TMI Blog2020 (10) TMI 962X X X X Extracts X X X X X X X X Extracts X X X X ..... sideration for time value of money and when such disbursal was guaranteed, it has to be treated as a financial debt under Section 5(8)(a) read with (i) of IBC - The third party was advanced debt which was admittedly given by the Financial Creditor to the said third party. Even if Corporate Debtor issued guarantee in recovery proceeding for the financial debt of third party and in default the said guarantee/s have been invoked by the Financial Creditor, the Corporate Debtor is liable to pay the amount being amount of liability in respect of guarantee issued which falls in the definition of Section 5(8)(i) of IBC. Counsel for Appellant did not show as to how findings as recorded by the Adjudicating Authority with regard to India Bulls were not sustainable. Going through the record, we do not find any reason to interfere with the findings as recorded by the Adjudicating Authority in connection to the claim entertained of India Bulls - the inclusion of entire claim of Oriental Bank of Commerce (now PNB) and India Bulls (Respondent No.3) and the determination of the voting percentage of the members of COC on the basis of admitted claims of these Financial Creditors, is legal and prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.54 Crores were towards corporate guarantees which were extended by the Corporate Debtor towards debts of seven separate third party Companies (in arguments in Appeal, it is mentioned that there were seven third party Companies. Before the Adjudicating Authority, it appears that five Companies were referred. The Respondent No.2 also in its argument, has referred about seven Companies. For the present Appeal, we are concerned with the question of law involved). The Appellant claimed before the Adjudicating Authority that the Respondent No.2 OBC/PNB Bank could not be said to be having financial debt with regard to corporate guarantees given of third party debts and the percentage of voting right of the Respondent No.2 should be corrected. 3. The Appellant also claimed before RP and Adjudicating Authority that the Respondent No.3 India Bulls Housing Finance Ltd. was also not a Financial Creditor and should not be in the COC. The Resolution Professional had not agreed with the Appellant and the Appellant moved the Adjudicating Authority claiming that the Resolution Professional should be directed to reconstitute the COC and the claim of Respondent No.2 Bank to the extent of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Authority, however, observed that the application was maintainable even if name of OBC was not changed in Application. It observed regarding related party that the issue did not arise for consideration in the Application. Thus, the submissions on these counts of OBC were discarded (see Para 10 of the Impugned Order). 7. The Adjudicating Authority took note of the fact that there was a Term Loan Agreement admittedly executed by the Corporate Debtor in favour of OBC for availing loan by third parties. OBC claimed before Adjudicating Authority that out of ₹ 40 Crores, ₹ 7.54 Crores and odd due was relating to default in payment of term loan and ₹ 33 Crores and odd was on account of corporate guarantee which was invoked by letter dated 26.09.2018. OBC claimed that in addition to executing term loan availed by Corporate Debtor, Corporate Debtor had stood guarantor by executing corporate guarantee for availing loan by five Companies (names of which are mentioned in the Impugned Order) which was invoked. OBC claimed that the Corporate Debtor was liable to pay those amounts and these are financial debts under Section 5(8)(i) of the Code. It was claimed that the Judgem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he benefit of the principal debtor is a sufficient consideration to the surety for giving guarantee as expressly provided in Section 127 of the Contract Act. Thus, even though there is no consideration to the third party surety for mortgage, the consideration of having done anything for the benefit of the principal debtor is a sufficient consideration. This position of law appears to me not altered by the Hon ble Supreme Court in the cited decision of Anuj Jain. In para 43 of Anuj Jain, the Hon ble SC holds that financial debt may include any of the methods for raising money or incurring liability by the modes prescribed in sub-clauses (a) to (f) of Section 5(8); it may also include any derivative transaction or counter-indemnity obligation as per sub-clauses (g) and (h) of Section 5(8); and it may also be the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clauses (a) to (h). For broadening the above view of the Hon ble SC, I extract para 43 of the judgment as follows: 43. Applying the aforementioned fundamental principles to the definition occurring in Section 5(8) of the Code, we have not an iota of dou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Companies which Companies were the principal debtors of OBC. It is argued that the Corporate Debtor was not a corporate guarantor to initial disbursement made by OBC to any of the seven Companies and it was during pendency of recovery proceedings that