acquisition of asset by an Asset Reconstruction Company an particular manner and procedure is prescribed and when asset is acquired as per provisions of Section 5 of SARFAESI Act, deeming section will come into play.

Application under Section 7 having admitted against the Principal Borrower, it was not open for the Respondent No.1 to file application against the Corporate Guarantor since two simultaneous proceedings under Section 7 cannot be proceeded with - HELD THAT:- In the case of Dr. Vishnu Kumar Agarwal vs. Piramal Enterprises Ltd. [2019 (2) TMI 316 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI] it was held that though there is a provision to file joint application under Section 7 by the 'Financial Creditors', no application can be filed by the 'Financial Creditor' against two or more 'Corporate Debtors' on the ground of joint liability ('Principal Borrower' and one 'Corporate Guarantor', or 'Principal Borrower' or two 'Corporate Guarantors' or one 'Corporate Guarantor' and other 'Corporate Guarantor'), till it is shown that the 'Corporate Debtors' combinedly are joint venture company.

The Hon’ble Supreme Court in Laxmi Pat Surana vs. Union of India & Anr. [2021 (3) TMI 1179 - SUPREME COURT] had occasion to consider the right to proceed against Guarantor in aforesaid case. Hon’ble Supreme Court has held in the above judgment that Section 7 is an enabling provision which permits the Financial Creditor to initiate CIRP against a Corporate Debtor. The Corporate Debtor can be the Principal Borrower as well as the Corporate Guarantor. The Hon’ble Supreme Court held that right or cause of action would enure to the lender to proceed against the Principal Borrower, as well as the guarantor in equal measure.

The scheme of I&B Code, in view of law laid down by the Hon’ble Supreme Court in Laxmi Pat Surana vs. Union of India & Anr., the judgment of this Tribunal in Dr. Vishnu Kumar Agarwal is not followed.

It is further relevant to notice that no submission have been advanced regarding debt or default. Debt and default by the Corporate Debtor is an admitted fact which has not been questioned or contested. The Adjudicating Authority having returned the finding that there exist financial debt and default, no error has been committed by the Adjudicating Authority in admitting Section 7 application.

There are no error in the impugned order admitting Section 7 application. There is no merit in the Appeal. Appeal is dismissed.