J 2018 SCC OnLine NCLT 24252 Sandeepsinghi Singhiandcocom 20200113 152059

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2018 SCC OnLine NCLT 24252
In the National Company Law Tribunal†

(BEFORE R.P. NAGRATH, MEMBER (JUDICIAL) AND PRADEEP R. SETHI, MEMBER (TECHNICAL))
Corporation Bank … Petitioner-Financial Creditor;

Versus
Amtek Auto Limited … Respondent-Corporate debtor.
CA Nos. 61/2018, 77/2018, 177/2017, 178/2018 & 72/2018 in CP (IB) No.
42/Chd/Hry/2017‡
Decided on July 25, 2018
Advocates who appeared in this case :
(in CA No. 77/2018) 1) Mr. Atul Nanda, Senior Advocate for the ICICI Bank;
Mr. Sahil Sharma, Advocate;
Vishakha Kaul, Advocate;
(in CA No. 61/2018) 1) Mr. Anand Chhibbar, Senior Advocate for the Kotak
Mahindra Bank;
Mr. Vaibhav Sahni, Advocate;
Mr. Jaswinder Mann, Advocate;
(in CA No. 177 & 178/2018) 1) Mr. Sanjay Bajaj, Advocate for the IDBI Bank;
Mr. Vansh Chawla, Advocate;
(in CA No. 72/2018) 1) Ms. Reema Khorana, Advocate for the Central Bank of India;
Mr. Kartik Rathi, Advocate;
Mr. Sanjay Bhatt, Advocate for the Resolution Professional;
Mr. Nitin Kaushal, Advocate for the Committee of Creditors;
Ms. Misha, Advocate.
The Order of the Court was delivered by
R.P. NAGRATH, MEMBER (JUDICIAL):— All these miscellaneous applications are
being disposed of by a common order as the similar questions of law and facts are
involved.
2. The brief history of the case is that CP (IB) No. 42/Chd/Hry/2017 was filed by
the Corporation Bank, a financial creditor under Section 7 of the Insolvency and
Bankruptcy Code, 2016 (for brevity the ‘Code’) for initiating the insolvency resolution
process against Amtek Auto Limited, the corporate debtor. That petition was admitted
by this Tribunal on 24.07.2017 declaring moratorium in terms of Section 14(1) of the
Code. Mr. Dinkar Tiruvannadapuram Venkatasubramanian was appointed as the
Interim Resolution Professional (IRP) with necessary directions by order dated
27.07.2017. He was ultimately confirmed as the Resolution Professional (RP) by the
Committee of Creditors.
3. The resolution professional filed CA No. 08 of 2018 seeking extension of the
period of completion of insolvency resolution process based on the decision taken in 5th
meeting of the Committee of Creditors held on 06.12.2017 and the period was
extended by another 90 days by order dated 17.01.2018.
4. In these miscellaneous applications, the issue raised is with regard to invocation
of the bank guarantee/indemnity/letters of comfort furnished by the corporate debtor
in respect of loans obtained by the subsidiaries of the corporate debtor. The bank
guarantee/indemnity furnished by the corporate debtor have been invoked after the
commencement of the resolution process.
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5. CA No. 61 of 2018 is filed by Kotak Mahindra Bank a banking company

incorporated under the Companies Act, 1956 and mainly engaged in the business of
banking. According to the applicant, the erstwhile ING Vysya Bank has amalgamated
with the applicant Bank under the Scheme of Amalgamation sanctioned by the
Reserve Bank of India (RBI) on 01.04.2015. It is admitted proposition of fact that the
applicant Bank is a financial creditor of the corporate debtor and also a member of the
committee of creditors. However, the corporate debtor also furnished the guarantee to
the applicant Bank for the facilities granted to ACIL Limited, a subsidiary of the
corporate debtor. The outstanding dues against the said subsidiary upto 09.08.2017 is
more than Rs. 205 crores.
6. It is stated that the applicant Bank filed the claim in pursuant of the public
announcement on 10.08.2017 in Form C. Copy of Form C is at Annexure A-4 attached
with the application. The facts furnished in Form C by the applicant therein are not
disputed. In this Form against Serial No. 4, the applicant claimed the amount of more
than Rs. 38 crores so far as the debt of the corporate debtor is concerned, but a note
was also appended that the corporate debtor stood guarantor for the loan granted to
its subsidiary stating that the present outstanding due was more than Rs. 205 crores.
In this note, it was mentioned in Form C that the amount of debt from the subsidiary
is part of the contingent liability. This Form C is at Annexure A-4, dated 10.08.2017.
The amount of claim made by the applicant Bank was admitted by the Resolution
Professional to the tune of Rs. 37.46 crores.
7. It is further stated that the applicant Bank invoked the corporate guarantee on
22.09.2017, which is after the insolvency commencement date. Copy of the notice
dated 22.09.2017 issued by the applicant Bank in this regard is at Annexure A-5. This
is addressed to ACIL Limited, a subsidiary of the corporate debtor and also to the
corporate debtor. It was stated in this letter that the subsidiary of the corporate debtor
defaulted in making repayment of the loan as per the schedule and the loan was
classified as non-performing asset as on 31.03.2017 as per the guidelines of RBI. By
this letter, the applicant Bank has called upon the subsidiary of the corporate debtor
and the corporate guarantor i.e. the corporate debtor in this case, to repay the amount
within seven days along with interest amounting to more than Rs. 205 crores as on
24.08.2017 together with further interest.
8. The intimation of invocation of the bank guarantee was given to the Resolution
Professional vide letter dated 04.10.2017 which is at Annexure A-7. The Resolution
Professional conveyed that this invocation of the guarantee on 22.09.2017 is in
violation of Section 14 of the Code under which the moratorium was passed by this
Tribunal. It was also conveyed that un-invoked bank guarantee can at best be treated
as contingent claim without entitlement to voting rights. The letter sent by the
Resolution Professional in this regard is at Annexure A-8. This was reiterated by the
Resolution Professional in further communication between the parties.
9. Reference is made to clause 17 of the corporate guarantee dated 08.07.2014
Annexure A-12 (Colly) furnished by the corporate debtor with regard to the loan
advanced to the aforesaid subsidiary to the tune of Rs. 70 crores. This clause reads as
under:—
“The Guarantor hereby agrees and declares that as of the date of this Deed, the
total liability of the Guarantor under this Guarantee shall not exceed the sum of INR
70,00,00,000.00 (Rupees Seventy crore only) (exclusive of interest and other
charges). However, the Guarantor agrees that the Bank shall be at liberty to
enhance the limits under the Facilities offered/sanctioned and/or extend further
financial assistance to the Borrower from time to time without notice to the
Guarantor and all the terms and conditions stated in this Deed along with any other
existing corporate guarantee deed shall continue to be applicable for such
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enhanced/further limits and this Guarantee shall remain a continuing one for such
amounts due and will not be affected or vitiated in any way whatsoever but will
remain in full force and effect and be binding on the Guarantor. In addition to the
above, all interests, costs, expenses, etc. forming a part of the Guaranteed
Obligations shall also be payable by the Guarantor.”
10. The corporate debtor had executed the corporate guarantee on 13.08.2007
which was supplemented by the corporate guarantee dated 09.02.2011 for a sum of
Rs. 131 crores. Copy of these guarantee deeds are at Annexure A-12 (Colly).
11. In the light of the above facts, the instant application has been filed under
Section 60(5) of the Code.
