2025 (5) TMI 1842 - AT - IBC

Dismissal of Appellant s petition under Section 7 of the IBC filed against Corporate Guarantor - initiation of insolvency proceedings with fraudulent and malicious intent - seeking expungement of adverse findings and remarks passed under Section 65 of the IBC which if allowed to stand cause serious prejudice to the Bank s institutional reputation and lawful recovery efforts - HELD THAT - Part IV of the Form filed under section 7 mentions the Agreement dated 16.04.2015 also as one of the documents in addition to other loan agreements. It is the submission of the Appellant that it s a clerical error. The aforesaid agreement was never signed and implemented by the Appellant. So the question of Novation of Guarantee Agreement does not arise at all - The record contains several documents that reaffirmed the Respondent s liability. The facilities were renewed through sanction letters dated 05.02.2013 31.03.2014 and 27.04.2015 all signed by the Respondent. In addition the Respondent signed revival letters on 31.10.2014 (for the Rs.60 Crores facility) and 03.02.2015 (for the Rs.40 Crores facility) thereby extending the limitation period and confirming the existing liabilities. On 21.01.2016 the borrower executed a balance confirmation that also bore the Respondent s stamp reaffirming acknowledgment of the outstanding dues. It is seen from clauses of the deed of guarantee that it is a independent and comprehensive document which once executed remains binding on guarantors till such time the credit facility under reference is fully discharged. The AA fails to consider any of these clauses nor does it apply the settled law under Section 128 of the Indian Contract Act 1872 or the binding ratio of the Hon ble Supreme Court in Lalit Kumar Jain v. Union of India 2021 (5) TMI 743 - SUPREME COURT which upholds the liability of guarantors under the IBC. Instead the order incorrectly quotes a clause from the loan agreement (Clause 8) as if it were part of the guarantee deed thereby demonstrating a fundamental factual error. The Tribunal finds that the Respondent s own conduct in continuing to acknowledge the debt while giving conflicting dates of default further supports the Appellant s case. It shows that the guarantee obligation was alive and continuing and that the application under Section 7 was based on a valid and enforceable claim. The allegations of forum shopping collusion and abuse of process have been made against SBI- a nationalised bank acting under statutory banking regulations and guidelines of the Reserve Bank of India (RBI). Upon careful scrutiny of the record it is found that the AA has reached its conclusion about fraud and collusion without in-depth examination of documents on record some important documents like the Judgment quashing the FIR against SBI officials has not been considered while matters relating to other companies which are not impacting this matter have been considered to reach the finding of fraud under Section 65 of the Code. The AA s order casts aspersions on the institutional integrity of a public body engaged in lawful debt recovery. Conclusion - The impugned order passed by the Ld. NCLT on 07.10.2024 is based on incorrect facts a misreading of the evidence and fails to critically examine the issues. The NCLT s failure to provide adequate reasoning consider all relevant material and apply basic principles of natural justice renders the order invalid. Appeal allowed.

Summary

The core legal questions considered in this judgment are:

1. Whether the initiation of insolvency proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) by the financial creditor (State Bank of India) against the corporate guarantor (Respondent) was with fraudulent or malicious intent, thereby attracting the provisions of Section 65 of the IBC.

2. Whether the Adjudicating Authority (National Company Law Tribunal) erred in dismissing the Section 7 petition and allowing the Section 65 application alleging abuse of process and malafide intent.

3. The legal effect and enforceability of the corporate guarantee executed by the Respondent, including the impact of renewal and revival letters, sanction letters, and acknowledgments under the Limitation Act.

4. The correctness of the findings regarding the reliance on an unsigned sanction letter dated 16.04.2015 and alleged disbursals made after the loan account was declared a Non-Performing Asset (NPA).

5. Whether the adverse remarks and findings against the financial creditor and its officials were justified, especially in light of principles of natural justice and judicial precedents protecting public servants.

Issue-wise Detailed Analysis:

1. Fraudulent or Malicious Initiation of Insolvency Proceedings under Section 65 IBC

The relevant legal framework includes Section 7 (initiation of Corporate Insolvency Resolution Process by financial creditors) and Section 65 (penal provision against fraudulent or malicious initiation of insolvency proceedings) of the IBC. The Court referred to precedents such as the Appellate Tribunal's decision in Sanjay Pandurang Kalate v. Vistra ITCL (India) Ltd., which emphasized that allegations of fraud or collusion require proof beyond reasonable doubt and of an unquestionable nature.

The Tribunal examined the factual matrix, including the loan agreements, corporate guarantees, revival letters, sanction letters, and communications between parties. It found that the Respondent had repeatedly acknowledged its liability through signed documents and emails as late as 2021, which constituted admissions under Section 18 of the Limitation Act, thereby extending the limitation period.

The Court noted that the Adjudicating Authority's conclusion that the Section 7 petition was filed fraudulently was primarily based on two assumptions: reliance on an unsigned sanction letter of 2015 and alleged disbursals after the account turned NPA. However, the Tribunal found these assumptions factually incorrect or legally irrelevant. The unsigned sanction letter was never acted upon and was not the basis of the claim, which rested on duly executed and acknowledged documents. The alleged disbursal of Rs. 22.10 Crores after NPA was, in fact, an internal adjustment and not a fresh disbursal.

