IN THE NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI
Company Appeal (AT) (Insolvency) Nos. 742 of 2024 and 743 of 2024 Decided On: 08.05.2024 Vikram Babulal Sanghvi and Ors. Vs. State Bank of India Hon'ble Judges/Coram: Ashok Bhushan, J. (Chairperson) and Barun Mitra, Member (T) Counsels: For Appellant/Petitioner/Plaintiff: Keith Verghese, Advocate ORDER Ashok Bhushan, J. (Chairperson) 1 . These two Appeal(s) have been filed by the Personal Guarantors of the Corporate Debtor, namely - Vikram Babulal Sanghvi and Naresh Babulal Sanghvi, challenging the order of the Adjudicating Authority dated 27.02.2024, by which order the Applications filed under Section 95, sub- section (1) of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the "Code") filed by the State Bank of India ("SBI") were admitted. 2 . In Company Appeal (AT) (Insolvency) No. 742 of 2024, order under challenge is order dated 27.02.2024 passed in CP(IB) No.100/ NCLT/ AHM/2021 and in Company Appeal (AT) (Insolvency) No. 743 of 2024 has been filed against the order dated 27.02.2024 passed in CP(IB) No.92/ NCLT/ AHM/2021, by which orders Application filed by SBI in both the cases, under Section 95, sub-section (1) have been admitted. Both the Appellant(s) were Personal Guarantors of the Corporate Debtor - Sanghvi Forging & Engineering Limited and the SBI having filed Applications under Section 95 against both the Personal Guarantors, it shall be sufficient to refer to the pleading and facts in Company Appeal (AT) (Insolvency) No. 742 of 2024 for deciding these two Appeal(s). 3. Brief facts of the case are: (i) A working Capital Term Loan Consortium Agreement was executed between the Consortium bank consisting of the Respondent with Bank of Baroda and the Corporate Debtor. An Agreement was also entered into between the Personal Guarantor with Consortium Bank. Guarantee for repayment of various financial facilities extended to Sanghvi Forging & Engineering Limited was provided by the Appellant. (ii) The Corporate Debtor having defaulted in payment of debt, Section 7 Application was filed by the Financial Creditor, which Application was admitted by order dated 30.08.2019 passed by Adjudicating Authority. (iii) On 15.01.2019, recall notice was issued by the Financial Creditor invoking the Personal Guarantee of the Appellant. On 13.04.2021, Statutory Demand notice was issued by the SBI to the Appellant after invoking the personal guarantee.
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(iv) In Corporate Insolvency Resolution Process ("CIRP") of the Corporate Debtor, the Adjudicating Authority vide order dated 26.04.2021 approved the Resolution Plan of one Bharat Forge Ltd. (v) Applications under Section 95 was filed by the Financial Creditor against the Personal Guarantors being CP(IB) No.100/ NCLT/ AHM/2021 (in Company Appeal (AT) (Insolvency) No. 742 of 2024) and CP(IB) No.92/ NCLT/ AHM/2021 (in Company Appeal (AT) (Insolvency) No. 743 of 2024), in which Applications, RP was appointed. The RP filed its Report recommending the admission of the Applications. The Personal Guarantors filed affidavit in reply, raising various objections. The Adjudicating Authority heard the parties and by the impugned order dated 27.02.2024 admitted the Applications. (vi) Aggrieved by which order, these Appeals have been filed. 4 . The learned Counsel for the Appellant(s) challenging the order dated 27.02.2024, admitting Section 95 Applications, contends that Adjudicating Authority committed error in admitting Section 95 Applications, whereas after approval of the Resolution Plan, the entire debt of the Corporate Debtor stood assigned to a Special Purpose Vehicle ("SPV") (M/s BF Industrial Solutions Ltd.) and in view of the assignment of entire debt of the Corporate Debtor, personal guarantees of the Appellant(s) could not be enforced. It is submitted that under the Resolution Plan, personal guarantees are retained by the Financial Creditor, whereas, entire debt of the Corporate Debtor has been assigned to the SPV, in such circumstances, personal guarantees could not be enforced by the Financial Creditor. The Appellant in his submission has relied on judgment of Delhi High Court in Vineet Saraf vs. Rural Electrification Corporation Ltd. - MANU/DE/4669/2023 and judgment of High Court of Australia in Hutchens v. Deauville Investments Pty Ltd. - MANU/AUSH/0084/1986 : 68 Australian Law Report 367, where it was held that on assignment of entire debt, the guarantees could not be enforced, which judgment has not been considered by the Adjudicating Authority. 5. We have considered the submissions of learned Counsel for the Appellant and have perused the record. 6 . The Company Petition filed under Rule 7(2) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtor) Rules, 2019 has been brought on record by the Appellant. In Part-III of the Application, particulars of debt has been given. In Column-1 of Part-III, it is clearly contemplated that in the event of successful implementation of the Resolution Plan approved by the Adjudicating Authority, the claim of Financial Creditor will be reduced by the amount received from the Resolution Applicant. Part-III, Column-1 and Column-2 are as follows:
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7 . From the pleadings in the Appeal, it is clear that in the Appeal itself, the Appellant quoted the relevant provisions of approved Resolution Plan. Clause 36 of the approved Resolution Plan as extracted at page-14 of the Appeal is as follows: "36. paragraph No. 7.1 of Schedule 2 (Implementation Provisions) as contained in the Resolution Plan is hereby deleted and replaced with the following new paragraph 7. 1: 7.1 On the Payment Date after completion of Step 6, the dues owed to the Secured Financial Creditors by the Corporate Debtor (ie the Total Secured Debt) shall be acquired and purchased by the Acquisition SPV along with all Relation rights (save and except the Excluded Guarantees) from the Secured Financial Creditors by paying them their respective portions of the Debt Acquisition
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Amount. The Secured Financial Creditors shall execute an assignment deed in a form and manner agreed between the Resolution Applicant and the Secured Financial Creditors, for the Irrevocable and unconditional assignment of the Total Secured Debt and Related Rights (save and except the Excluded Guarantees) in favour of the Acquisition SPV. It is clarified that notwithstanding anything to the contrary under the Plan, the Excluded Guarantees shall not be acquired under this Step 7 by the Acquisition SPV and the Secured Financial Creditors, in whose favour or for whose benefit such Excluded Guarantees have been issued, shall continue to remain entitled to such Excluded Guarantees including to invoke and enforce such Excluded Guarantees." 8. It is further submitted that as per the Resolution Plan, assignment agreement dated 28.06.2021 was executed in favour of SPV, i.e. M/s. BF Industrial Solution Ltd. From the Clause 36 of the Resolution Plan, as extracted by the Appellant, it is clear that guarantees has been excluded from assignment and that guarantees shall continue to remain with the Financial Creditor, which can be invoked and enforced. The submission of the Appellant that since the entire debt has been assigned to SPV, personal guarantees against the Appellant could not have been invoked, has been considered and rejected by the Adjudicating Authority by the impugned order. The Adjudicating Authority in paragraph 13, 14, and 17 observed following: "13. On perusal of the application and documents annexed with it, it is found that the Resolution Plan of the CD was approved on 26.04.2021. As per the plan the entire debt of the CD was acquired by SRA but how much amount received by the applicant pursuant to approval of the resolution was not mentioned in the application. Therefore, this Tribunal has listed this matter for clarification on 24.01.2024. Pursuant to the order of this Tribunal RP filed an Additional Affidavit clarifying the above points on 01.02.2024. It is stated in the affidavit that Total Amount of Rs. 46,71,99,997/- has been received by the present applicant pursuant to approval of resolution plan. Therefore, amount claimed to be in default will be reduced by Rs. 46,71,99,997/-. 14. It is admitted fact that the Resolution Plan of CD was approved and the entire debt of the Corporate Debtor has been taken over by Successful Resolution Applicant but the guarantee given by the promoters has not been assigned to SRA. The personal guarantor thereby has not been freed of his guarantee for the debt payable. It is noted under section 128 of Indian Contract Act, 1872 that when a default is committed the Principal Borrower and Surety are jointly and severally liable to Creditor and Creditor has the right to recover its dues from either of them or from both of them simultaneously. 17. The Hon'ble Supreme Court in its judgment in Lalit Kumar Jain V Union of India & Ors. held that the release or discharge of a principal borrower from the debt owned by it to creditor by an involuntary process, i.e. by operation of law, or due to liquidation or insolvency proceedings, does not absolve the surety I guarantor of his or her liability, which arises out of an independent contract." 9. The judgment of the Hon'ble Supreme Court in Lalit Kumar Jain vs. Union of India & Ors. - MANU/SC/0352/2021 : 2021:INSC:297 : (2021) 9 SCC 321 has categorically laid down that approval of Resolution Plan does not ipso facto discharge the liabilities of Personal Guarantors. In paragraph 126 of the judgment, following has been observed: "126. For the foregoing reasons, it is held that the impugned notification is