the Corporate Debtor had agreed to give guarantee on behalf of the said seven borrowers in the event OBC agreed to restructure proposal of the borrowers. The Agreement of Guarantee was executed on 2nd September, 2014 and one of the copies is on record. Thus, it is claimed that there was no disbursement to the seven Companies after the execution of the guarantees and the guarantees were also bipartite between OBC and the Corporate Debtor. The principal debtors were not parties to the Agreements of Guarantee. Thus, the learned Counsel for the Appellant is finding fault with the invocation of the said guarantees. According to him, such contract of guarantee involves three parties and each must be privy to such contract. Those principal debtors were not party to the said documents of guarantee. It is also argued that in the matter of Brahmayya and Company vs. K. Srinivasan reported in AIR 1959 Madras 122, it was held that privity of co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Appellant being related party to Corporate Debtor and such issue cannot be now argued as no Appeal has been filed against such observation. 13. Counsel for Respondent No.1 has supported the Impugned Order claiming that the corporate guarantee furnished by Corporate Debtor was invoked by Respondent No.2 Bank on 26th September, 2018 and Respondent No.2 became entitled to claim the value of such security. Corporate Debtor is one of the co-borrowers with regard to the claim made by Respondent No.3 and there was also mortgage of property by Corporate Debtor to secure the loan from India Bulls. Thus, the RP is supporting the Impugned Order. 14. The Respondent No.2 Bank (OBC, now PNB) has argued that although the Appellant is purporting to be Financial Creditor, it is a set up Financial Creditor; that, Appellant and the Corporate Debtor are one and the same and both are being controlled by same group of persons and this is apparent from the fact that Advocate Anand Sukumaran is lawyer for the erstwhile Director of Corporate Debtor - Saurav Mukherjee in Supreme Court in Civil Appeal No.2696 of 2020 which was filed when CIRP was initiated. It is claimed that the arguing Counsel fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f which debt has been guaranteed by the Corporate Debtor and the matter falls under Section 5(8)(i) of IBC and thus, is a financial debt. Argument is that the Judgement in the matter of Anuj Jain is not helpful in the present matter as in the matter of Anuj Jain , it was case of mortgaged properties with the Bank and debt amount could have only been realised by sale of mortgaged properties but not from the Corporate Debtor - JIL. In Anuj Jain , it was not a case of giving guarantee to repay or indemnify repayment of loans. It is also argued that observations of the Court in a given Judgement are always required to be read in the context in which they appear. Reference is made to the Judgement in the matter of Haryana Financial Corporation and Anr. v. Jagdamba Oil Mills and Anr. 2002 3 SCC 496. (This Judgement has been discussed by Hon ble Supreme Court in the matter of Anuj Jain in Para 41.1.5). Thus, the learned Counsel for the OBC has argued that the Appeal deserves to be dismissed. 17. In Rejoinder, Counsel for the Appellant submitted that the allegations made against the Appellant and Advocates are baseless. The allegations of Appellant being related parties has be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isor himself, or by the conduct of any other person, is called a contract of indemnity. 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. 127. Consideration for guarantee.- Anything done, or any promise made, for the benefit of the principal debtor, may be a sufficient consideration to the surety for giving the guarantee. Thus, it was noticed that Section 127 of the Indian Contract Act provides that anything done, or any promise made for the benefit of the principal debtor, may be a sufficient consideration to the surety for giving the guarantee. 21. After dealing with the first issue, Hon ble Supreme Court found that it was a case of preferential transaction hit by Section 43 of IBC. (See Paragraphs 26 and 27). The second issue (relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... borrowed money against payment of interest from the applicant. It is also not the case that the corporate debtor has raised any amount from the applicant under any credit facility. It is not the case of the applicant that there is any liability towards the corporate debtor in respect of any lease or higher purchase contract. It is further not the case of an applicant that any receivables been sold or discounted. It is further not the case of the applicant that any amount has been raised for the corporate debtor under any other transaction having the commercial effect of borrowing to the corporate debtor. It is not the case of the applicant that any derivative transaction has been entered with the corporate debtor. It is also not the case of the applicant that any counter indemnity obligation in respect of a guarantee, indemnity, bond, documentary, letter of credit or any other instrument issued by a bank or a financial institution for the corporate debtor. Further, no amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to above has been issued by the corporate debtor. (Underlined to note distinction) Relevant portion of P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is that debt along with interest disbursed against time value of money lacks in the impugned transaction . 