In this article author explains provisions of Insolvency & Bankruptcy Code, 2016 (hereafter referred as “IBC”) in relation to power of Creditors to file application against Corporate Guarantor.
Article deals with the issue “Whether Creditor can file application against Corporate Guarantor in case of default by Principle Debtor and petition against principle debtor has already been admitted under the Insolvency & Bankruptcy Code, 2016.”
Insolvency and Bankruptcy Code, 2016 (the, “Code”) is a crucial legislation passed by the Parliament which has the potential to be a game changer in the insolvency and bankruptcy regime in India.
Here the question is; If Principle borrower taken loan from the Bank or any services / goods for any one and the Corporate Guarantor given guarantee on behalf of the principle borrower. The Creditor has already filed application against the principle borrower and application is admitted. In that case whether financial/ operational creditor can claim also against the “Corporate Guarantor”.
|Case Name||IDBI Bank Ltd. V. BCC Estate (P.) Ltd|
|Respondent Company (Guarantor)||BCC Estate (P.) Ltd|
|Principle Borrower||Bhatia Global Trading Ltd|
|Applicant||IDBI Bank Ltd|
|Bench Name||NATIONAL COMPANY LAW TRIBUNAL, AHMEDABAD BENCH|
|Order No.||C.P. NO. (IB) 81/7/NCLT/AHD./2017|
|Date||SEPTEMBER 6, 2017|
|Section||7 (Financial Creditor)|
A. Factual Background:
1. IDBI Bank Limited filed this Application under Section 7 of the Insolvency and Bankruptcy Code, 2016 [“IB Code” for short] read with Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, (“IB Rules” for short) against BCC Estates Private Limited, treating as ‘Corporate Guarantor/Corporate Debtor’ with a request to initiate Corporate Insolvency Resolution Process.
2. Petitioner……Respondent Company stood as a Corporate Guarantor to Bhatia Global Trading Ltd., which is due to pay an amount of Rs. 82,04,12,819.41 to the Applicant Bank.
3. Petitioner……Bank filed Insolvency Petition against the Principal Borrower, viz., Bhatia Global Trading Ltd. The said Petition was admitted by this Authority by order dated 23.5.2017.
4. Petitioner……T Petitioner……he financial facilities granted to Bhatia Global Trading Ltd., was secured by Guarantee Agreement executed by the Respondent in favour of the Applicant on 17.3.2011. Bhatia Global Trading Ltd., availed the loan aggregating to Rs. 80 Crores which was secured by the Corporate Guarantee of the Respondent Company.
5. Petitioner……In spite of repeated reminders sent to the Respondent Company no payments were made to the Applicant. At no stage Respondent disputed the amounts due and payable by the Applicant. The Board of Directors of the Respondent Company by a Resolution dated 3.6.2016 resolved that Respondent is one of the Guarantors in respect of the Working Capital Facility of Rs. 1299 Crores availed by Bhatia Global Trading Ltd., Respondent Company executed Revival Letters 20th December, 2013, and 25.8.2016 acknowledging liability to the lenders and other secured parties.
6. Petitioner……Respondent Company being a Corporate Guarantor failed and neglected to pay the amount due and payable by Bhatia Global Trading Ltd., in its capacity as ‘Principal Borrower’.
7. Petitioner…… Applicant issued a notice dated 7th March, 2017 to the Respondent Company calling upon them to pay forthwith an amount of Rs. 82,04,12,819.41 together with further interest from 15thFebruary, 2017 at the contractual rate with compound interest. The said notice was duly served on the Respondent Company, but Respondent Company did not choose to give reply or make payment. On the other hand, Respondent Company acknowledged the Balance Confirmation. Respondent Company as a Corporate Guarantor is liable to pay Rs. 82,04,12,819.41 to the Applicant. Respondent Company filed its last Annual Return for the year ended 31st March, 2016. Applicant proposed the name of Shri Ravi Kapoor, as Interim Resolution Professional and filed his Written Communication. Applicant filed this Application on 12th July, 2017. Applicant despatched copy of the Application to the Respondent. This matter was listed for the first time before this Authority on 17thAugust, 2017.
Objections by Respondent:
8. The first objection raised is that Mr. Amit Kumar Nanda has no proper authority to file this Application and therefore it is liable to be rejected.