12. The Resolution Professional contested the application by filing the written reply.
It is stated that the claim arising out of the invocation of the corporate guarantee
furnished by the corporate debtor after commencement of the insolvency resolution
process is not admissible. It was further stated that the corporate guarantee cannot be
invoked after the commencement date of insolvency resolution process in view of the
order of moratorium under Section 14(1) of the Code. The other facts stated in the
application have not been denied. The claim in respect of the date of corporate debtor
to the tune of Rs. 37.46 crores was admitted and the voting share of the applicant as
member of the committee of creditors was 0.05% and it had been participating in the
deliberations of the COC accordingly. Therefore, it is stated that invocation of the
corporate guarantee after commencement of the insolvency resolution process can be
said to be an amount of debt, which was not due on the insolvency commencement
date.
13. It is further alleged that the amount claimed due to invocation of the corporate
guarantee after the insolvency commencement date cannot be admitted as the
concept of the accelerated payment applies to the liquidation proceedings, which is
not applicable to the insolvency resolution process. It was further stated that when the
restructuring of the corporate debtor is still in progress, recovery of dues that have not
become due and payable will defeat the purpose of the Code. The Insolvency &
Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons (CIRP)
Regulations, 2016 (for short to be referred here-in-after as CIRP Regulations) only
refers to the claims existing as on insolvency commencement date.
14. CA No. 77/2018 is a similar application under Section 60(5) of the Code filed by
ICICI Bank, which otherwise is also one of the members of the committee of creditors
in respect of the claim made against the corporate debtor as on the insolvency
commencement date. The applicant Bank has invoked the indemnity bond furnished
by the corporate debtor i.e. Amtek Auto Limited for the loan advanced to one of its
subsidiaries namely OCL Iron and Steel Limited (Borrower). Apart from the aforesaid
challenge, it was also stated that the resolution professional has wrongly and
arbitrarily assessed the liquidation value payable to the unsecured financial creditors
as nil, which fact is also reflected in the resolution plan.
15. The facts relevant for the disposal of this application are that the applicant
ICICI Bank lent an amount of Rs. 135 crores to the borrower under the Onshore
Facility Agreement, copy of which is at Annexure A-1. The loan was disbursed to the
borrower on 29.11.2011. Under the said agreement the Axis Bank was appointed as
agent for all the lenders. Accordingly, an Inter-Creditor Deed dated 24.11.2011
Annexure A-2 was entered into between Standard Chartered Bank (SCB) (acting on
behalf of the lender Offshore Facility Agreement) Axis Bank (on behalf of lenders of the
Onshore Facility Agreement including the Applicant) and the Borrower. As per clause
11.1 of the deed, SCB was nominated as a Global Agent authorised on behalf of the
applicant and other secured creditors. SCB/Global Agent entered into an indemnity
agreement dated 15.11.2011 Annexure A-3 with the borrower and the corporate
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debtor i.e. Amtek Auto Limited. In this agreement OCL Iron & Steel Ltd. has been
referred to as the Seller and Amtek Auto the Corporate Debtor as Purchaser. Under this
agreement, the corporate debtor undertook to indemnify the applicant among other
lenders for any liability arising under the facility agreement. The relevant clauses of
the indemnity agreement are reproduced as under:—
“6.2 Without prejudice to anything contained in this Agreement, the Purchaser
shall indemnify and hold harmless the Secured Parties for any loss suffered by the
Secured Parties in connection with the Facility and the Transaction Documents,
howsoever caused, including on account of Seller's failure to pay interest or
principal or any other amounts as per the terms of the Transaction Documents, the
performance or non-performance by the Seller of its obligations under the
Transaction Documents, any loss or liability arising out of the negligence or breach
or breach of duty or Wilful Misconduct of the Seller or failure of the Seller to
maintain adequate balance in the Proceeds Account.
6.3 Without prejudice to anything contained in this Agreement, on either the
Seller or the Global Agent (acting on behalf of the Secured Parties) raising any
indemnity claim in case of occurrence of an Event of Default, the Purchaser shall
deposit such amounts in the Proceeds Account in accordance with Clause 6.7 below,
that the amount lying in the Proceed Account is equal to the aggregate of all the
amounts due under the Transaction Documents.”
16. It is further stated that in March, 2016, the account of the borrower was
declared as Non-Performing Asset (NPA). Several default notices were also sent to the
borrower as well as to the corporate debtor. A letter dated 09.01.2017 Annexure A-4
was sent to the borrower to cure the defaults and copy of this letter was also
addressed to the corporate debtor.
17. The relevant assertion for the present controversy is that the Global Agent
acting on behalf of the Secured Creditors sent a notice of demand dated 03.08.2017 to
the corporate debtor invoking the Indemnity Agreement on account of the defaults
made by the borrower under the Facility Agreement and asked the corporate debtor to
deposit the outstanding amount. The total amount outstanding as on date of
invocation was to the tune of Rs. 139.6 crores inclusive of interest. This letter dated
03.08.2017 invoking the Indemnity Agreement is at Annexure A-5.
18. Pursuant to the public announcement after admission of the case, the applicant
furnished its claim dated 10.08.2017 in Form C stating therein even the amount
payable under Onshore Facility Agreement. Copy of Form C is at Annexure A-6.
19. On account of non-payment by the borrower or the corporate debtor, the Global
Agent terminated the Facility Agreement on 14.11.2017 and accelerated all the
amounts accrued and outstanding in connection with the Facility Agreement as
immediately payable and that letter has been termed as recall notice which is at
Annexure A-7. Since an amount of Rs. 27 crores towards the principal had also fallen
due under Onshore Facility Agreement on 30.11.2017, the applicant vide letter dated
04.12.2017 asked the resolution professional to revise the initial claim under Form C
by adding Rs. 27 crores plus interest payable thereon. Thus, the total amount of debt
of the applicant would be Rs. 166.62 crores. This claim of the applicant was declined
by the resolution professional by his email dated 08.01.2018 mainly on the ground
that this amount was not due on the insolvency commencement date and that the
guarantee cannot be invoked after declaration of the moratorium. The resolution
professional also stated that it being a contingent liability cannot be admitted.
20. The other ground to challenge the proceedings for approval of the resolution
plan by the applicant is that the resolution plan unilaterally and without any
justification or reasoning, revised the cap on the amounts recoverable by the
consenting unsecured financial creditors to 14% of the verified amount instead of 17%
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of the total settlement amount. Even the cap of 17% of the total settlement amount
for the unsecured creditors proposed in the resolution plan dated 05.03.2018 was
without any reason and basis. The resolution professional is also stated to have
violated the provisions of Regulation 38 of the Regulations, which expressly and clearly
provide that the liquidation value due to the dissenting financial creditors should be
made before any other recoveries to the assenting financial creditors. The resolution
professional has also ignored the difference between the provisions of 52 and 53 of the
Code as there is a vast difference with regard to the water fall in case of liquidation of
the corporate debtor. Under these provisions, the secured creditor has priority with
respect to its security and not over other assets of the corporate debtor. The aforesaid
provisions clearly signify that the amount that remained outstanding after the secured
creditors are paid out of their security, they rank below the unsecured creditors.
21. It is further alleged that the insolvency resolution process and the resolution
plan are obviously lopsided in favour of the secured creditors of the corporate debtor
and the interests and rights of the unsecured creditors have not been given due
recognition. Emphasis has been laid on the minutes of the 9th and 10th meeting of the
committee of creditors, copies of which are at Annexure A-14 and A-15 respectively.
The challenge, therefore, is basically that the amount decided to be paid to the
unsecured creditors has been fixed arbitrarily and not in consonance with the
provisions of the Code, Regulations and other law.
