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2021 (10) TMI 1086

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..... The Appellant 'Intec Capital Ltd' for brevity 'Intec' filed an Application under Section 7 of the Insolvency and Bankruptcy Code, 2016 for initiation of Corporate Insolvency Resolution Process (CIRP) against the Corporate Guarantor / Corporate Debtor 'Eastern Embroidery Collections Private Limited' (EECPL) for the sum borrowed by the partnership firm M/s Eastern Overseas. 2.2 The Appellant 'Intec Capital Ltd' is the Financial Creditor and is a non-banking Financial Company engaged inter-alia in the business of providing financial facilities. On the other hand, M/s 'Eastern Overseas' is a partnership firm engaged in embroidery and similar activities that approached 'Intec' for loan facilities and M/S' Eastern Embroidery Collection Private Limited' (Corporate Debtor) provided the Corporate Guarantee. As a result, the Corporate Guarantor 'EECPL' becomes the Corporate Debtor for the said loan facility provided by 'Intec'. 2.3 M/s 'Eastern Overseas' ("Borrower") on 07.10.2013 got sanctioned two loans Rs. 82,20,000/- on 09.10.2013 i.e., LNN0I01413-140002997 and Rs. 34,65,000/- on 18.02.2014 i.e, LNNHP00713-140003387 from M/s Intec Capital Limite .....

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..... d to submit the Application in 'Form C' under Section 95 (4) of the IBC, and that too after service of demand notice as required under Section 95 (4) (a) read with Rule 7 of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtor's) Rules, 2019 and that too if the debt is not paid within 14 days from the date of service of demand notice. 2.10 The Adjudicating Authority has made the following observations; "20. A bare perusal of the provision shows that an application by the creditor against the personal Guarantor shall be filed under section 95 (1) of the IBC, and according to section 95 (4) IBC 2016 (i) an application under subsection (1) shall be accompanied with details and documents relating to the debts owed by the debtor to the creditor or creditors submitting the Application for insolvency resolution process as on the date of Application, (ii) it shall only be filed on failure by the debtor to pay the debt within a period of 14 days of the service of the notice of demand and (ii) supported with relevant evidence of such default or none repayment of debt. 21. On conjoin .....

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..... 19 instead of "The Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016". 3.2 The Ld. Adjudicating Authority has curtailed the remedies available to the Appellant of making an Application for Resolution of Insolvency of Corporate Debtor, who qualifies under the definition of "Corporate Person" and "Corporate Debtor" stated under Sub-section (7) & (8) of Section 3 of the IBC. Accordingly, the Corporate Guarantor is a Corporate Debtor in terms of Section Sub-section (7) and (8) of Section 3 of IBC and not a "Personal Guarantor" in terms of Sub-section (22) of Section 5 of the I&B Code. 4. Statutory Provisions 4.1 Companies Act, 2013 Sec 2(20) "company" means a company incorporated under this Act or under any previous company law; 4. Insolvency and Bankruptcy Code, 2016 Sec 3(7) "corporate person" means a company as defined in clause (20) of Section 2 of the Companies Act, 2013 (18 of 2013), a limited liability partnership, as defined in clause (n) of sub-section (1) of Section 2 of the Limited Liability Partnership Act, 2008 (6 of 2009), or any other person incorporated with limited liability under any law for the time being in force but shall not .....

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..... emed to be withdrawn before its admission.] Explanation.-For the purposes of this sub-section, a default includes a default in respect of a financial debt owed not only to the applicant financial creditor but to any other financial creditor of the corporate debtor. (2) The financial creditor shall make an application under sub-section (1) in such form and manner and accompanied with such fee as may be prescribed. (3) The financial creditor shall, along with the application furnish- (a) record of the default recorded with the information utility or such other record or evidence of default as may be specified; (b) the name of the resolution professional proposed to act as an interim resolution professional; and (c) any other information as may be specified by the Board. (4) The Adjudicating Authority shall, within fourteen days of the receipt of the Application under sub-section (2), ascertain the existence of a default from the records of an information utility or on the basis of other evidence furnished by the financial creditor under sub-section (3): [Provided that if the Adjudicating Authority has not ascertained the existence of default and passed an order .....

