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TMI Blog2017 (11) TMI 1697X X X X Extracts X X X X X X X X Extracts X X X X ..... and (hereinafter referred to as "the principal borrower"), a short term loan of Rs. 4 Crores on the terms and conditions contained in the loan agreement of the same date entered into between the principal borrower and the Plaintiff. Since there was a default in the payment of the short term loan, these Deeds of Guarantee were invoked and it is on this basis that the present Summary Suit has been filed and a decree is sought against the Defendants in the Summons for Judgment. 3. The brief facts giving rise to the present controversy are that the Plaintiff is a non-banking financial institution doing business of advancing finance to its customers. Defendant No. 1 at all material times was a Director of the principal borrower and has also executed a guarantee as mentioned earlier. Defendant No. 2 is also sued as a guarantor who has offered a corporate guarantee in favour of the Plaintiff and guaranteed repayment of the dues of the principal borrower. 4. According to the Plaintiff, on or about 10th December, 2008, the principal borrower, through Defendant No. 1, approached the Plaintiff for sanction of a short term loan of Rs. 4 Crores for the business activities of the principal bor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quisitions, the Plaintiff by its advocate's letter dated 10th December, 2009 called upon the Defendants, as guarantors, to pay to the Plaintiff the sum of Rs. 3,44,22,936/- on or before 24th December, 2009 failing which appropriate proceedings would be initiated. Despite this notice, no payment was coming forth and it is in these circumstances that the present Suit is filed. 8. After filing of the present Suit, the writ of summons was served upon the Defendants and thereafter the Defendants filed their appearance. It is thereafter that the Plaintiff has taken out this Summons for Judgment. An affidavit-in-reply dated 20th October, 2011 opposing the Summons for Judgment has also been filed on behalf of the Defendants. The Defendants have also filed an additional affidavit dated 20th November, 2017 seeking to bring on record certain other subsequent developments. 9. The basic defences that have been taken in the affidavit in reply are as under:- (i) the Plaintiff is a 100% subsidiary of SICOM Ltd., and therefore, the Plaintiff ought to have filed proceedings before the Debts Recovery Tribunal which was conferred exclusive jurisdiction to adjudicate upon and recover the dues o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l backdrop Mr. Jagtiani, the learned counsel appearing on behalf of the Plaintiff submitted that the Defendants have no defence on the merits of the present case. He submitted that admittedly a short term loan was availed of by the principal borrower and which was duly guaranteed by the Defendants by executing two separate Deeds of Guarantee. He submitted that the only defences that are raised in the affidavit in reply are that the Plaintiff being a 100% subsidiary of SICOM, the Debts Recovery Tribunal would have the exclusive jurisdiction to entertain and try the present suit and the second is that the Suit is not maintainable as a Summary Suit because the Plaintiff has got adequate security. The third argument regarding the guarantees being insufficiently stamped is concerned, Mr. Jagtiani submitted that this is not a defence that is taken by the Defendants even though they have filed two affidavits and hence I should not entertain such a defence. Further, even across the bar it has not even been stated as what was the correct stamp duty payable and according to the Plaintiff the deeds of guarantees were sufficiently stamped. On all these counts Mr. Jagtiani submitted that the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal under this Act. (2-A) Without prejudice to sub-section (2), the Appellate Tribunal shall exercise, on and from the date to be appointed by the Central Government, the jurisdiction, powers and authority to entertain appeals against the order made by the Adjudicating Authority under Part III of the Insolvency and Bankruptcy Code, 2016." 13. I must mention here that PART III of the IBC, 2016 has not yet been brought into force. "18. Bar of jurisdiction.-On and from the appointed day, no court or other authority shall have, or be entitled to exercise, any jurisdiction, powers or authority (except the Supreme Court, and a High Court exercising jurisdiction under Articles 226 and 227 of the Constitution) in relation to the matters specified in Section 17: Provided that any proceedings in relation to the recovery of debts due to any multi-State co-operative bank pending before the date of commencement of the Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2012 under the Multi-State Co-operative Societies Act, 2002 ((39 of 2002) shall be continued and nothing contained in this section shall, after such commencement, apply to such proceedings." 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res. This argument therefore also stands rejected. 16. The third argument that was canvassed before me was that the guarantees executed by the Defendants are insufficiently stamped, and therefore, cannot be looked at for any purpose whatsoever. I am afraid I am unable to accept this argument for more than one reason. Firstly, this argument has never been raised either in the affidavit in reply or the additional affidavit which has been filed on 20th November, 2017. This argument, for the first time was canvassed across the bar by the learned counsel appearing for the Defendants. I would be justified in not entertaining this argument on this count alone. Despite this, I find that these Deeds of Guarantee have been duly franked on 17th December, 2008 with a stamp duty of Rs. 100/-. The Defendants have not brought anything to my notice which would indicate that the stamps put on the Deeds of Guarantee are insufficient or that a larger amount of stamp duty was payable on the Deeds of Guarantee on the date when they were executed. This being the case, even this argument holds no merit and is rejected. 