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legal and valid. It is also held that approval of a resolution plan relating to a corporate debtor does not operate so as to discharge the liabilities of personal guarantors (to corporate debtors). The writ petitions, transferred cases and transfer petitions are accordingly dismissed in the above terms, without order on costs." 10. We may notice the judgment of this Tribunal in Company Appeal (AT) (Insolvency) No. 975 of 2022 - UV Asset Reconstruction Company Limited vs. Electrosteel Castings Limited, where one of the questions arose as to whether by approval of Resolution Plan, entire debt of the Corporate Debtor stood extinguished and as a result there will be no default. It was held by this Tribunal that even after approval of Resolution Plan, recourse against third party can be resorted to and the approval of Resolution Plan, does not extinguish the right of Financial Creditor to proceed against third party. This Tribunal while considering the issue, laid down following in paragraph 50, 51 and 56: "50. Law on extinguishment of claim against personal guarantor and third party on approval of Resolution Plan has been settled by Hon'ble Supreme Court in its judgment in Lalit Kumar Jain vs. Union of India and Ors. - MANU/SC/0352/2021 : 2021:INSC:297 : (2021) 9 SCC 321, where the Hon'ble Supreme Court held that approval of resolution plan does not ipso facto discharge a personal guarantor (of a Corporate Debtor) of her or his liabilities under the contract of guarantee. In paragraph 126 the Hon'ble Supreme Court held following: "126. For the foregoing reasons, it is held that the impugned notification is legal and valid. It is also held that approval of a resolution plan relating to a corporate debtor does not operate so as to discharge the liabilities of personal guarantors (to corporate debtors). The writ petitions, transferred cases and transfer petitions are accordingly dismissed in the above terms, without order on costs." 51. There cannot be any dispute to the proposition that after the approval of the Resolution Plan, entire debt of the Corporate Debtor against the Financial Creditor stand discharged and after approval of Resolution Plan, Financial Creditor can have no further recourse against the Corporate Debtor. But the question as to whether debt of personal guarantor or third party which arises out of different contract shall also automatically extinguished after the approval of Resolution Plan is a question to be answered in the present case. As noted above, the law laid down by the Hon'ble Supreme Court is categorical that approval of a Resolution Plan does not ipso facto discharge a personal guarantor. We have to look into the Resolution Plan to find out as to whether approval of Resolution Plan discharge guarantor or third parties or not. The learned Senior Counsel for the Appellant has relied on Clause 3.2 of the Resolution Plan, under heading 'Proposal for Workmen and Financial Creditor'. Sub-clause (ix) of Clause 3.2 has been relied, which clearly mentions that Company shall stand discharged of any default, but on the same time it has been mentioned that any rights against any third party shall not be extinguished. It is relevant to extract following relevant part of sub-clause (ix): "... Furthermore, the Company shall stand discharged of any default or event of default under any loan documents or other financing agreements or arrangements (including any side letter, letter of comfort, letter of undertaking etc.) and all rights/ remedies of the creditors shall stand permanently
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extinguished except any rights against any third party (including the Existing Promoter) in relation to any portion of Unsustainable Debt secured or guaranteed by third parties. Furthermore, it is hereby clarified that upon approval of the Resolution Plan by the NCLT,...." 56. We, thus, are of the view that in view of Clause 3.2 (ix) of the Resolution Plan, when read in the light of the CoC Meeting dated 29.03.2018, which throws considerable light on the meaning and content of Clause 3.2 (ix), the submission of the Respondent cannot be accepted that after approval of Resolution Plan, the entire debt stand extinguished and no recourse can be taken by the Financial Creditor against third party." 11. The learned Counsel for the Appellant(s) has placed reliance on the judgment of the Hon'ble Delhi High Court in Vineet Saraf vs. Rural Electrification Corporation Ltd. - MANU/DE/4669/2023. In the said case, a writ petition was filed for quashing the demand notice dated 09.12.2022 issued by Respondent under Rule 7(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtor) Rules, 2019. In paragraph 1 and 2 of the judgment, facts have been noticed, which are to the following effect: "1. The petitioner has filed the instant writ petition seeking quashing of the impugned Demand Notice dated 09.12.2022 issued by the respondent i.e., Rural Electrification Corporation Limited(hereinafter 'REC Ltd.') under Rule 7(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 (hereinafter 'Rules, 2019') invoking the personal guarantees of the petitioner for the purported total outstanding debt of Rs. 1211,91,94,259 (hereinafter 'impugned demand notice'). 