22. From the above facts, it is stated that the rejection of the claim of the applicant
to the tune of Rs. 27 crores and the interest thereon was incorrect. Further that for a
financial creditor to file its claim, there need not be any default within the meaning of
the Code. The amount of Rs. 27 crores was even otherwise due as on insolvency
commencement date. In any case, it is stated that the plea that indemnity agreement
was invoked after the insolvency commencement date is of no consequence. Such an
interpretation would lead to unfair advantage to the corporate debtor. The Resolution
Plan even provides in clause 11 of schedule 3 that all liabilities (whether contingent or
crystalised) in relation to any corporate guarantees, indemnities and all other forms of
credit support provided by the corporate debtor prior to the closing date and all
contingent liabilities disclosed in the annual audited financial statements of the
corporate debtor and liabilities were not in the notice of the Corporate Debtor or not
acknowledged by the corporate debtor shall stand extinguished and discharged on and
with effect from closing date.
23. The Resolution Professional has opposed the plea on almost similar grounds as
set up in CA No. 61/2018 filed by Kotak Mahindra Bank, more particularly that the
Indemnity/surety was invoked after commencement of the insolvency resolution
process.
24. It is further submitted that the claim of Rs. 139.66 crores as unsecured debt as
on the insolvency commencement date was admitted. The applicant had voting share
of 1.1% in the meeting of COC and had been participating the deliberations of the COC
as such. Therefore, the resolution professional was not obliged to include the
additional claim being the amount based on the invocation of the Indemnity/surety
after the insolvency commencement date.
25. As on insolvency commencement date, the liquidation value of the corporate
debtor was far less than the total claim and the financial creditors share which was to
the tune of Rs. 12604.60 crores. Besides mortgage of immovable properties of the
corporate debtor, the secured creditors and financial creditors have the floating
hypothecation charge over all the immovable and fixed assets and the current assets
and the investments of the corporate debtor and therefore, there was no asset of the
corporate debtor, which could be said to be un-encumbered. In view of the aforesaid
fact, the unsecured creditor could not question the realisable value as nil in case of
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liquidation. To support this contention, the resolution professional in the reply has
relied upon the Joint Deed of Hypothecation dated 23.12.2016 executed by the
corporate debtor in favour of the financial creditors as at Annexure A-1 with the reply.
Despite that and to muster support, both the bidders i.e. Liberty House Group (LHG)
and Deccan Value Investments (DVI) had included the term of offering some returns
to the unsecured creditors in their respective plans. In the LHG's plan, it was stated
that the aggregate amount payable to the consenting unsecured financial creditors
shall not exceed 17% of the total settled amount, which was objected by some of the
secured financial creditors as reflected in the minutes of the meeting of the COC held
on 06.03.2018, which is at Annexure A-2.
26. Pursuant to the negotiations between the financial creditors and the LHG, the
negotiated figure of 14% of the resolution plan proceeds were provided for unsecured
financial creditors. In this way, the figure of 14% was negotiated and no fault can be
found in the conduct of the resolution professional for that reason. Reference is made
to the minutes of the meeting dated 02.04.2018 Annexure A-3. It is further denied
that the resolution professional has acted mala fide against the interests of the
unsecured financial creditors.
27. Rejoinder has also been filed by the applicant. It is reiterated that the
resolution professional has wrongly and arbitrarily assessed the liquidation value
payable to the dissenting financial creditors as nil.
28. With regard to the allegation that there was hypothecation deed in respect of
the immovable assets, movable assets, bank accounts etc., this was never brought to
the notice in the meeting of the committee of creditors and this fact has been stated
only at this juncture of the pleadings. In fact in the communication dated 12.03.2018,
the resolution professional specifically assigned value to the un-encumbered assets of
the corporate debtor. In this way, the resolution professional has acted in a manner,
which has misled the committee of creditors by not presenting the hypothecation deed
earlier.
29. It is further stated that as per Schedule III of the Hypothecation Deed, the
goods hypothecated are movable assets, current assets and bank accounts. As per the
balance sheet of the corporate debtor for the year ending 31.03.2017, the corporate
debtor also possesses non-current financial assets, which do not fall under any of the
three heads. The relevant part of the said balance sheet is at Annexure A of the
rejoinder. Therefore, prayer is made for a direction to the resolution professional to
include the amount of Rs. 166.66 crores as part of the claim against the corporate
debtor and make amendment accordingly in the list of creditors.
30. It is also stated that once the resolution plan is approved and implemented or
the corporate debtor is liquidated, it will bind all the creditors of the corporate debtor
and therefore, the dues of all the creditors ought to be admitted through the CIRP.
Otherwise those rights would stand extinguished and the creditors would remain
remediless.
31. CA Nos. 177/2018 and 178/2018 have been filed on the ground that the
resolution professional has wrongly rejected the claims made by the IDBI Bank in
respect of the default committed by two different subsidiaries of the corporate debtor,
which furnished the letter of comfort for getting loan to the subsidiaries. It is admitted
proposition of fact that IDBI Bank otherwise is a member of the committee of creditors
for the debt against the corporate debtor and is a part of the committee of creditors.
32. In CA No. 177 of 2018, the borrower of applicant Bank is Amtek Ring Gears
Limited (ARGL) one of the subsidiaries of the corporate debtor. An amount of Rs. 200
crores was sanctioned to ARGL on 27.03.2012 for which the sanction letter is at
Annexure A-3. Apart from the loan documents executed by the borrower, the corporate
debtor had issued the letter of comfort dated 29.03.2012 contents of which have been
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reproduced in the application. The main emphasis is laid to the terms of letter of
comfort where under the corporate debtor undertook to indemnify the applicant in
case the default is committed by the borrower. It was also stipulated that the letter of
comfort is irrevocable and constitutes legal and binding obligation to the corporate
debtor and its successors/permitted assignees. Letter of comfort was backed by the
resolution of the Board of Directors of the corporate debtor dated 27.03.2012. ARGL
obtained further loan of Rs. 92 crores and executed fresh documents for that loan, but
no separate letter of comfort with regard to this additional facility was obtained from
the corporate debtor and therefore, the aforesaid amount of 12 crores was not included
in Form C.
33. The account of ARGL was not regular in terms of the guidelines of RBI issued
from time to time and it was declared non-performing asset on 29.09.2015 and a
recall notice dated 15.11.2017 was issued.
34. It is further stated that the applicant Bank issued a notice dated 23.03.2018 to
the corporate debtor in terms of the letter of comfort to pay the amount due from
ARGL and copy of that notice is at Annexure A-7. The applicant thus filed claim in
Form C dated 23.03.2018 to the resolution professional with regard to the amount
more than Rs. 148 crores, but the resolution professional rejected the same vide email
dated 26.03.2018 on the ground that the letter of comfort is not akin to the deed of
guarantee. Further the claim made by the applicant was stated to be barred by
limitation.
35. It was further stated in the letter of the resolution professional that the loan
obtained by the ARGL was secured by mortgage deed and the hypothecated deed,
documents of the FDRs of ARGL.
36. In CA No. 178/2018, the letter of comfort for the year 2012 was executed by
the corporate debtor in respect of its subsidiary Amtek Crankshafts (India) Limited
(ACIL). However, it is admitted that the applicant Bank also lent the loan to the
corporate debtor for which the claim in Form C, dated 10.8.2017 was made to the tune
of Rs. 1701,896 crores, which was admitted by the resolution professional. The loan
was granted to ACIL for which a letter of comfort was executed by the corporate
debtor for Rs. 254 crores. The account of ACIL was classified as NPA on 15.03.2016
and recall notice was issued to ACIL on 11.01.2018. Notice to the corporate debtor
was also issued on 23.03.2018 calling upon the company to pay the amount by
invoking the letter of comfort for which Form C dated 23.03.2018 Annexure A-8 was
made with the resolution professional. The amount claimed in this Form by invoking
the letter of comfort is more than Rs. 193 crores, which was rejected on almost similar
grounds.
37. Notice of these applications was also served to the resolution professional and
the facts of the case stated in the applications, however, are not disputed. The learned
counsel for the resolution professional submitted that these applications are being
opposed on the legal grounds and the same are not maintainable.