17. This, therefore, now brings me to the main question namely, whether by virtue of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of pending suits against the corporate debtor are prohibited. That prohibition does not extend to the guarantor of the corporate debtor. Further fortifying this argument, Mr. Cama as well as Mr. Jagtiani both brought to my attention the definition of the word "personal guarantor" as defined under Section 5 (22) which states that a "personal guarantor" means an individual who is the surety in a contract of guarantee to a corporate debtor. Relying upon these definitions, Mr. Cama and Mr. Jagtiani both submitted that the Act itself contemplates that the "guarantor" is a separate person from a "corporate debtor", and therefore, cannot be included in the definition of the words "corporate debtor". This would then certainly lead to the irresistible conclusion that the prohibition from instituting any suit or continuing with a pending suit would apply only in relation to the "corporate debtor" who is in insolvency and in whose favour an order of moratorium under section 14 has been passed, and not to any individual who is the surety in a contract of guarantee to the said corporate debtor. 18. Mr. Cama and Mr. Jagtiani both submitted that the language of Section 14 is absolutely cle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proceedings had to be initiated in relation to such guarantor as contemplated under Part III and only then would it get such benefit. 19. Over and above this, Mr. Jagtiani as well as Mr. Cama submitted that the wordings of Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985 (for short "SICA, 1985") clearly gave a limited protection to the guarantors of a Sick Industrial Company and which had approached the BIFR for the purposes of revival. This Act was brought into force to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner. Mr. Jagtiani and Mr. Cama placed reliance on the statement of objects and reasons to fortify their argument that since there was not a single law in India that deals with insolvency and bankruptcy, that this particular Code was brought into force. The provisions relating to insolvency and bankruptcy for companies could be found in the Sick Industrial Companies (Special Provisions) Act, 1985, the Recovery of Debt Due to Banks and Financial Institutions Act, 1993, the Securitisation and Reconstruction of Financial Assets and Enfo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the Committee of Creditors, the same is submitted to the Adjudicating Authority. 21. Mr. Gordia then drew my attention to Section 31 which deals with Approval of the Resolution Plan. Mr. Goradia submitted that once the Resolution Plan is submitted to the Adjudicating Authority, the Adjudicating Authority has to satisfy itself that the Resolution Plan, as approved by the Committee of Creditors, meets the requirements as referred to in Section 30(2), and if it does, it shall by order, approve the Resolution Plan. This approved Resolution Plan would be binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholders involved in the Resolution Plan. Mr. Goradia submitted that looking to the language of Section 31 and especially considering that any Resolution Plan that is approved by the Adjudicating Authority would be binding on the guarantors would clearly go to show that whilst the Resolution Plan is in its formulation, the order of moratorium passed in favour of the corporate debtor under section 14, would also enure to the benefit of the guarantor. If this be the case, Mr. Goradia submitted that the suit in the present case cannot pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dinance"). I therefore asked the learned counsel to even address me on this Ordinance, which they have done today. I shall also deal with the Ordinance in so far it relates to the issue before me. 24. Before I proceed to analyze the relevant provisions of the Code and the Ordinance, it would be apposite to refer to the statement of objects and reasons as to why this Code was brought into force. The statements of objects and reasons state that there was no special law in India that deals with insolvency and bankruptcy. Provisions relating to the insolvency and bankruptcy for companies could be found in SICA 1985, the Recovery of Debts and Bankruptcy Act, 1993, SARFAESI Act, 2002 and the Companies Act, 2013. These statutes provided for creation of multiple fora such as the BIFR, DRT, NCLT as well as their respective appellate tribunals. Over and above this, liquidation of companies was handled by the High Courts and individual bankruptcy and insolvency was dealt with under the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920. The objectives of the IBC, 2016 was to consolidate and amend the laws relating to reorganization and insolvency resolution of corp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... objects in mind SICA, 1985 was enacted. In other words, SICA, 1985 was enacted with the avowed object of identifying sick and potentially sick companies and then try to revive and rehabilitate them. 26. However, as time went by, the Government felt that BIFR and AAIFR (the authorities under SICA, 1985 entrusted with the object to ensure revival of sick companies) had not been able to fulfill the purpose and mandate