2. As per the facts of the case, the petitioner stood as a personal guarantor for a loan obtained by one FACOR Power Ltd. (hereinafter 'FPL') for a sum of Rs. 517.90 crores from the respondent i.e, REC Ltd. The loan agreement was dated 22.05.2009 (amended on 29.10.2010, 28.06.2013 and 12.11.2014). The deed of personal guarantee was executed on 24.08.2009 (amended and restated on 29.10.2010, 21.06.2013 and 22.01.2015)." 12. In the writ petition, the petitioner has prayed for writ of prohibition, preventing the Respondent from approaching the concerned NCLT under the provisions of the IBC and the demand notice so issued was prayed to be quashed. In wake of the aforesaid prayers in the writ petition, the Hon'ble Delhi High Court proceeded to examine various submissions, including the law with regard to rights of the Guarantors. The Delhi High Court ultimately took the view that prayers made in the writ petition cannot be granted and NCLT must carefully examine law on assignment, contract of surety and the applicability of judgment of Australia High Court in Hutchens. The Delhi High Court rejected the submission of the Appellant that rights under Article 14 of the Constitution of India has been violated. Ultimately, Delhi High Court dismissed the writ petition and laid down following in paragraph 160 to 163: "160. It is not the case that the reliefs prayed for cannot be granted by the concerned NCLT. The petitioner's claim of the guarantor getting a right to be heard at a belated stage, is not sufficient to entertain the present petition. The legislature, in its wisdom, thought it fit to give the right of hearing at belated
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stage. Indeed, if in the present case the petition is entertained, it would subvert the procedure laid down under the IBC. The respondent in turn would be denied the opportunity to present their case before the concerned NCLT. 1 6 1 . This court is, therefore, of the opinion that the present writ petition deserves to be dismissed. Ordered accordingly. Pending application also stands dismissed. 1 6 2 . The concerned NCLT may make a decision upon the submissions advanced by the petitioner and the respondent on its own merits. 163. All observations on the merits of the case shall be considered as prima facie and the competent court/Tribunal is at liberty to deal with the issues on merits." 13. The judgment of the Delhi High Court itself makes it clear that Delhi High Court was only of prima facie opinion and left it to be dealt with by the concerned Tribunal on merits. We, thus, are of the view that judgment of the Delhi High Court in Vineet Saraf does not come to any aid in the present case. 1 4 . The learned Counsel for the Appellant(s) has submitted that the Appellant(s) in their written submissions have also placed reliance on the judgment of Australian High Court in Hutchens v. Deauville Investments Pty Ltd. - MANU/AUSH/0084/1986 : 68 Australian Law Report 367, which judgment has not been dealt with by the Adjudicating Authority. The judgment of High Court of Australia in the above case arose out of action brought by Respondent for possession of certain land registered under the Transfer of Land Act 1958. The basis of the action was alleged default by Hutchens as under a registered mortgage of the land. The facts of the case has been noticed in paragraph-1 of the judgment, which is as follows: "1. This is an appeal by special leave from a judgment of the Full Court of the Supreme Court of Victoria affirming the decision of a single judge dismissing an appeal to him from an order made by a Master. The appellant is Kenneth Ruston Hutchens ("Hutchens") who was the defendant in the Supreme Court in an action brought by the respondent, Deauville Investments Pty. Ltd. ("Deauville"), for possession of certain land registered under the Transfer of Land Act 1958 (Vict.). The basis of the action was alleged default by Hutchens as mortgagor under a registered mortgage of the land. By his order, the Master gave the respondent leave summarily to enter final judgment for possession of the land and thereby precluded the matter going to trial." 15. The High Court of Australia took the view that facts are complicated and evidence is unsatisfactory and the matter needs to be remitted for further pleading leading trial in which any outstanding issues of fact may be resolved. In paragraph-2 of the judgment, following observations were made: "2. The facts are complicated and the evidence is unsatisfactory. Since, for the reasons appearing hereunder, we consider that the appeal should be upheld and that the matter should be remitted to the Supreme Court for further pleading leading to a trial in which any outstanding issues of fact may be resolved, it is desirable that we refrain from unnecessary canvassing of the incomplete evidence at present before the Court. It is, however, necessary to indicate the essential factual context within which the issues canvassed on the present appeal arise for consideration. Subject to elucidation and correction by further
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