The Tribunal rejected the Respondent's contentions that the initiation was malicious, noting that internal banking decisions or regulatory compliance issues do not amount to fraudulent or malicious initiation under Section 65. The Court emphasized that the financial creditor's claim was bona fide and based on enforceable liabilities.

2. Enforceability and Continuity of Corporate Guarantee

The Court analyzed the guarantee deed executed by the Respondent and the relevant clauses, including clauses 1, 3, 6, 8, 9, 11, 14, 18, and 19, which collectively establish that the guarantee was continuing, irrevocable, independent of borrower liability, and enforceable on demand. The guarantee remained binding despite variations in loan terms or security arrangements.

The Tribunal found that the Adjudicating Authority erred in misquoting clauses and failing to apply settled legal principles, including Section 128 of the Indian Contract Act and binding Supreme Court precedents upholding guarantor liability under the IBC. The Respondent's repeated acknowledgments through revival letters, sanction letters, and balance confirmations reinforced the continuing liability.

Thus, the Tribunal held that the guarantee was valid and enforceable, and the financial creditor's claim was legally sustainable.

3. Reliance on the Unsigned Sanction Letter and Alleged Post-NPA Disbursals

The Respondent argued that the 16.04.2015 sanction letter was unsigned, invalid, and constituted a fresh sanction requiring new guarantees, which were not executed, thereby negating liability. It also alleged illegal disbursals after the account became NPA.

The Tribunal examined the record and found that the 2015 letter was never acted upon and was erroneously included in the Section 7 petition documents due to clerical error. The actual claim was based on earlier executed agreements and acknowledgments.

Regarding post-NPA disbursals, the Tribunal accepted the Bank's explanation that certain amounts were Export Packing Credit (EPC) facilities or internal adjustments, not fresh disbursals. It noted that the NPA date for the relevant account was 31.03.2016, and only two entries postdated this, both explained satisfactorily. The Adjudicating Authority's failure to consider these explanations was a significant error.

4. Adverse Remarks and Natural Justice

The Tribunal observed that the Adjudicating Authority made serious adverse remarks against the financial creditor and its officials, including allegations of forum shopping, suppression of facts, and abuse of process, without affording the Bank an opportunity to respond. This violated principles of natural justice.

Further, the Tribunal noted that criminal proceedings initiated against SBI officials were quashed by the Delhi High Court, which held that the disputes were civil in nature and that the FIR was a misuse of the criminal process. The High Court's judgment was not considered by the Adjudicating Authority, rendering its adverse findings legally unsustainable.

The Tribunal emphasized that public servants acting in discharge of official duties are protected from frivolous criminal prosecution unless mala fide intent is clearly established, which was absent here.

5. Treatment of Competing Arguments and Evidence

The Respondent relied heavily on the unsigned sanction letter and alleged collusion between the Bank and borrower representatives, including non-auction of mortgaged property and selective recovery efforts. It also cited findings from unrelated proceedings involving other group companies.

The Tribunal found these arguments and evidence largely irrelevant or factually incorrect. It distinguished matters relating to other group companies and noted that the Bank had initiated appropriate recovery proceedings under SARFAESI and DRT mechanisms. The Respondent's inconsistent positions-admitting no grievance before the High Court but pursuing adverse claims here-were also noted as indicative of malafide conduct on its part.

Conclusions:

The Tribunal concluded that the Adjudicating Authority's order dismissing the Section 7 petition and allowing the Section 65 application was based on incorrect facts, misreading of evidence, and failure to apply settled legal principles. The adverse remarks against the Bank and its officials were unjustified and violative of natural justice.

The Tribunal set aside the impugned order, allowed the appeal, and expunged the adverse findings against the financial creditor. It held that the initiation of insolvency proceedings was bona fide, based on valid and enforceable guarantees and acknowledgments, and did not constitute abuse of process under Section 65 of the IBC.

Significant Holdings:

"The guarantee herein contained is a continuing one for all amounts advanced by the Bank to the borrower... and shall not be determined or in any way be affected by any account or accounts opened or to be opened by the bank becoming nil or coming into credit at any time or from time to time..." (Clause 8 of Guarantee Deed)

"The Guarantee hereby given is independent and distinct from any security that the Bank has taken or may take... the Guarantors will not claim to be discharged to any extent because of the Bank's failure to take any or other such security..." (Clause 18 of Guarantee Deed)

"Section 65 of the IBC can only be invoked when the proceedings are initiated with a fraudulent or malicious intent, which is not even alleged properly, let alone proved in this case."

"Adverse findings against public servants must not be made lightly, especially when they affect public confidence in the system."

"The initiation of insolvency proceedings by a financial creditor based on duly executed loan agreements, guarantees, revival letters and acknowledgments is a bona fide exercise of its rights and does not amount to abuse of process."

"The Adjudicating Authority's failure to consider material evidence, including the quashing of criminal proceedings against Bank officials, renders its order invalid."

"Natural justice requires that no adverse remarks be recorded against a party without giving it an opportunity to respond."