as envisaged under SICA, 1985. It is in this light that in the year 1999, the Government constituted a Committee under the Chairmanship of Justice V. Balakrishna Eradi, ("the Eradi Committee") a retired Judge of the Supreme Court, to review the law relating to Insolvency and Winding up of Companies. This Committee presented a Report on 31.7.2000, under the caption "Report of The High Level Committee on Law Relating to Insolvency and Winding up of Companies". This Committee, after hearing all the parties and analysing the statistical data made available to it, opined that the facts and figures spoke for themselves and they placed a big question-mark on the utility of the institution of the BIFR and SICA, 1985. The problem of endemic delays inherent in SICA, 1985, proced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 to 223. Part V deals with the Miscellaneous Provisions and comprises of sections 224 to 255 along with 11 Schedules. 29. Section 2 of the IBC, 2016 (and which falls in Part I) deals with its application and reads as under:- "2. The provisions of this Code shall apply to- (a) any company incorporated under the Companies Act, 2013 or under any previous company law; (b) any other company governed by any special Act for the time being in force, except in so far as the said provisions are inconsistent with the provisions of such special Act; (c) any Limited Liability Partnership incorporated under the Limited Liability Partnership Act, 2008; (d) such other body incorporated under any law for the time being in force, as the Central Government may, by notification, specify in this behalf; and (e) partnership firms and individuals, in relation to their insolvency, liquidation, voluntary liquidation or bankruptcy, as the case may be." (emphasis supplied) 30. Section 2 clearly stipulates that the provisions of this Code shall apply inter alia to any company incorporated under the Companies Act, 2013 or under any previous company law; any other company governed by any specia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ership Act, 2008, or any other person incorporated with limited liability under any law for the time being in force but shall not include any financial service provider;" 34. Similarly, the words "corporate debtor" has been defined in Section 3(8) and reads thus:- "(8) "corporate debtor" means a corporate person who owes a debt to any person;" 35. What is clear from the aforesaid definition is that a "corporate debtor" means a "corporate person" who owes a debt to any person. A "corporate person" has also been defined which means the company as defined in clause 20 of Section 2 of the Companies Act, 2013, a limited liability partnership as defined in clause (n) of sub-section (1) of Section 2 of the Limited Liability Partnership Act, 2008 or any other person incorporated with limited liability under any law for the time being in force but shall not include any financial service provider. On a plain reading of these definitions namely, sections 3 (7) and 3 (8), what becomes clear is that an individual can never been a corporate debtor. I must also mention here that the words "insolvency professional" have also been defined in section 3(19) and read thus:- "(19) "insolvency prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time value of money and includes- (a) money borrowed against the payment of interest; (b) any amount raised by acceptance under any acceptance credit facility or its de-materialised equivalent; (c) any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument; (d) the amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed; (e) receivables sold or discounted other than any receivables sold on non-recourse basis; (f) any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing; (g) any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account; (h) any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other inst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial creditor" means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to. In turn, "financial debt" has been defined to mean a debt along with interest, if any, which is disbursed against consideration for the time value of money and includes nine items mentioned in Clauses (a) to (i) in Section 5(8). On the other hand, an "operational creditor" means a person to whom an "operational debt" is owed and includes any person to whom such debt has been legally assigned or transferred. In turn, the word "operational debt" has been defined to mean a claim in respect of the provision of goods or services including employment or a debt in respect of the repayment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority. The words "personal guarantor" are also defined to mean an individual who is the surety in a contract of guarantee to a corporate debtor. What can be discerned from the definition of the words "personal guarantor" is that it makes a clear distinction between a "personal guarantor" and a "corporate debtor". These two ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e an application to the Adjudicating Authority to extend the period of the corporate insolvency resolution process beyond one hundred and eighty days, if instructed to do so by a resolution passed at a meeting of the committee of creditors by a vote of seventy-five per cent of the voting shares. (3) On receipt of an application under sub-section (2), if the Adjudicating Authority is satisfied that the subject-matter of the case is such that corporate insolvency resolution process cannot be completed within one hundred and eighty days, it may by order extend the duration of such process beyond one hundred and eighty days by such further period as it thinks fit, but not exceeding ninety days: Provided that any extension of the period of corporate insolvency resolution process under this section shall not be granted more than once." 43. What this section basically provides is that subject to sub-section 2, the corporate insolvency resolution process shall be completed within a period of 180 days from the date of admission of the application to initiate such process. This period may be extended which shall not exceed a further period of 90 days. What in effect Section 12 stipulate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r regulator. (4) The order of moratorium shall have effect from the date of such order till the completion of the corporate insolvency resolution process: Provided that where at any time during the corporate insolvency resolution process period, if the Adjudicating Authority approves the resolution plan under sub-section (1) of Section 31 or passes an order for liquidation of corporate debtor under Section 33, the moratorium shall cease to have effect from the date of such approval or liquidation order, as the case may be." 46. Section 14(1) clearly stipulates that subject to the provisions of sub-sections (2) and (3), on the insolvency commencement date [which is defined in Section 5(12)], the Adjudicating Authority shall by order declare a moratorium to prohibit (a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority; (b) transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein; (c) any action to foreclose, recover or e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... initiate insolvency resolution process.- (1) A debtor who commits a default may apply, either personally or through a resolution professional, to the Adjudicating Authority for initiating the insolvency resolution process, by submitting an application. (2) Where the debtor is a partner of a firm, such debtor shall not apply under this Chapter to the Adjudicating Authority in respect of the firm unless all or a majority of the partners of the firm file the application jointly. (3) An application under sub-section (1) shall be submitted only in respect of debts which are not excluded debts. (4) A debtor shall not be entitled to make an application under sub-section (1) if he is- (a) an undischarged bankrupt; (b) undergoing a fresh start process; (c) undergoing an insolvency resolution process; or (d) undergoing a bankruptcy process. (5) A debtor shall not be eligible to apply under sub-section (1) if an application under this Chapter has been admitted in respect of the debtor during the period of twelve months preceding the date of submission of the application under this section. (6) The application referred to in sub-section (1) shall be in such form and manner an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the interim-moratorium under sub-section (1) shall operate against all the partners of the firm as on the date of the application. (3) The provisions of sub-section (1) shall not apply to such transactions as may be notified by the Central Government in consultation with any financial sector regulator." 50. Section 94 deals with an application filed by the debtor to initiate the insolvency resolution process subject to what is stated in Section 94. Section 95 on the other hand deals with an application filed by a creditor to initiate the insolvency resolution process of the debtor (who may be an individual or a partnership firm). This too is subject to what is further stated in Section 95. Thereafter, Section 96 provides for an interim-moratorium and clearly stipulates that when an application is filed under section 94 or section 95, the interim moratorium shall commence on the date of the application in relation to all the debts and shall cease to have effect on the date of admission of such application. During the interim-moratorium period, any legal action or proceeding pending in respect of any debt shall be deemed to have been stayed and the creditors of the debtor shall n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tor". 53. I am further fortified in this view when one looks at the objects and reasons as to why the IBC, 2016 was brought into force. As mentioned earlier, the Eradi Committee had clearly taken note of the fact that SICA, 1985 had miserably failed in achieving the objects for which it was enacted. One of the primary reasons that the Eradi Committee came to the aforesaid finding was because there was abuse of the provisions of Section 22 of SICA, 1985 which stalled legal proceedings against the Sick company as well as against the guarantor (albeit only to a limited extent). Over and above this, the Eradi Committee also opined that matters before the BIFR languished for years without any final resolution, thereby allowing the debtors to stall legal proceedings against themselves by their creditors. Keeping all this in mind, SICA, 1985 was repealed by S.O. 3568 (E) with effect from 1st December, 2016. What is interesting to note is that by S. O. 3594 (E) in exercise of the powers conferred by sub-section 3 of Section 1 of the IBC, 2016, the Central Government, with effect from the same date (namely, 1st December, 2016) also brought into force inter alia section 14 of the IBC, 2016. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of Sanjeev Shriya v. State Bank of India and Others reported in 2017 (9) ADJ 23 and on which heavy reliance was placed by Mr. Goradia, the learned advocate appearing on behalf of the Defendants. Before I deal with Section 31 it would be apposite to refer to certain other provisions. Section 29 contemplates Preparation of an information memorandum. Once this is done, Section 30 provides for submission of a resolution plan and stipulates that the resolution applicant may submit a resolution plan to the resolution professional prepared on the basis of the information memorandum. Thereafter, the resolution professional has to examine each resolution plan to confirm that the same complies with the provisions of Section 30(2). Thereafter, the resolution professional has to present the resolution plan to the committee of creditors for its approval. Once this is done, the committee of creditors may approve a resolution plan by a vote of not less than 75% of voting share of the financial creditors. Once the resolution plan is approved by the committee of creditors as contemplated under Section 30(4), the same has to be placed before the Adjudicating Authority for approval as contempl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as under:- "60. Adjudicating Authority for corporate persons.- (1) The Adjudicating Authority, in relation to insolvency resolution and liquidation for corporate persons including corporate debtors and personal guarantors thereof shall be the National Company Law Tribunal having territorial jurisdiction over the place where the registered office of the corporate person is located. (2) Without prejudice to sub-section (1) and notwithstanding anything to the contrary contained in this Code, where a corporate insolvency resolution process or liquidation proceeding of a corporate debtor is pending before a National Company Law Tribunal, an application relating to the insolvency resolution or bankruptcy of a personal guarantor of such corporate debtor shall be filed before such National Company Law Tribunal. (3) An insolvency resolution process or bankruptcy proceeding of a personal guarantor of the corporate debtor pending in any court or tribunal shall stand transferred to the Adjudicating Authority dealing with insolvency resolution process or liquidation proceeding of such corporate debtor. (4) The National Company Law Tribunal shall be vested with all the powers of the Debt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch corporate debtor shall be filed before such NCLT. In other words, when a corporate debtor is either in liquidation or in the insolvency resolution process, then notwithstanding anything contained in the Code the insolvency resolution or bankruptcy of its personal guarantor shall be filed before the very same NCLT that is handling the proceedings with reference to the corporate debtor. What is important to also note is that for the purposes of sub-section 2 of Section 60, the NCLT shall be vested with all the powers of the Debts Recovery Tribunal as contemplated under Part III of the Code. This is clear from a plain reading of section 60(4). As I see it, Section 60 carves out an exception with reference to the Adjudicating Authority when it comes to insolvency resolution or bankruptcy of a personal guarantor of a corporate debtor. This, to my mind, is perfectly logical in view of the fact that where the corporate debtor itself is undergoing the insolvency resolution process or liquidation, then, it should be the same Adjudicating Authority (namely the NCLT) who would also undertake the insolvency resolution process and/or bankruptcy of a personal guarantor so that there would no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which is the only reasoning I could find, reads as under:- "29. In the present matter, it has been urged that while passing the impugned order the DRT has failed to take notice of Part-III of IBC, 2016, which prevails over the provisions of the Act of 1993. It has also been urged that the entire proceeding before the DRT is completely without jurisdiction precisely in the backdrop that once the proceeding has already been commenced under IBC, 2016 and Moratorium under Section 14 of IBC, 2016 has already been issued and even in the said proceeding the parties have put their appearance before the insolvency professionals, then the impugned proceeding against the guarantors of principal debtor is per se bad. The argument advanced by Shri Navin sinah is also fortified on the ground that once the liability is still in fluid situation and the same has not been crystallized, then in such situation two parallel/split proceedings in different jurisdiction should be avoided, if possible. In the aforementioned circumstances, the objection so raised by learned counsel for the respondent bank regarding alternative remedy cannot sustain and is rejected." 61. On reading this decision, I find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 SCR 620] this Court considered and answered in affirmative the question whether the Bank is entitled to recover its dues from the surety and observed: (AIR p. 299, para 6) "6. ... It is the duty of the surety to pay the decretal amount. On such payment he will be subrogated to the rights of the creditor under Section 140 of the Contract Act and he may then recover the amount from the principal. The very object of the guarantee is defeated if the creditor is asked to postpone his remedies against the surety. In the present case the creditor is a banking company. A guarantee is a collateral security usually taken by a banker. The security will become useless if his rights against the surety can be so easily cut down." 38. In SBI v. Indexport Registered (1992) 3 SCC 159] this Court held that the decree-holder Bank can execute the decree against the guarantor without proceeding against the principal borrower and then proceeded to observe: (SCC p. 164, para 10) "10. ... The execution of the money decree is not made dependent on first applying for execution of the mortgage decree. The choice is left entirely with the decree-holder. The question arises whether a decree which is f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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