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..... or transferred to; (8) "financial debt" means a debt along with interest, if any, which is disbursed against the consideration for the 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; [Explanation.-For the purposes of this sub-clause,- (i) any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing; and (ii) the expressions, "allottee" and "real es .....

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..... form and manner and accompanied by such fee as may be prescribed. (7) The details and documents required to be submitted under sub-section (4) shall be such as may be specified. 4.3 Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 [As amended up to GSR 583(E), dated 24-9-2020] [30 November, 2016] In exercise of the powers conferred by clauses (c), (d), (e) and (f) of sub-section (1) of Section 239 read with Sections 7, 8, 9 and 10 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016), the Central Government hereby makes the following rules, namely- 1. Short title and commencement.- (1) These rules may be called the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. (2) They shall come into force from the 1st day of December, 2016. 2. Application.-These rules shall apply to matters relating to the corporate insolvency resolution process. 3. Definitions.-(1) In these Rules, unless the context otherwise requires,- (a) "Code" means the Insolvency and Bankruptcy Code, 2016 (31 of 2016); (b) "corporate insolvency resolution process" means the insolvency resolution process for corporate persons under C .....

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..... wledgement due; or (b) by electronic mail service to a whole time director or designated partner or key managerial personnel, if any, of the corporate debtor. (3) A copy of demand notice or invoice demanding payment served under this rule by an operational creditor shall also be filed with an information utility, if any. 4.4 Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 [15 November, 2019] 1. Short title and commencement.- (1) These rules may be called the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019. (2) They shall come into force from the 1st day of December, 2019. 2. Application.- These rules shall apply to insolvency resolution process for personal guarantors to corporate debtors. 3. Definitions.- (1) In these rules, unless the context otherwise requires,- (a) "Adjudicating Authority" means- (i) for the purpose of section 60, the National Company Law Tribunal constituted under section 408 of the Companies Act, 2013 (18 of 2013); .....

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..... A, along with an application fee of two thousand rupees. (2) The Guarantor shall serve forthwith a copy of the Application referred to in sub-rule (1) to every financial creditor and the corporate debtor for whom the Guarantor is a personal guarantor. 7. Application by creditor.- (1) A demand notice under clause (b) of sub-section (4) of section 95 shall be served on the Guarantor demanding payment of the amount of default, in Form B. (2) The Application under sub-section (1) of section 95 shall be submitted in Form C, along with a fee of two thousand rupees. (3) The creditor shall serve forthwith a copy of the Application referred to in sub-rule (2) to the Guarantor and the corporate debtor for whom the Guarantor is a personal guarantor. (4) In case of a joint application, the creditors may nominate one amongst themselves to act on behalf of all the creditors. 8. Confirmation or nomination of insolvency professional.- (1) For the purposes of sub-section (2) of section 97 and sub-section (5) of section 98, the Board may share the database of the insolvency professionals, including information about disciplinary proceedings against them, with the Adjudicating Author .....

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..... pellant and perused the record. There is no appearance from the Respondent side despite service of notice. The Adjudicating Authority has rejected the Application filed U/S 7 of the Code with the following observations; "14. Ld. Counsel for the applicant submitted that since the Corporate Debtor has failed to repay the loan, therefore, the present Application is filed against the personal Guarantor to initiate the CIRP against the personal Guarantor. He further submitted that on the date of recall of loan the Guarantee was also invoked. 15. Before making any comment on the submissions made on behalf of the applicant, at this juncture, we would like to refer Rule 3 of Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 (w.e.f 01.12.2019) 9 herein after referred as Rules). Rule 3(1)(1) of the said Rules defines the word guarantors i.e. "guarantor" means a debtor who is a personal guarantor to a corporate debtor and in respect of whom Guarantee has been invoked by the creditor and remains unpaid in full or part. 16. A bare perusal of the definition shows to file an applicatio .....

