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TMI Blog2024 (3) TMI 1317X X X X Extracts X X X X X X X X Extracts X X X X ..... 5, 1107 & 1108 of 2020 filed under Section 61 of the Insolvency & Bankruptcy Code, 2016 ( in short 'Code') in CA No. 1393(PB)/2019 in CP No. (IB) - 50 (PB)/2018 under which the Resolution Plan was approved by the Adjudicating Authority. The Appellants have filed the present Appeals being aggrieved to the extent as it allows recourse to the Financial Creditors against the Personal Guarantors of Asian Colour Coated Ispat Limited (in short 'Corporate Debtor'), the Respondent No. 1 herein. 2. Since the subject matter, the facts of all the four Appeals, the Impugned Order dated 26.10.2020 passed by the National Company Law Tribunal, New Delhi, Principal Bench (in short 'Adjudicating Authority') is common and these four Appeals were conjointly pleaded by Appellants as well as by the Respondents, we shall examine all these four Appeals together and decide by way of one common order covering all four appeals. 3. Heard the Counsel for the Parties and perused the records made available including the cited judgements. 4. It is noted that the Corporate Insolvency Resolution Process (in short 'CIRP') of the Corporate Debtor was initiated on 28.07.2018 in CP No. (IB) - 50 (PB)/2018 passed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore there could not have been any concept of "Excluded Rights" being part of the Resolution Plan and the approval of the Resolution Plan containing such provisions is illegal and perverse. 11. The Appellants emphasised that the approval of the Resolution Plan by the Adjudicating Authority ought to be within the ambit of the code and anything contravening the provisions of the code is to be treated as illegal. In this connection, the Appellants submitted that the portion of Resolution Plan which permitted the Financial Creditors to retain the rights to pursue their legal remedies against the Appellants as the Personal Guarantor to the Corporate Debtor in absence of any debt, which ceased to exist after assignment of the entire debt to the SPV, such legal remedy in guise "Excluded Rights" could not have been approved and was the not examined properly and such pleadings were not deliberated adequately by the Adjudicating Authority. 12. The Appellants submitted that the Impugned Order is illegal because it seeks to enforce the security interest without the existence of debt qua the Financial Creditor as the same is against the Indian Contract Act, 1872 and Transfer of Property Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the deed of assignment. It is the case of the Appellants that no-one can claim that pure debt can be transferred but the right to sue against the Personal Guarantors to the Corporate Debtor would remain with the Financial Creditors. 18. The Appellants submitted that in view of this legal position, if any party who could pursue the legal remedies against the Appellants being the Personal Guarantors to the Corporate Debtor could have been only the SPV and by no way the Financial Creditors could vest themselves the rights under the illegal pretext of "Excluded Rights" which was unlawfully inserted in the Resolution Plan and was illegally approved by the Adjudicating Authority violating the provisions of the Code. 19. The Appellants submitted that the Impugned Order has relied upon three judgments of the Hon'ble Supreme court of Indian, namely, Lalit Kumar Jain vs. Union of India & Ors. [(2021) 9 SCC 321], State Bank of India Vs. v. Ramakrishnan & Anr. Civil Appeal No. 4553 of 2018 and Gauri Shankar Jain Vs. Punjab National Bank & Anr. W.P. No. 10147 (W) of 2019 which are not applicable in the present cases as legal questions raised by them in the present Appeals were not covered in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere. 25. The Appellants pleaded this Appellate tribunal to look into the spirit of the Code which is for the revival of the Corporate Debtor and not to be allowed as recovery mechanism by the Financial Creditors which will defeat the very purpose of the Code and will compromise position of various Stakeholders including the Personal Guarantors to the Corporate Debtor. 26. The Appellants submitted that if no outstanding debt is reflected in the books of the Financial Creditors, how such Financial Creditors can contemplate any legal remedy against the Personal Guarantors, simply because the financial debt does not survive in the books of the Corporate Debtor as well as the Financial Creditors and after the assignment such financial debts along with the underlying rights could vest only with the assignee of the debt i.e., SPV in the present case. 27. The Appellants stated that the liabilities towards the guarantees which were directly connected with the debts and therefore become inseparable from the assignment and it has to be exercised only by the party in whose favour debts have been transferred and therefore the Financial Creditors have no locus to move against the Personal Gua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... brogation as guarantors of the Corporate Debtor contravening the provisions of Indian Contract Act, 1872 and the Appellant further submitted that since the terms of restructuring of debt are not spelt out in the Resolution Plan, the Appellants automatically get discharged in the capacity of Guarantor under the provision of the Indian Contract Act, 1872. The Appellant stated that after implementation of Resolution Plan of claims against the Corporate Debtor are extinguished except as provided in the Resolution Plan by the SRA and become binding on of Stakeholders including Financial Creditors, Operational Creditors, Corporate Debtor and other Stakeholders in terms of Section 31 of the Code. 35. The Appellants submitted that the RBI guidelines are very clear and are in nature of mandatory directives and cannot be violated by the Stakeholders including the Financial Creditors. 