38. CA No. 72/2018 is filed by the Central Bank of India in respect of the surety
furnished by the corporate debtor for loan to its subsidiary Stride Auto Parts Ltd. (SAP)
and Lotus Auto Engineering Limited (LAE), a group company of the corporate debtor.
SAP applied for the credit facilities which was granted by the applicant Bank vide
sanction letter dated 14.07.2012 and a term loan of Rs. 100 crores was sanctioned.
The partial finance for set up of 0.5 million per annum component machining and
36,000 TAP of iron casting capacity unit in Rajasthan. One of the security terms of the
said sanction was the corporate guarantee by the corporate debtor and a letter of
comfort to be obtained from the corporate debtor with regard to equity infusion, timely
completion of the project and to meet cost overrun, if any. This letter was modified by
letter dated 04.10.2012 issued by the applicant Bank. Instead of the term of corporate
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guarantee by Amtek Auto Ltd. with a further letter of comfort as stated above, the said
subsidiary i.e. SAP was to furnish letter of comfort by the corporate debtor backed by
Board resolution with regard to equity infusion, timely completion of the project and to
meet cost overrun, if any and to meet short fall in the repayment obligations. The
modified letter is at Annexure A-3.
39. The respondent corporate debtor passed a resolution dated 04.10.2012
approving Form C and contents of letter of comfort and issued the letter of comfort
dated 05.11.2012 Annexure-4 undertaking that in consideration of the term loan of
Rs. 100 crores, the respondent will meet the short fall in repayment of the obligations
by SAP.
40. The borrower company (SAP) defaulted in repayment of the dues and the debt
was declared as NPA on 30.06.2016. A notice of demand dated 03.03.2017 was issued
under Section 13(2) of the SARFAESI Act, 2002 to the borrower calling upon to pay
the outstanding amount, which was more than 89.50 crores as on 02.03.2017 and the
notice under the said guarantee was also sent to the corporate debtor. The notice sent
to SAP and corporate debtor dated 02.03.2017 and 03.03.2017 respectively are at
Annexure A-5 (Colly).
41. In response to the public announcement published by the IRP after admission
of the case, a claim dated 02.08.2017 was made by the applicant Bank with the
resolution professional. Copy of the claim is at Annexure A-7 claiming the amount of
more than Rs. 108 crores.
42. Thereafter the applicant Bank submitted a separate proof of claim in Form C
dated 05.08.2017 claiming an amount of more than Rs. 196 crores as on 24.07.2017
being more than Rs. 101 crores in the account of LAE Limited and more than Rs. 94
crores in respect of SAP in terms of the letters of comfort dated 30.08.2011 and
05.11.2012 respectively.
43. The resolution professional by his email dated 16.08.2017 informed the
applicant Bank that the aforesaid claim is excluded from the definition of financial
creditors. The applicant called for the reasons for the rejection. The resolution
professional by his communication dated 14.12.2017 informed that the letter of
comfort prima facie does not guarantee in repayment and does not fall within the
purview of the financial debt.
44. In pursuant thereto, the applicant Bank reiterated the claim on 20.12.2017
under letter of comfort issued to secure the loan of SAP stating that this letter of
comfort was not improved letter of undertaking, but in Form C, a guarantee in case
any short fall arises. This letter is at Annexure A-1. From the aforesaid allegation, it
is, therefore, quite clear that the applicant Bank has not reiterated the claim so far as
LAE was concerned, but only asserted in respect of loan advanced to SAP.
45. It is then stated that the resolution professional by his email dated 18.01.2018
intimated that the claim based on letter of comfort was not admissible. The corporate
debtor in fact has not made any promise, which may fall within the requirement of
Section 126 of the contract Act.
46. So, the instant application has been filed by the applicant Bank to press the
claim in respect of the amount of Rs. 94,25,41,041/- lent in the account of SAP based
on the letter of comfort dated 05.08.2012.
47. In reply thereto, the resolution professional has stated that the applicant Bank
gave finance assistance to the corporate debtor Amtek Auto Limited and accordingly
claim in Form C dated 02.08.2017 was made, which was admitted by the resolution
professional and the applicant was assigned voting share of 0.86% in the committee of
creditors. Reference is made to Sections 124 and 126 of the Contract Act to say that
the terms of the letter of comfort do not fall under the definition of ‘contract of
indemnity’ and ‘contract of guarantee’.
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48. It is also stated that even the claim of the applicant Bank in respect of the said
letter of comfort has become time barred as there is no revival document of any nature
in respect of the letter of comfort.
49. We have heard the learned senior counsel for the applicant in CA No. 61 of
2018, CA No. 77/2018 and learned counsel for rest of the applicants and the learned
counsel for the resolution professional and the learned counsel for committee of
creditor.
CA No. 72/2018:
50. Having given our thoughtful consideration to the documents relied upon by the
applicant Bank, we are not convinced with the submissions that the letter of comfort is
in the nature of either guarantee or indemnity. Learned counsel for the applicant Bank
referred to case law on the subject that letter of comfort is enforceable as guarantee.
51. In CS (OS) 2850/2011 titled as Tiong Woon Project & Contracting Pte. Ltd. v.
Naftogaz India Pvt. Ltd. I.A. 10958/2012 was filed by defendant No. 1 under Section 8
of the Arbitration and Conciliation Act, 1996 for seeking reference of dispute between
the plaintiff and defendant No. 1 to arbitration as per the terms of the work order
dated 14.11.2008. Defendant No. 1 was the principal contractor in respect of the
contract awarded by defendant No. 2. A part of the work order was sub-contracted to
the plaintiff namely for provision & erection of cranes of coke drums. It was the case
before the Hon'ble Delhi High Court that the plaintiff thereafter raised additional bills
for variations i.e. for usages of the cranes even after the expiry period of 4 weeks plus
1 week in terms of clause 9 of the work order and the bills were raised. In the
meanwhile, the defendant No. 1 addressed communication to defendant No. 2
requesting to issue letter of comfort to the plaintiff for outstanding amount of Rs.
6,36,13,136/- which would be released to the plaintiff by submission of progressive
invoices. The defendant No. 2 issued letter to the plaintiff, wherein defendant No. 2
stated as under:—
“Dear Sir, Nafto Gaz vide letter ref, # NG/BROL/6743/CDSP/L-023 dated
25.09.2009, requested to issue “Letter of Comfort” towards your outstanding
payments against heavy lift erection works carried out at CDSP Bina. For the
purpose of expeditious and smooth completion of the work, we hereby, assure that
agree to release an amount of Rs. 6,36,13,136/- (Rs. Six Crores Thirty Six Lakh
Thirteen Thousand One Hundred & Thirty Six only) to Tiong Woon Project (India)
Pvt. Ltd., on first priority basis from the certified bills/invoices of Nafto Gaz India
Pvt. Ltd. against our contract (FOA # BRP/MECH/135, dated 05.07.2009) for “Coke
Drum System Package” work at Bina Refinery. Thanking you. Yours faithfully for &
on behalf of BORL.”
52. From the facts of the case, the Hon'ble Delhi High Court observed that by
issuance of letter of comfort dated 25.09.2009, the defendant No. 2 in fact guaranteed
the payment due to the plaintiff under the plaintiffs contract with defendant No. 1 to
the extent indicated in the said letter and subject to approval of the bills by defendant
No. 1. Therefore, the said payment was bound to be made by the defendant No. 2 to
the plaintiff in terms of the issuance of the said assurance/letter of comfort/guarantee,
once the conditions of the said assurance were satisfied.