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..... e such directions for consolidating the proceedings under the applications as it thinks just. (4) An application under sub-section (1) shall be accompanied with details and documents relating to- (a) the debts owed by the debtor to the creditor or creditors submitting the Application for insolvency resolution process on the date of Application; (b) the failure by the debtor to pay the debt within a period of fourteen days of the service of the notice of demand; and (c) relevant evidence of such default or non-repayment of debt. (5) The creditor shall also provide a copy of the Application made under sub-section (1) to the debtor. (6) The Application referred to in sub-section (1) shall be in such form and manner and accompanied by such fee as may be prescribed. (7) The details and documents required to be submitted under sub-section (4) shall be such as may be specified. 20. A bare perusal of the provision shows that an application by the creditor against the personal Guarantor shall be filed under Section 95 (1) of the IBC and according to Section 95(4) IBC 2016 (i), an application under sub-section (1) shall be accompanied with details and documents relating to the .....

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..... sions of law." (verbatim copy) 7. Analysis 7.1 The Adjudicating Authority has held that the Insolvency and Bankruptcy (Application to Adjudicating Authorities for Bankruptcy Process for Personal Guarantors to Corporate Debtors" Rules, 2019 will be applicable instead of "the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules 2016. Under both the Rules, the conditions for the applicability of the Rules are provided. 7.2 Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 20191 [15 November, 2019] 2. Application.-These rules shall apply to insolvency resolution process for personal guarantors to corporate debtors. 3. Definitions.- (1) In these rules, unless the context otherwise requires,- (e) "guarantor" means a debtor who is a personal guarantor to a corporate debtor and in respect of whom Guarantee has been invoked by the creditor and remains unpaid in full or part; Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 [As amended up to GSR 583(E), dated 24-9-2020] [30 November, 2016] 7.3 The Insolvency and Bankruptcy (A .....

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..... l Guarantors to Corporate Debtor) Rules, 2019 as Rule 2 and 3 are both Rules clearly define the applicability of the part of IBC. 7.9 It is further contended that the learned Adjudicating Authority under the wrong apprehension considered Respondent to be a Personal Guarantor while the Respondent is a Corporate Guarantor. 7.10 It is pertinent to mention that the Appellant had not filed an Application against a Personal Guarantor under Section 95 of the Code; instead, the Application is filed against the Corporate Guarantor/Corporate Debtor. 7.11 It is also important to point out that the Appellant has annexed the Guarantee Agreement (Annexure 4) with the Appeal paper book. In Column 11 of the Guarantee Agreement, details of documents is stated, which is given below for ready reference; a) Loan Agreement/DPN/irrevocable power of attorney/declaration, indemnity. b) ECS through Punjab and Sindh Bank Account No. 00751300068765. c) Creation of exclusive charge in ROC in favour of Intake Capital Limited on the prime security offered-NA. d) Personal Guarantee and Deeds of Guarantee of Mohinder Singh Narang and Mrs Manjit Kaur in favour of 'Intake Capital Limited'. e) Corporate .....

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..... r). Hence, the first question stands answered against the Appellant." (Verbatim copy with emphasis supplied) 7.16 The law laid down by the Hon'ble Supreme Court in the above-mentioned case is fully applicable in the instant case. In the case mentioned above, Hon'ble Supreme Court has rejected the contention of the Appellant that since the loan was offered to the proprietary firm (not a corporate person), action under Section 7 of the Code cannot be initiated against the Corporate Person even though it had offered Guarantee in respect of the transaction. In this case, also Principal Borrower is a proprietary firm, and the Corporate Debtor had given the Corporate Guarantee for the said loan. 8. Conclusion 8.1 Based on the above discussion, it is clear that Respondent 'Eastern Embroidery Collections Private Limited' was the Corporate Guarantor of the Principal Borrower 'Eastern Overseas', and not a Personal Guarantor. Therefore, in terms of Sub-section (7) and (8) of Sec 3 of I&B Code, 2016 is a Corporate Debtor. Further, the applicable Rules would be 'Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016'. 8.2 Therefore, we are of the considered opinion t .....

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