36. Concluding their arguments, the Appellants submitted that the Impugned Order be set aside. 37. Per contra, the Contesting Respondent i.e, JSW Steel Coated Products Limited/ SRA, who is the Respondent No. 2 herein, countered all the averments made by the Appellants treating these to be malicious, misleadin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espondent No. 2 submitted that the similar contentions was earlier discussed by the Hon'ble Supreme Court of India in the matter of Essar Steel India Ltd. Committee of Creditors [(2020) 8 SCC 531], where the Apex Court after considering the similar objections of the Guarantors found no infirmity in the Resolution Plan and refused to make any observation regarding impacting the proceedings regarding the invocation of such guarantees. 43. The Respondent No. 2 submitted that the Stakeholders including the Guarantors of the Corporate Debtor are bound by the approved Resolution Plan in terms of the Section 31 (1) of the Code. The Respondent No. 2 further submitted that it is a settled position of the law that the Guarantor's liabilities are co-extensive with the Corporate Debtor. 44. The Respondent No. 2 reiterated that since the Resolution Plan specifically provided for extinguishment of right of subrogation available to the Appellants as Guarantors, the arguments of the Appellants herein that the Resolution Plan is not in compliance with the Indian Contract Act, 1872, is without any legal standing. 45. The Respondent No. 2 elaborated that it was conscious decision taken by him as S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itted that the various clauses of the incorporated as part of the final Resolution Plan dated 06.05.2019 r/w Addendum dated 17.06.2019 i.e., Clause 1.3, 1.8, 1.10, 1.12, 1.13, 1.14 read along with relevant definition in Schedule I- List of defined terms, clearly indicate that nothing in the Resolution Plan shall operate or have the effect or assignment, revoking or cancelling or extinguishing the "Excluded Right" as defined and directs the Financial Creditors (DFC) and/or related creditors as applicable, are free to pursue such remedies and exercise such rights as the Financial Creditors may under applicable laws in respect of such "Excluded Rights". 53. The Respondent No. 3 clarified that it was only remaining debt according incorporated as part of the final Resolution Plan dated 06.05.2019 r/w Addendum dated 17.06.2019 which was assigned to the SPV of the Respondent No. 2 in accordance with the Resolution Plan but carved out "Excluded Rights" and financial contracts, except which legal rights of recovery through "Excluded Rights", were assigned to the SPV of the SRA. 54. The Respondent No. 3 took pains to explain that consciously Resolution Plan protected the rights of the Fina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ancial Creditors to carve out the concept of "Excluded Rights" in favour of the Financial Creditors to pursue recoveries against the Personal Guarantors for the remaining unpaid portion of debts not provided in the Resolution Plan. 63. Concluding his arguments the Respondent No. 4 submitted that the Appeals deserves to be dismissed. Findings 64. At the outset, we take into consideration the facts regarding admitted debt and proposed payment by the SRA w.r.t. Financial Creditors and Operational Creditors and therefore following picture emerges :- "Resolution Plan submitted by the Respondent No. 2 proposes the following :- S. No. Parties Admitted Debt (Approx.) (INR) Payment Proposed by Respondent No. 2 (INR) Total 7801,82,87,850 1550,00,00,00 1. Secured Financial Creditors 4864,39,65,599 1499,98,93,253 (Loan Assignment Payment) 2. Unsecured Financial Creditors 1702,60,19,604 25,00,00,000 3. Operational Creditors 507,87,66,450 25,00,00,000 ➤ For a consideration of Loan Assignment Payment ("LAP"), a 'Purchaser' will step into the shoes of the DFCs and exercise rights in respect of the entire admitted financial debt presently owed to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of such debt. 2. Para 1.13 of the Addendum: Definition of "Remaining Debt"- ""Remaining Debt" shall mean all rights, title, interests of the creditors in and to Admitted Financial Debt less the Corporate Guarantee Debt, along with all rights, assets, title, charges, encumbrances, mortgages and guarantees (including the personal guarantees issued by Mr. Pradeep Kumar Aggarwal to the Direct Financial Creditors, to