53. Intesa Sanpalo SPA v. Videocon Industries Limited Company Petition No. 528 of
2012 in the winding up petition before the Hon'ble Bombay High Court decided on
05.12.2013, the facts were that the respondent company executed a Letter of
Patronage undertaking to maximum amount EUROS 38000000 inclusive of costs,
expenses etc. to the petitions as per the terms set out in the patronage letter.
54. It was held by Hon'ble Bombay High court that terms of Patronage letter were
in the nature of a guarantee in the absence of which the loan agreement would not
have been executed. The agreement i.e. the patronage letter was by way of comfort
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letter was rejected.
55. The respondent has not referred to any precedent in support of the contention
that the letter of comfort cannot be enforced as an indemnity or a guarantee.
56. However, the terms of letter of comfort in this case have to be considered to
see if the same was in the nature of guarantee or indemnity. The sanction letter
granted to SAP is at Annexure A-3 attached with the application. In this letter, there
was one condition of personal/corporate guarantee. The loan was sanctioned for
setting up of 36,000 TPA Ferrous Casting capacity and 0.50 million pa Machining
Components capacity, as per the terms mentioned in the sanction letter. It was
stipulated that the term loan is to be released only after perfection of security. Amtek
Auto Limited was to furnish the corporate guarantee and also a letter of comfort with
regard to equity infusion, timely completion of the project and to meet the cost
overrun, if any.
57. The revised sanction letter dated 04.10.2012 was issued as at page 54 of this
application and the term relating to the corporate guarantee and letter of comfort as
referred to above was revised to letter of comfort by Amtek Auto Limited backed by
Board resolution with respect to equity infusion, timely completion of the project and
to meet shortfall in the repayment obligations.
58. The corporate debtor i.e. Amtek Auto Limited furnished the letter of comfort
dated 05.08.2011, which is at Annexure A-4. It is stated that Amtek Auto Limited
undertakes to provide necessary financial support by equity infusion in SAP as may be
necessary and also undertake to meet the cost overrun, if any and to meet short fall
in repayment obligations. The corporate debtor also assured timely completion of
the project by SAP. This letter of comfort was accompanied by the resolution dated
04.10.2012.
59. The law is well settled on the subject that liability of a guarantor or a surety is
co-extensive with the principal borrower. Learned counsel for the parties have not
disputed this proposition that it is choice of the creditor to pursue the remedy for
recovery of the outstanding amount against the principal borrower and the
guarantor/surety or either of them. The creditor is not obligated to pursue the remedy
first against the principal borrower and then only after exhausting the remedy to
proceed against the guarantor. The relevant provisions with regard to the contract of
indemnity, contract of guarantee/surety and the definition of principal debtor and the
creditor and the surety liability are given in Sections 124, 126 and 128 of the Indian
Contract Act, which are reproduced as under:—
“124. “Contract of indemnity” defined. - A contract by which one party promises
to save the other from loss caused to him by the conduct of the promisor 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 whom the guarantee is given is called
the ‘creditor’. A guarantee may be either oral or written.
128. Surety's liability. - The liability of the surety is coextensive with that of the
principal debtor, unless it is otherwise provided by the contract.”
60. In Tiong Woon Project case (supra), the surety i.e. defendant No. 2 which
issued letter of comfort in categorical terms stated that for the purpose of expeditious
and smooth completion of the work assured and agreed to release the amount of Rs.
6,36,13,136/- to the plaintiff on first priority basis from the certified bills against the
contract work at Bina Refinery. This was held to be a guarantee/indemnity under
which defendant No. 2 was liable.
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61. The intention of the parties in the present case is quite apparent that initially
the letter of guarantee was required, but in the subsequent modified sanctioned letter,
the term of guarantee was removed, but letter of comfort was required calling
assurance regarding timely completion of the project etc., but there was no assurance
or a term that the corporate debtor would pay the outstanding dues. What the letter of
comfort signifies is that the corporate debtor assured to meet the short fall in
repayment obligations. So, the liability of the corporate debtor on the basis of this
letter of comfort was not co-extensive. The applicant Bank has to exhaust the
remedies against SAP and there being mortgaged property or other assets
hypothecated by the principal borrower to take recourse against the borrower and to
seek recovery from the corporate debtor for the short fall. In the sanction letter
Annexure A-3, the loan to SAP was to be secured by first pari passu charge over the
entire fixed deposit assets of SAP valued at Rs. 549 crores and to furnish collateral
security being pari passu charge over the current assets of the company. It was
stipulated that the term loan is to be realised only after perfection of security.
62. It is not the case of the applicant bank that it has exhausted the remedy
against the principal borrower to have recourse to the corporate debtor. In view of the
above, no fault can be found in the communication of the Resolution Professional
declining to accept the claim made against the corporate debtor. CA No. 72 of 2018 is,
therefore, rejected.
63. In rest of the miscellaneous applications CA Nos. 61/2018, 77/2018, 177/2018
and 178/2018, there is common question of law as to whether invocation of the
guarantee/indemnity/letter of comfort after the insolvency commencement date can
be enforced against the corporate debtor. While disposing of CA No. 72 of 2018, it has
already been observed that it all depends upon the terms of the letter of comfort as to
whether it can be construed as a guarantee or a document of indemnity.
64. In CA No. 177/2018 filed by IDBI Bank, the letter of comfort executed by the
corporate debtor is dated 29.03.2012 as at Annexure A-5. This letter of comfort was
given by the corporate debtor for ensuring that the loan is granted by the IDBI Bank
to its sister concern. It is undertaken that the corporate debtor shall ensure ARGL, the
sister concern repays the loan/facilities along with all interest, liquidated damages,
front and fee premium etc. to IDBI. It was further undertaken that in the event of
funds of ARGL being insufficient to meet any such debt obligation, the corporate
debtor shall make the funds available to ARGL to ensure payment to IDBI on the
stipulated dates to clear its debt obligations under the loan agreement and related
documents. Had this been the only clause in the letter of comfort in question, it could
be considered as a moral obligation/responsibility, but in the present case, there is an
unconditional undertaking that in the event of ARGL committing default in any of its
obligations to the applicant bank, the corporate debtor shall make good to IDBI any
loss, damages, expenses or other costs as may accrue to IDBI as a result thereof, and
shall immediately at the sole discretion of IDBI either make available funds to ARGL in
order to make ARGL able to meet its commitments or directly pay to IDBI any
amounts that IDBI may in its sole discretion call upon the corporate debtor to pay in
this connection. Similar are the terms of the letter of comfort dated 28.03.2012 at
Annexure A-5 with CA No. 178 of 2018 relating to the loan advanced by IDBI to
ARCIL, a subsidiary of the corporate debtor.
65. Coming to the terms of the guarantee deeds executed by the Corporate Debtor
in favour of Kotak Mahindra Bank in CA No. 61 of 2018 and the indemnity agreement
executed by the Corporate Debtor in favour of ICICI Bank in CA No. 77 of 2018, the
settled proposition of law is that the liability of the guarantor/surety would depend
upon the terms of the contract of guarantee/indemnity.
66. In Syndicate Bank v. Channaveerappa Beleri, (2006) 11 SCC 506, the Hon'ble
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Supreme Court of India held that the guarantor's liability depends upon the terms of
his contract. There is also a difference between a guarantee which stipulates that the
guarantor is liable to pay only on a demand made by the creditor and a guarantee
which does not contain such a condition. In a case where the guarantee is payable on
demand, the limitation period for start of the cause of action beings to run, when the
demand is made and the guarantor commits breach by not complying with the
demand. In the said case, the terms of guarantee made it clear that the liability to pay
would arise on the guarantors when a demand is made and it was held that the time
limit would begin to run, when the contract is broken. In the said case the contract
was broken and the right to sue arose only when a demand for payment was made by
the Bank and was refused by the guarantor.