9. The second objection raised is that Applicant did not place copies of entries in Bankers’ Book in accordance with the Bankers’ Books Evidence Act.v
10. The third objection is there are other financial creditors that are Banks and they constitute consortium of Banks and therefore this Application is not maintainable
11. The next objection is that Respondent Company is only a Guarantor but not a Principal Borrower and therefore this Application is not maintainable.
12. The next objection is that the Principal Borrower is already undergoing Corporate Insolvency Resolution Process in an Application filed by IDBI and therefore if Resolution Process is commenced against the Corporate Debtor it amounts to redundancy since the Corporate Debtor submitted Resolution Plan which consists of assets of the Guarantors also.
Replies by the Applicant:
13. First Delegation of Powers, Chapter No.25, Mr. Amit Kumar Nanda being the Deputy General Manager of the Applicant Bank is duly authorized to file this Application which is approved by the Board of Directors of the IDBI Bank.
14. Applicant along with Additional Affidavit filed copies of Statement of Account of Principal Borrower. In fact, Applicant filed along with Application, Certificate issued under Bankers’ Books Evidence Act and therefore there is no substance in the said objection.
15. Section 7 of the Code says that any one of the financial creditors can file an application to trigger Corporate Insolvency Resolution Process either jointly with other financial creditors or individually. Therefore, this objection does not sustain.
16. It is a settled law that liability of the Guarantor is co-extensive with that of the Principal Borrower. It is for the Creditor to choose against whom he wants to proceed. There is no bar in the Law which prevents any Creditor to proceed both against the Principal Borrower and Guarantor. Therefore, this objection is also not sustainable.
17. Respondent is a Corporate Body. Respondent stood as a Corporate Guarantor to the Principal Borrower, Bhatia Global Trading Ltd. In such a case on the ground that Corporate Insolvency Resolution Process already commenced against the Principal Borrower, the Guarantor cannot avoid Corporate Insolvency Resolution Process when it failed to repay the amount borrowed by the Principal Borrower. The Guarantee Agreement executed by the Respondent Company is a continuing Guarantee and an Irrevocable Guarantee.
B. Findings of the NCLT Bench:
Sub-Clause (i) of sub-section (8) of Section 5 of the Code says, ‘the amount of any liability in respect of any of the guarantee for any of the items referred to in sub-clauses (a) to (h) of Clause 8 is a financial debt. In the case on hand, the Principal Borrower borrowed money from the Applicant Bank against the payment of interest by executing the Loan Agreement, Mortgage Deeds etc. For such loan transaction, Respondent Company stood as a Guarantor as a Corporate Guarantor. Therefore, Respondent Company is under a legal obligation to repay the loan amount borrowed from the Principal Borrower. Therefore, the amount due to the Applicant from the Principal Borrower is a financial debt and as the Respondent stood as a Guarantor for the financial debt the Respondent shall be treated as a Corporate Debtor because the financial debt is due from him also to the Applicant.
The Hon’ble National Company Law Appellate Tribunal, on 17th January, 2017, in Company Appeal (AT) (Insolvency) No. 1 & 2 of 2017 in the matter of Innoventive Industries Ltd. v. ICICI Bank held that in an application filed by the Financial Creditor under Section 7 for initiation Corporation Insolvency Resolution Process, the Adjudicating Authority is required to satisfy-
(a) Whether a default has occurred;
(b) Whether an application is complete; and
(c) Whether any disciplinary proceeding is against the Proposed Insolvency Resolution Professional.
In the case on hand, Respondent Company committed a default in repayment of the outstanding amount. The Application is complete in all respects. The material on record show that no disciplinary proceeding is pending against the proposed Interim Resolution Professional.
This petition is admitted under section 7(5)(a)of the Code.
On the basis of above decided case law it can be opine that “Even the Creditor filed the application against the principle borrower simultaneously it can file the application against the Corporate Guarantor also”.
I. Whether it is mandatory to file application by all the banks in case of consortium of Bank.
No. Section 7 of the Code says that any one of the financial creditors can file an application to trigger Corporate Insolvency Resolution Process either jointly with other financial creditors or individually. Therefore, this objection does not sustain.
II. Whether Creditor can demand the payment directly from the Guarantor or can demand from both the principle borrower and corporate Debtor.
It is a settled law that liability of the Guarantor is co-extensive with that of the Principal Borrower. It is for the Creditor to choose against whom he wants to proceed. There is no bar in the Law which prevents any Creditor to proceed both against the Principal Borrower and Guarantor.
(Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at email@example.com).
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