the extent of the Loan Assignment Payment), and any beneficial interest therein, securing such debt. (but excluding the Excluded Rights), which will be assigned/novated to the Purchaser pursuant to this Resolution Plan. The assignment and novation of the personal guarantees issued by Mr. Pradeep Kumar Aggarwal to the Direct Financial Creditors, to the extent of the Loan Assignment Payment is an integral part of the Resolution Plan." 3. Para 1.12 of the Addendum: Definition of "Excluded Rights"- ""Excluded Rights" shall mean (A) personal guarantees provided by persons other than Mr. Pradeep Aggarwal, (B) any mortgage and/or hypothecation provided by ACCIL Hospitality Limited, and (C) corporate guarantees provided by AGR Steel Strips Private Limited and ACCIL Hospital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, we shall take up and discuss al above issue in joint manner in subsequent paras. 68. We are of the opinion that the intent of the legislature behind the provisions of the Code is for resolution of the Corporate Debtor and not of the Personal Guarantors of the Corporate Debtor. The financial creditors have a right to proceed against the personal guarantors of the Corporate Debtor, and further, that the personal guarantors, in terms of section 31 of the Code are duty bound by the terms of the Resolution Plan approved by the Adjudicating Authority. We also feel that a Resolution Plan itself can vary and modify the rights of the creditors and guarantors of the corporate debtor and provide for continuation of personal guarantees which do not need any confirmation from Personal Guarantor to the Corporate Debtor. We carefully note that there is a categorical right carved out in favour of the Financial Creditors, through the specific term i.e., the 'Excluded Rights' which have not been assigned to the SPV. The Resolution Plan defined the term 'Remaining Debt' which has been assigned to the SPV of the Respondent No. 2 and perusal of the relevant provisions clearly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xtent of the value of the security. Illustrations (a) C, advances to B, his tenant, 2,000 rupees on the guarantee of A. C has also a further security for the 2,000 rupees by a mortgage of B's furniture. C cancels the mortgage. B becomes insolvent and C sues A on his guarantee. A is discharged from liability to the amount of the value of the furniture. (b) C, a creditor, whose advance to B is secured by a decree, receives also a guarantee for that advance from A. C afterwards takes B's goods in execution under the decree, and then, without the knowledge of A, withdraws the execution. A is discharged. (c) A, as surety for B, makes a bond jointly with B to C, to secure a loan from C to B. Afterwards, C obtains from B a further security for the same debt. Subsequently, C gives up the further security. A is not discharged." (Emphasis Supplied) 72. From Section 140 of the Indian Contract Act, 1872 it becomes clear that the surety is vested with all the rights of the creditors against the principles debtor once surety has paid his full obligations towards the Financial Creditors and he would be subrogated in the shoes of the Creditors and becomes entitled to enforce securities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsciously made for the revival of the Corporate Debtor and has adopted the concept of clean slate theory for the reborn corporate entity under new management. 76. Now we will also look into the aspect of Section 140 and 141 of the Indian Contract Act, 1872 vis-à-vis Section 238 of the Code. We note that Section 238 of the Code describes categorically that the code take precedent over any inconsistency contained in any other existing law which includes Indian Contract Act, 1872, therefore, despite provisions of Section 140 and 141 of the Indian Contract Act, 1872 the Personal Guarantors cannot claim any relief in view of clear provisions of Section 238 of the Code. 77. The denial of right of subrogation is no more res-judicata and has been decided in catena of the judgments by the Hon'ble Supreme Court of India. 78. At this juncture, we will go through few of judgments on the issue of subrogation. 79. Essar Steel India Ltd. Committee of Creditors (Supra) :- "102. Also, under the caption "terms of settlement", the final resolution plan dated 2-4-2018, as approved on 23-10-2018. specifically provided: "Financial Creditors: Pursuant to the approval of this resolution pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocate appearing on behalf of Shri Prashant Ruia, also pointed out Section XIII(1)(g) of the resolution plan dated 23-10-2018, in which it is stated as follows: "Upon the approval of the resolution plan by the Adjudicating Authority in relation to guarantees provided for and on behalf of, and in order to secure the financial assistance availed by the corporate debtor, which have been invoked prior to the effective date, claims of the guarantor on account of subrogation, if any, under any such guarantee shall be deemed to have been abated, released, discharged and extinguished. It is hereby clarified that, the aforementioned clause shall not apply in any manner which may extinguish/affect the rights of the financial creditors to enforce the corporate guarantees and personal guarantees issued for and on behalf of the corporate debtor by existing promoter group or their respective affiliates, which guarantees shall continue to be retained by the financial creditors and shall continue to be enforceable by them." (emphasis supplied) "106. Following this judgment in V. Ramakrishnan case (SBI v. V Ramakrishnan, (2018) 17 SCC 394: (2019) 2 SCC (Civ) 4581, it is difficult to accept Shr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Personal Guarantors to the Corporate Debtor. 