67. In CA No. 77 of 2018 filed by ICICI Bank, the facility was granted to the
borrower on the basis of Onshore Facility Agreement dated 15.11.2011 Annexure A-1
and inter-creditor deed dated 24.11.2011 Annexure A-2. The indemnity agreement
was executed between ICICI Bank, Corporate Debtor and the Borrower in the said case
namely OCL Iron and Steel Limited, a subsidiary of the Corporate Debtor on
15.11.2011 and that document is at Annexure A-3. The Corporate Debtor was referred
to as the Purchaser in the said agreement and the Borrower as the Seller. The term of
guarantee was that without prejudice to anything contained in the agreement, the
Purchaser shall indemnify and hold harmless the Secured Parties for any loss suffered
by the Secured parties in connection with the facility and the transaction documents,
howsoever caused including on account of the Seller's failure to pay interest or
principal or any other amounts as per the terms of the transaction documents etc. It is
stipulated that the Purchaser shall indemnify the Seller and the Secured Parties under
clause 3.7(a) and 3.7(b) within three business days of demand and to deposit the
amount payable in the proceeds in accordance with clause 5.5(c) (payment
instructions).
68. The claim made by the Bank on the basis of the notice dated 09.01.2017
Annexure A-4 which was addressed to the Borrower as well as the Corporate Debtor
has already been admitted by the Resolution Professional. This claim was made in
Form No. C Annexure A-6, dated 10.08.2017.
69. The dispute pertains to the amount which was to accrue in November, 2017
against the Borrower. In this claim, it was, however, highlighted that under the loan
facility, the amount disbursed by ICICI Bank to OCL was Rs. 1350.0 million out of
which principal amount of Rs. 270.0 million was yet to fall due for payment. It is
thereafter that the applicant Bank issued recall notices dated 14.11.2017 and
15.11.2017 Annexure A-7 (Colly) to the Borrower as well as the Corporate Debtor on
the basis of which the subsequent claim was filed.
70. The learned Senior Counsel for the ICICI Bank in CA No. 77 of 2018
vehemently contended that the claim which would fall due in the future has also to be
accepted by the Resolution Professional and the same cannot be ignored out of
consideration. To support his contention, the learned Senior Counsel also referred to
various provisions of the Code. Section 3(11) of the Code defines the term ‘debt’ as
meaning a liability or obligation in respect of a claim which is due from Corporate
Debtor and includes a financial debt and operational debt. The term claim is defined in
Section 3(6) which reads as under:—
“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,
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undisputed, secured or unsecured.”
So, according to the learned senior counsel, the claim includes the payment
whether or not the amount is fixed, disputed or undisputed or whether the right to
remedy for breach of contract gives right to payment, whether or not such right is
reduced to judgment, fixed, matured, unmatured, disputed, undisputed etc.
71. Mr. Atul Nanda, learned senior counsel for the applicant also refers to certain
other provisions of the Code and Regulations in order to fortify the contention that
Resolution Professional has not performed his duties in accordance with the
requirement of the provisions. Section 18 of the Code prescribes the duties for the
Interim Resolution Professional. Reference is made to clause (b) of Section 18(1) of
the Code which obliges the Resolution Professional to receive all the claims submitted
by the creditors to him pursuant to the public announcement. It is further contended
that under clause (e) of sub-section (2) of Section 25 of the Code, the Resolution
Professional is to maintain an updated list of claims and under clause (k), he has to
perform such actions as specified by the IBBI. The learned senior counsel, therefore,
contends that the Resolution Professional is to collate the claims and not the amount
due as on the insolvency commencement date.
72. According to the learned senior counsel, the existence of the debt due to the
financial creditors can be proved on the basis of documents as provided in Regulation
8(2) of the Regulations which reads as under:—
“(2) The existence of debt due to the financial creditor may be proved on the
basis of - (a) the records available with an information utility, if any; or (b) other
relevant documents, including—
(i) a financial contract supported by financial statements as evidence of the
debt;
(ii) a record evidencing that the amounts committed by the financial creditor to
the corporate debtor under a facility has been drawn by the corporate debtor;
(iii) financial statements showing that the debt has not been repaid; or
(iv) an order of a court or tribunal that has adjudicated upon the non-payment of
a debt, if any.”
73. Reference has also been made to Regulation 10, 12(2) and 13(1) of the
Regulations which are reproduced below:—
“10. Substantiation of claims.
The interim resolution professional or the resolution professional, as the case
may be, may call for such other evidence or clarification as he deems fit from a
creditor for substantiating the whole or part of its claim.
12. Submission of proof of claims.
(2) A creditor, who failed to submit proof of claim within the time stipulated in
the public announcement, may submit such proof to the interim resolution
professional or the resolution professional, as the case may be, till the approval of a
resolution plan by the committee.
Provided that such inclusion shall not affect the validity of any decision taken by
the committee prior to such inclusion.
13. Verification of claims.
(1) The interim resolution professional or the resolution professional, as the case
may be, shall verify every claim, as on the insolvency commencement
date, within seven days from the last date of the receipt of the claims, and
thereupon maintain a list of creditors containing names of creditors along with
the amount claimed by them, the amount of their claims admitted and the
security interest, if any, in respect of such claims, and update it.
74. Learned senior counsel, therefore, submitted that it is not only the amount of
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claim which was due on the date of submission of the claim form, but even claims
arising subsequent to that which have to be accepted. By making pointed reference to
Regulation 12(2) of the Regulations, it was submitted that a creditor who has failed to
submit the proof of claims within the stipulated time may submit such proof to the
Interim Resolution Professional or Resolution Professional, as the case may be till
approval of the plan by the Committee. It was contended that the factum of the
amount of Rs. 27 crores due to the debtor for which the corporate debtor furnished the
indemnity bond, would be falling due in the month of November 2017 was even
indicated in the original Form ‘C’ dated 10.08.2017 (Annexure-6) and the revised
claim was accordingly filed on 04.12.2017 after recall notices dated 14.11.2017 and
15.11.2017 Annexure A-7 were served and this claim could not be ignored.
75. Learned senior counsel for Kotak Mahindra Bank in CA No. 61/2018 similarly
referred to the contents of Form C dated 10.08.2017 Annexure A-4 in which there was
a specific mention that the corporate debtor was also a guarantor to Kotak Mahindra
Bank although the guarantee had still not been invoked. The guarantee was invoked
on 22.09.2017 vide letter at Annexure A-5 for which intimation dated 04.10.2017
Annexure A-7 was sent to the Interim Resolution Professional but still this claim was
not entertained.
76. Having given our thoughtful consideration to the aforesaid contentions, we are
of the view that the IRP or the RP, as the case may be are bound by the provisions of
the Code and Regulations framed thereunder and they cannot travel beyond the
prescribed duties.
77. Under Regulation 8(1) of the Regulations, a person claiming to be a financial
creditor of the corporate debtor has to submit proof of claim in the prescribed Form C
of the Schedule attached with the Regulations. Form C clearly specifies in column 4
that the claimant has to state total amount of claim including any interest as on the
insolvency commencement date.
78. It cannot be contended that the requirement in the claim Form has not been
happily worded nor such contention could be raised before this Tribunal, where the
vires of the Rules cannot be questioned. In any case, Regulation 13 specifically limits
the time upto which date, the claim could be preferred. Regulation 13(1) of the
Regulation says that the Interim Resolution Professional or the Resolution Professional
as the case may be, shall verify the claim as on the insolvency commencement
date. The word updation of the claims as per Section 25(2) of the Code cannot extend
to the amount becoming due after the insolvency commencement date, but this is in
relation to those creditors, who somehow failed to submit the claim originally within
the time mentioned in the public announcement.