22. From the above, the distinction between matters which came up for consideration before Hon ble Supreme Court in the matter of Anuj Jain and the present matter became clear. There the attempt to get Mortgage treated as if it is in the nature of guarantee, was not accepted. Even before Supreme Court similar effort was made (See Para 37.4) but it did not succeed. Banks knew that if it is treated as guarantee, they could sail through. 23. It was in the context of examining mortgage executed and the contents of the mortgage. Hon ble Supreme Court made following observations (part of which Adjudicating Authority reproduced):- 43. Applying the aforementioned fundamental principles to the definition occurring in Section 5(8) of the Code, we have not an iota of doubt that for a debt to become financial debt for the purpose of Part II of the Code, the basic elements are that it ought to be a disbursal against the consideration for time value of money. It may include any of the methods for raising money or incurring liability by the modes prescribed in sub-clauses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver, it would remain a debt alone and cannot partake the character of a financial debt within the meaning of Section 5(8) of the Code. The respondent mortgagees are not the financial creditors of corporate debtor JIL. [Emphasis supplied] 24. For the above reasons, the Hon ble Supreme Court found that the mortgagees in that matter were not financial creditors of Corporate Debtor JIL. 25. Before us, the learned Counsel for the Appellant has tried to read Para 43 of the Judgment in the matter of Anuj Jain (reproduced supra) to insist that Hon ble Supreme Court has held that the requirement of disbursement against consideration for time value of money is essential ingredient and this should be read in context of a guarantee also. At the same time, it has also been argued that Section 5(8)(i) is not a stand alone provision. We refer to observations made by Hon ble Supreme Court in this very Judgement of Anuj Jain in Para 41.1.5 which reads as follows:- 41.1.5. For taking into comprehension the ratio of Pioneer Urban (supra) and for its application to the question at hand, appropriate it would be to recount the basic principles expounded and explained by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lindly placing reliance on a decision is not proper. [Emphasis supplied] 26. It is quite clear that observations made in the Judgement must be read in the context in which they appear. While reading above Para 43 of the Judgement of Hon ble Supreme Court, we also need to keep in view Section 127 which was referred by Hon ble Supreme Court in Para 12.4 (reproduced supra). The learned Counsel for the OBC/PNB has rightly argued that in the present matter, if the guarantee issued by Corporate Debtor is perused, the Corporate Debtor had guaranteed repayment of debts and the guarantees were executable against the Corporate Debtor which is a totally different case in case of mortgage where the Creditor has to proceed against the mortgaged property and cannot directly proceed against the debtor. The Counsel for Appellant argued that the guarantees were given during pendency of recovery proceedings. 27. In Para VIII of Appeal under the heading FACTS IN ISSUE AND QUESTION OF LAW , the Appellant has mentioned that the Adjudicating Authority could not have summarily come to a conclusion without considering the documents of guarantees and whether the principal debtors were p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngh. Ranjit Singh claimed that he was only a guarantor and not a co-debtor and as such he was liable only in case of default by the Company. Para 11 of the Judgement shows that in that case also, the Company did not execute the bond. The bond was executed by Ranjit Singh. The bond did not expressly recite that the Company was a principal debtor and the Company did not execute the bond. Hon ble Supreme Court observed:- The bond, it is true, did not expressly recite that the Company was the principal debtor; it is also true and the Company did not execute the bond. But a contract of guarantee may be wholly written, may be wholly oral, or may be partly written and partly oral. The documents which secured repayment of the Bank's claim at the foot of the cash-credit account were executed simultaneously: the bond executed by Ranjit Singh was one of them and the conduct of Ranjit Singh and the Company indicates that Ranjit Singh agreed to guarantee payment of the debt due by the Company. We hold, therefore, that the Bank, the Company and Ranjit Singh were parties to the agreement under which for the dues of the Company, Ranjit Singh became a surety. Thus, in the present ma ..... X X X X Extracts X X X X X X X X Extracts X X X X
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