81. Lalit Kumar Jain vs. Union of India & Ors. [(2021) 9 SCC 321] "130. The rationale for allowing directors to participate in meetings of the CoC is that the directors' liability as personal guarantors persists against the creditors and an approved resolution plan can only lead to a revision of amount or exposure for the entire amount. Any recourse under Section 133 of the Contract Act to discharge the liability of the surety on account of variance in terms of the contract, without her or his consent, stands negated by this court, in V. Ramakrishnan where it was observed that the language of Section 31 makes it clear that the approved plan is binding on the guarantor, to avoid any attempt to escape liability under the provisions of the Contract Act. It was observed that: "25. Section 31(1), in fact, makes it clear that the guarantor cannot escape payment as the resolution plan, which has been approved, may well include provisions as to payments to be made by such guarantor...." 132. In Committee of Creditors of Essar Steel (1) Ltd. v. Satish Kumar Gupta (the "Essar Steel case") this court refused to interfere with proceed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nguished under the Resolution Plan and therefore the arguments of the Appellant on issue of rights of subrogation's are not convincing. If the rights of subrogation are allowed to continue against the Corporate Debtor under the management of the new SRA, the same would have the effect of putting the SRA and the Corporate Debtor in the same position as prior to its insolvency resolution. The allegation of the Appellant pertaining to differential treatment due to extinguishing their rights of subrogation under the approved Resolution Plan against the Corporate Debtor is unfounded, which is only to ensure that the SRA takes control of the Corporate Debtor on a clean slate without carrying any previous liability baggage. 83. We feel that the extinguishment of Personal Guarantors right of subrogation is unavoidable and inaccessible fact in insolvency cases and it requires to be respected by all stakeholders and any departure from such principles will have adverse impact on revival of the Corporate Debtors, interest of the Financial Creditors and overall negative impact on the national economy. 84. Therefore, we are not inclined to accept the pleas of the Appellants regarding their rig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, or the lessee of an estate under the management of a court of Wards, to assign his interest as such tenant, farmer or lessee.]" (Emphasis Supplied) It may be argued that the purpose of stipulating Section 6(e) i.e., non-transferable of mere right to sue or such actionable claims is to prohibit the practice of gambling out of litigation. We observe that right to sue has been preceded by the word "mere" meaning only right to sue but if the right to sue is not simpliciter right or involves direct or indirect interests in the property (including financial debt) such right to sue can be argued to be assignable and therefore may not fall in the ambit of Section 6(e) of the Transfer of Property Act, 1882. Normally speaking, when the entire business or entire debt is transferred to the new entity, right to sue should automatically presumed to be transferred to the new entity. 86. In the present Appeals, we have already noted the final Resolution Plan dated 06.05.2019 r/w Addendum dated 17.06.2019, contained specific clause regarding the rights of the Financial Creditors along with the rights of the SPV. 87. We are conscious of the fact that clear and deliberate decision was taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eme Court as well as high courts in various judgments, for instance in Agri Marketing Co. vs. Imperial Exports Limited, 2001 SCC OnLine Bom 841, by the Hon'ble Bombay High Court. Thus, the survival of guarantees is clearly in contravention of Section 6(e) of the Transfer of Property Act, 1882 and as such in violation of Section 30(2)(e) of the Code. (Emphasis supplied) 90. We also look into the cited judgment about Section 6(e) of the Transfer of Property Act, 1882 and the relevant portion of the judgment passed in Union of India Vs. Sri Sarada Mills Ltd. [(1972) 2 SCC 877] and Maharaj Singh Vs. Kumud Board [MANU/UP/3476/2016], reads as under :- "16. For the case in hand we are concerned with Section 6(e) which says a "mere right to sue" cannot be transferred. Section 6 come up for consideration in Union of India Sri Sarada Miis Led MANU/SC/0410/1972: A.I.R. 1973 SC 281 wherein it held that a bare right of action, might be, claims to damages for breach of contract or claims to damages for tort and assignment of the mere right of litigation, is bad. An assignment of property is valid even although that property may be incapable of being received without litigation. The reas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate Debtor. 