79. Regulation 12(2) of the Regulations enables a creditor who failed to submit
proof of claim within the time stipulated in the public announcement to submit such
proof to the Interim Resolution Professional or the Resolution Professional as the case
may be till approval of the resolution plan by the committee of creditors. Close
scrutiny of all these provisions would lead to the only conclusion that the claim can be
accepted only which were due upto the insolvency commencement date as given in
Regulation 13(1) of the Regulations. Reference has not been made to any of the
prescribed form under the Regulations, which permit the furnishing of the claim
beyond the insolvency commencement date. We are further of the view that the
‘claim’ can be made only in respect of a ‘debt’. Section 3(11) of the Code which
defines the term ‘debt’ only includes a liability or obligation in respect of a claim
which is due.
80. The matter, however, has been set at rest by the Hon'ble Principal Bench of the
NCLT, New Delhi in Axis Bank Limited v. Edu Smart Services Private Limited, (IB)-102
(PB)/2017, decided on 27.10.2017. In the said case also Axis Bank invoked the Bank
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Guarantee after the insolvency commencement date. It was held by the Hon'ble
Principal Bench that Axis Bank in the circumstances would not qualify to the
consideration of its claim as it has become due and payable after the insolvency
commencement date.
81. The learned Senior Counsel for the applicant in CA No. 61 of 2018 and CA No.
77 of 2018, however, submitted that against this order of the Hon'ble Principal Bench,
appeal has been filed before the National Company Law Appellate Tribunal, New Delhi
in Company Appeal (AT) (Ins) No. 302 of 2017 and while issuing the notice, the
Hon'ble Appellate Tribunal has directed the Resolution Professional to consider the
claim of the appellant, which shall be subject to the decision of the appeal. We
are, however, of the view that unless the principle laid down by the Hon'ble Principal
Bench is set aside or reversed, there is no scope of contending that a different view
can possibly be taken by this Tribunal.
82. The learned Senior Counsel for the applicant in CA No. 77 of 2018 relied upon a
judgment of Hon'ble Supreme Court in Harshad Shantilal Mehta v. Custodian, (1998)
5 SCC 1 to contend that a debt is said to be due to the extent that it has existence as
a debt; but may be payable at a future time. Reference is made to paragraph 19 of the
judgment, wherein the definition of the term due in Jowilt's Dictionary of English Law
has been quoted as anything owing, that which one contracts to pay or perform to
another…. As applied to a sum of money, ‘due’ means either that it is owing or that it
is payable; in other words, it may mean that the debt is payable at once or at a future
time.
83. We do not find much force in the above contention as there is a lot of difference
between the amounts payable at once or in future than a contingent liability. The
Hon'ble Supreme Court held in Shanti Prasad Jain and Union of india v. Director of
Enforcement, Foreign Exchange Regulation Act, (1963) 2 SCR 297 that a ‘contingent
debt’ is strictly speaking not a debt at all. In its ordinary as well as its legal sense, a
debt is a sum of money payable under an existing obligation. It may be payable
forthwith, selvendum in presenti, then it is a debt “due” or it may be payable at a
future date, solvendum future; then it is a debt “accruing”. But in either case, it is a
debt. But a contingent debt has no present existence because it is payable only when
the contingency happens and exhypothesi that may or may not happen.
84. The aforesaid judgment may be helpful in a case, where there are other
Financial Creditors or Bankers who have lent money to the Corporate Debtor, though
the amount has not become non-performing asset, but in any case, the amount would
always be due to the Bankers under the contract of debt, which can be claimed as on
the insolvency commencement date with further interest as contracted. Such a claim
cannot be a contingent debt.
85. Here in the present case, in all the applications under consideration, the
guarantee/indemnity/letter of comfort were involved much after the insolvency
commencement date and as already observed while narrating the terms of the
document that liability of the Corporate Debtor would arise only on demand which can
be by invocation of guarantee to make liability of corporate debtor co-extensive with
the debtor. So, unless the Corporate Debtor is informed that the principal borrower has
committed the default and that it has not paid the amount, the debt becomes due
under the document of guarantee/indemnity/letter of comfort.
86. In view of the above discussion, we find that the decision of the Resolution
Professional in not accepting the claims of the applicants in all the four applications on
the basis of invocation of guarantee/indemnity/letter of comfort after the insolvency
commencement date cannot be faulted with. There cannot be any dispute with the
proposition that the insolvency commencement date is the date of admission of the
petition, as defined in Section 5(12) of the Code, which was 24.07.2017.
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87. The other contention to challenge the resolution plan by the applicant in CA No.
77 of 2017 is the incorrect method determining the liquidation value for the unsecured
creditors despite there being un-encumbered assets of the company, over which a
secured creditor has no exclusive claim and the secured creditor would fall below the
other unsecured creditor in the water fall.
88. The learned Senior Counsel specifically referred to the information supplied by
the Resolution Professional stating that the liquidation value of the encumbered assets
was accepted at Rs. 2122 crores and for un-encumbered assets the same was 1996
crores. According to the learned counsel, the secured creditors had no preferential
right with regard to the disbursement of the debts. The learned counsel would refer to
paragraph 22 of the judgment of the Hon'ble Supreme Court of India in Jintendra Nath
Singh v. Official Liquidator, (2013) 1 SCC 462 for contending that the secured
creditors have no charge on such unsecured assets as also no consequential,
preferential or even pari passu claim over the sale proceeds derived from these assets
of the company. We find that in this paragraph No. 22 of the judgment, reference was
only made to a contention on behalf of the appellant before the Hon'ble Supreme
Court. This part of the judgment moreover refers to the dissenting view. The majority
view of the Hon'ble Supreme Court in the said case was as under:—
Our conclusions on interpretation of the provisions of Section 529 and 529A of
the Companies Act, therefore, are as follows:—
16.1. A secured creditor has only a charge over a particular property or asset
of the company. The secured creditor has the opinion to either realise his security
or relinquish his security. If the secured creditor relinquishes his security, like
any other unsecured creditor, he is entitled to prove the debt due to him and
receive dividends out of the assets of the company in the winding up
proceedings. If the secured creditor opts to realise his security, he is entitled to
realise his security in a proceeding other than the winding up proceeding but has
to pay to the liquidator the costs of preservation of the security till he realises
the security.
16.2. Over the security of every secured creditor, a statutory charge has been
created in the first limb of the proviso to clause (c) of sub-section (1) of Section
529 of the Companies Act in favour of the workmen in respect of their dues from
the company and this charge is pari passu with that of the secured creditor and is
to the extent of the workmen's portion in relation to the security of any secured
creditor of the company as stated in clause (c) of sub-section (3) of Section 529 of
the Companies Act.
16.3. Where a secured creditor opts to realise the security then so much of the
debt due to such secured creditor as could not be realised by him by virtue of the
statutory charge created in favour of the workmen shall to the extent indicated in
clause (c) of the proviso to sub-section (1) of Section 529 of the Companies Act
rank pari passu with the workmen's dues for the purposes of Section 529-A of the
Companies Act.
16.4. The workmen's dues and where the secured creditor opts to realise his
security, the debt to the secured creditor to the extent it ranks pari passu with the
workmen's dues under clause (c) of the proviso to sub-section (1) of Section 529 of
the Companies Act shall be paid in priority over all other dues of the company.”
Therefore, the facts of the case before the Hon'ble Supreme Court are clearly
distinguishable.
89. The above judgment before the Hon'ble Supreme Court related to the
interpretation of the provision of Section 529 and 529A of the Companies Act, 1956.
Under Section 529(1)(c) of the Companies Act, 1956 in the winding up of an insolvent
company, the same rules are to prevail and observed with regard to the respective
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rights of secured and unsecured creditors as are in force for the time being under the
law of insolvency with respect to the estate of persons adjudged insolvent and this
clause no more exists in the provisions of the Code which has overriding effect in view
of Section 238.
