Whether Insolvency Resolution Process against Guarantor could be Initiated on default in Repayment to Creditor

Renish Petrochem FZE v. Ardor Global (P.) Ltd.

Short Summary:

In this flash tabloid, the writer initiates by speak of the provisions of Insolvency & Bankruptcy Code, 2016 (hereafter referred as “IBC”) in relation to power of NCLT to accept the application in against Guarantor in case of default by Corporate Debtor.

As IBC code has prescribed the Corporate Debtor. The main shove of the article, is upon the question “WHETHER INSOLVENCY RESOLUTION PROCESS AGAINST GUARANTOR COULD BE INITIATED ON DEFAULT IN REPAYMENT TO CREDITOR” .

In this editorial author discuss the provisions relating to insolvency process against Guarantor in the landmark judgement delivered by NCLT, Ahmedabad Bench in case of RENISH PETROCHEM FZE (Here after referred as “OC”) ARDOR GLOBAL (P.) LTD.  (Here after referred as “respondent”)

INTRODUCTION:

Corporate Debtor: means a corporate person who owes a debt to any person;

“Corporate Person” means a 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;

Case element:

A. Factual Background:

i. Applicant that it had supplied various materials from time to time to Ardor International Limited and the outstanding amount from Ardor International Limited is Rs. 15,35,40,909.49 ps.

ii. Applicant that Applicant agreed to supply goods to Ardor International Limited on a condition that the payment of all and any sums of monies due and payable by Ardor International Limited shall at all times be guaranteed by Ardor Global Private Limited, its Associate Entity.

iii. Pursuant to said understanding, a Deed of Guarantee between the OC and the respondent company was entered whereby the respondent company unconditionally and irrevocably guaranteed as principal obligator to make entire payment to the applicant.

iv. Applicant issued notice dated 15th November, 2016 to the Respondent. In response to the said notice, Authorised Signatory of Respondent Company issued a Reply dated 4.12.2016 acknowledging the claim made by the applicant in respect of supply of goods to Ardor International Limited on the basis of Deed of Guarantee dated 1st September, 2014. In the said Reply, Respondent Company requested time to clear the dues

v. Applicant issued notice as required by Rule 5 of the Adjudicating Rules to the Respondent Company on the same day by hand and endorsement of the same was made by the Respondent on the notice. Thereafter on 31st May, 2017, this Petition is filed by the Applicant.

vi. The Hon’ble High Court of Gujarat in Company Petition No. 297 of 2016 vide its orders dated 28.11.2016 and 6.12.2016 ordered for liquidation proceedings and appointed Official Liquidator to take over charge and possession of assets of Ardor International Ltd.

vii. The winding up order is passed not in respect of the Respondent Company and it is in respect of Ardor International Limited.

viii. The Registry brought to the notice of this Authority on 18.7.2017, on which date the matter was posted for pronouncement of the Order that a Caveat Application No. 10 of 2017 filed by Central Bank of India, Ahmedabad relating to this matter is pending. Therefore, this Authority directed the Applicant to serve notice on the Central Bank of India and file proof of service.

ix. Coming to the right of audience to the Central Bank of India, which is said to be a ‘Financial Creditor’ of the Corporate Debtor, there is no provision in the Code or in the Adjudication Rules that on an application filed by the Operational Creditor under Section 9 of the Code there is a need to give notice to the Financial Creditor. However, in view of the Caveat filed by the Financial Creditor, notice has been ordered. The argument put forward by the learned Counsel for the Central Bank of India is that the Corporate Debtor is a Principal Borrower from the Central Bank of India and therefore the Operational Creditor cannot trigger Insolvency Resolution Process against the Corporate Debtor herein on the ground that it is a guarantor to Ardor International Limited. Learned Counsel appearing for the Central Bank of India further contended that the amount due under a contract of guarantee from Ardor Global Private Limited is not an ‘operational debt’.

x. Learned Counsel appearing for the Operational Creditor contended that ‘operational debt’ is defined in sub-section (21) of Section 5 which says ‘operational debt’ means a claim in respect of provision of goods. ‘Claim’ is defined in Section sub-section (6) of Section 3. A reading of Clause (b) of sub-section (6) of Section 3 of the Code clearly means right to remedy for breach of contract under any law for the time being in force if such breach gives a right for payment of money, it is a claim.

B. Provisions Under the Act:

“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;

“operational debt” means 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;

 (6) “claim” means—

(a) a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured;

(b) right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured;

Findings of the NCLT Bench: 

On reading of definition of claim and operation debt together “means a (claim) ‘right to remedy for breach of contract under any law for the time being in force’ in respect of provision of Goods or Services including employment …………

Pursuant to provision of Contract Act “The provisional of the Contract Act clearly shows that the liability of the on the Guarantor is con-extensive to that of the Principal Debtor”

The key issue for consideration before NCLAT was whether Guarantor can be considered as Corporate Debtor in case of claim by operational creditor.

Hon’ble NCLT states that , when the definition of the word ‘claim’ in Section 3 of the Code is inserted into the definition of ‘operational debt’ in sub-section (21) of Section 5, it includes the amount payable under the Guarantee Agreement also. No doubt, in case of ‘financial debt’, Section 8 Clause (i) specifically says about the liability in respect of any of the guarantee for any of the items referred to in sub-clauses (a) to (h). There is no such specific clause in case of ‘operational debt’. But, reading the definition of ‘claim’ into the definition of ‘operational debt’, it could only mean that the amount due from the buyer of the goods, and which is due to the seller of the goods and is guaranteed by the Guarantee Agreement, is also an ‘operational debt’.

Further, The provisions of the Contract Act clearly go to show that the liability of the Principal Borrower and that of the Guarantor is co-extensive to that of the Principal Debtor. On this aspect, learned Counsel for the Applicant also relied upon the decision in Central Bank of India v. C.L. Vimla . Therefore, the objection raised by the Central Bank of India, that Operational Creditor cannot proceed against the Respondent from whom the ‘financial debt’ is due to them, do not merit acceptance.

In view of the above discussion, this Petition deserves to be admitted and accordingly it is admitted

Conclusion:  In the above case law the:

• Hon’ble High Court of Gujarat in Company Petition No. 297 of 2016 vide its orders dated 28.11.2016 and 6.12.2016 ordered for liquidation proceedings and appointed Official Liquidator to take over charge and possession of assets of Ardor International Ltd. (Original Debtor).

However, due to guarantee agreement Operational Creditor filed insolvency application against Guarantor (respondent in the case).

However, the winding up order is passed not in respect of the Respondent Company and it is in respect of Ardor International Limited

• Pursuant to decision in Central Bank of India v. C.L. Vimla it is clear that “the liability of the Principal Borrower and that of the Guarantor is co-extensive to that of the Principal Debtor”

(Author – CS Divesh Goyal, ACS is a Company Secretary in Practice from Delhi and can be contacted at [email protected])

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