92. We are of clear opinion that the financial creditors have reserved the rights to proceed against the personal guarantors like the Appellant herein in terms of the "Excluded Rights" in approved Resolution Plan. There is no question of transfer of a "mere right to sue" and in such circumstances, we feel that it is a structured financial deal in form of Resolution Plan exercised based on the commercial wisdom, with aim of resolution of a corporate debtor, as well as to ensure that financial creditors are able to recover their outstanding debts as guaranteed by the Personal Guarantors, the Appellants herein. We endorse the views that resolution of debts cannot be misconstrued as full satisfaction of debts payable to the creditors and Resolution of debts under the Resolution Plan is only to the extent of the obligations against and this will not take away the rights of the Financial Creditors to proceed against the Appellants as Promotors who stood as guarantors and the assets mortgaged by others against the loan availed by the principal debtor. 93. The above proposition is further fortified by section 238 of the Code which specifically provides that the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regarding treatment in the books of the financial creditors with respect to such continuing rights of the financial creditors against the personal guarantors of the Corporate Debtor after the approval of the Resolution Plan. We feel that it the prerogative and within the purview of such Financial Creditors (within the applicable regulatory framework as applicable ) and it does not come to rescue of the Appellants to escape their liability under the guarantee agreements on the-basis of such grounds. We observe that the treatment in the Books of the Financial Creditors is based on RBI Prudential norms which were issued with several purposes, including and not limited to, discouraging the Financial Creditors to resort to ever greening of loans. We feel that such RBI guidelines do not intent to give undue benefits to the Personal Guarantors of the Corporate Debtors or debar the Financial Creditors in pursuing their legal rights to recover their outstanding debts from the Personal Guarantors to the Corporate Debtor. After all, it cannot be anyone's case to write off public money by such circuitous route or hypothetical legal assumption. 99. The Hon'ble Supreme Court, in Swiss Ribb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial wisdom of CoC has been given paramount status without any judicial intervention, for ensuring completion of the stated processes within the timelines prescribed by the I&B Code. There is an intrinsic assumption that financial creditors are fully informed about the viability of the corporate debtor and feasibility of the proposed resolution plan. They act on the basis of thorough examination of the proposed resolution plan and assessment made by their team of experts. The opinion on the subject-matter expressed by them after due deliberations in CoC meetings through voting, as per voting shares, is a collective business decision. The legislature, consciously, has not provided any ground to challenge the "commercial wisdom" of the individual financial creditors or their collective decision before the adjudicating authority. That is made non-justiciable 59. In our view, neither the adjudicating authority (NCLT) nor the appellate authority (Nclat) has been endowed with the jurisdiction to reverse the commercial wisdom of the dissenting financial creditors and that too on the specious ground that it is only an opinion of the minority financial creditors. The fact that substantial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r it could realise its monies in the event creditor realised principal debtor dues from the guarantor. Since IBC has categorically envisaged that no liability will remain in force against the corporate debtor after plan approval, right of subrogation will not be available to the guarantors. It makes no difference to the right to proceed against the surety. The right to proceed against guarantor will remain in force because loan has been assigned to a purchaser. To the extent it has paid to the creditor, it is entitled to proceed against the guarantor Resolution of debts cannot be misconstrued as full satisfaction of debts payable to the creditors. This is only a compromise or arrangement to the extent of the obligations against an insolvent company, but this will not take away the right of creditors to proceed against others who stood as guarantors and the assets mortgaged by others against the loan availed by the principal debtor."
( Emphasis Supplied )
104. We do not find any error in the Impugned Order.
105. In fine, the Appeals devoid of any merit, fail and stand rejected. No costs. Interlocutory Applications, if any, are Closed. X X X X Extracts X X X X X X X X Extracts X X X X
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