90. Learned Senior Counsel for the applicant in CA No. 77 of 2018, however,
submitted that the Resolution Professional has wrongly interpreted the provisions of
Code for determining the allocation of the liquidation value by ignoring the import of
Section 52 of the Code.
91. We are of the considered view that sub-section (2) to (9) of Section 52 of the
Code would be applicable only, if the Financial Creditor choses to realise its security
interest created by the Corporate Debtor. But in the present case, there is nothing to
suggest that the financial creditors ever invoked the security interest to be enforced
for recovery of the dues. Sub-section (9) of Section 52 of the Code says that where the
proceeds of the realisation of the secured assets are not adequate to repay debts owed
to the secured creditor, the unpaid debts of such secured creditor shall be paid by the
liquidator in the manner specified in clause (e) of sub-section (1) of section 53. It is
only in such a case that the secured creditor would fall below the unsecured creditor in
distribution of the liquidation value in the order of priority. Otherwise Section 52(1) of
the Code says that a secured creditor in the liquidation proceedings may relinquish its
security interest to the liquidation estate and receive proceeds from the sale of assets
by the liquidator in the manner specified in section 53 of the Code.
92. Section 53(1) of the Code says that notwithstanding anything to the contrary
contained in any law enacted by the Parliament or any State Legislature for the time
being in force, the proceeds from the sale of the liquidation assets shall be distributed
in the following order of priority and within such period and in such manner as may be
specified namely—
“a) the insolvency resolution process costs and the liquidation costs paid in
(b) the following debts which shall rank equally between and among the following:
—
(i) workmen's dues for the period of twenty-four months preceding the
liquidation commencement date; and
(ii) debts owed to a secured creditor in the event such se/cured creditor has
relinquished security in the manner set out in section 52;
(c) wages and any unpaid dues owed to employees other than workmen for the
period of twelve months preceding the liquidation commencement date;
(d) financial debts owed to unsecured creditors;
(e) the following dues shall rank equally between and among the following:—
(i) any amount due to the Central Government and the State Government
including the amount to be received on account of the Consolidated Fund of
India and the Consolidated Fund of a State, if any, in respect of the whole or
any part of the period of two years preceding the liquidation commencement
date;
(ii) debts owed to a secured creditor for any amount unpaid following the
enforcement of security interest;
(f) any remaining debts and dues;
(g) preference shareholders, if any; and
(h) equity shareholders or partners, as the case may be.”
93. Under this provision, therefore, the debt of the secured creditor and the
workmen's dues fall above in the category in the water fall of unsecured creditor. This
Section does not indicate at all that in case there are some un-encumbered assets of
the Corporate Debtor, the priority is to be given to the unsecured creditors over the
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secured creditors in respect of those assets.
94. On merits, however, the stand of the Resolution Professional is that there was
in fact no unencumbered asset of the Corporate by referring to the Annexure A-1, the
joint Deed of Hypothecation dated 23.12.2016 attached with the reply to the
application.
95. The relevant term of this joint hypothecation deed executed by the Corporate
Debtor in favour of Axis Trustee Services Ltd. acting the Banks/Financial
Institutions/NBFCs is to hypothecate to and in favour of security Trustee entire
movable assets fixed assets, including but not limited to movable plant and
machinery, machinery spares, tools and accessories and other movables, present and
future, the borrower's entire current assets, including but not limited to stocks of raw
material, semi-finished and finished goods, stores and spares not relating to the plant
and machinery (consumable stores and spares), bills receivable, book debts and all
other movables (excluding such movables as are permitted by the said Lenders from
time to time) (both present and future) including documents of title to goods and the
Borrower's entire Account Assets including all the Bank Accounts and other
assets, such as outstanding moneys, receivables including receivables by way of cash
assistance and/or cash, including under the Cash Incentive Scheme or any other
scheme claims including claims by way of refund of customs/excise duties under the
Duty Drawback Credit Scheme or any other Scheme, bills, invoices, documents,
contracts, engagements, securities, investments and rights, both present and future,
of the Borrower being and lying in the Borrower's or rented premises or godowns and
whether lying loose or in cases or otherwise used in the business of the Borrower at
the said site or in transit now belonging to or that may at any time, during the
continuance of the JLF Corporate Loan and JLF Refinanced Term Loan and this security
belong to the Borrower or that may be held by any party to the order or disposition of
the Borrower (which assets comprised in this security are hereinafter for brevity's sake
referred to as the “Hypothecated Assets”).
96. According to the Resolution Professional, there was nothing left in the company,
which was not hypothecated and therefore, the argument that there was any un-
encumbered asset is also not tenable.
97. The learned senior counsel for the applicant, however, submits that in the
Balance Sheet of the Corporate Debtor, there are certain Non Guarantee Financial
Assets, which do not fall within any of the criteria, but from the broad and wider scope
of the hypothecation deed, the above contention cannot be accepted. The
hypothecation deed intends to includes everything belonging to the company. Even if,
the Resolution Professional has sent an email, which is not supported from the
documents available on record, no advantage can be taken by the applicant. It is not
conceivable that such a hypothecation deed can be attacked as it is amongst the
documents taken into possession by the Resolution Professional. So, on both these
counts, this averment in the application of ICICI Bank cannot be sustained.
98. The third contention of the applicant pertains to the distribution of the amount
under the resolution plan to the unsecured creditors which is to the extent of 14% as
finally approved.
99. The aforesaid contention has been appropriately answered by the Resolution
Professional in the reply. It is stated that despite the liquidation value assigned to the
unsecured creditors as Nil, both the Resolution Applicants, who submitted the plans to
garner maxium support offered upto 17% of the total settlement amount to the
unsecured Financial Creditors. This is evident from the minutes of the meeting of COC
dated 06.03.2018 Annexure A-2 with the reply. At page 62 of the paper book of the
reply, it was observed by CoC that the payment to each of consenting unsecured
Financial Creditors shall not exceed 17% of the total outstanding amount. IDBI Bank,
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however, pointed out that this payment of 17% is very high and needs to be revised.
100. Pursuant to this, the Resolution Professional in the reply has further alleged
that subsequently pursuant to the negotiation between the Financial Creditors and the
LHG, a negotiated figure of 14% of the resolution plan proceeds were provided for
unsecured Financial Creditors. This is the term which is highly objected to by the
ICICI Bank in CA No. 77 of 2018. However, no fault can be found in the aforesaid
negotiated amount as would be evident from the minutes of the meeting dated
02.04.2018 Annexure A-3. During this meeting, the issue of allocation of 17% of 14%
of the resolution plan proceeds to the unsecured creditor was duly considered. The
minutes shown at page 77 of the reply that ICICI Bank expressed that the recovery for
unsecured creditors was suggested upto 17% by the resolution applicant, whereas the
distribution of the plan proceeds to them as circulated by IRP was 14%, but the
Resolution Professional respond that 14% was the negotiated amount. The resolution
plan containing the aforesaid term was ultimately approved by the Committee of
Creditors, which cannot be faulted with particularly when ICICI Bank has assented to
the plan.
101. We thus find no merits in all these applications and the same are accordingly
dismissed.
Copy of this order be supplied to the counsel for all the parties.
———
† Chandigarh Bench
‡
Under Section 60(5) of the Insolvency & Bankruptcy, Code, 2016
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SCC Online Web Edition, Copyright © 2020

Page 1 Monday, January 13, 2020

2018 SCC OnLine NCLT 24252

In the National Company Law Tribunal†

Corporation Bank … Petitioner-Financial Creditor;

5. CA No. 61 of 2018 is filed by Kotak Mahindra Bank a banking company

© EBC Publishing Pvt.Ltd., Lucknow.

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