Tuesday 27 October 2020

Ajay Chaturvedi vs. JM Financial Asset Reconstruction Co. Ltd - Insolvency of Corporate Guarantor without exhausting the remedy against the Principal Borrower

NCLAT (29.11.2018) in  Ajay Chaturvedi vs. JM Financial Asset Reconstruction Co. Ltd. & Anr. [Company Appeal (AT) (Insolvency) No. 320 of 2018] held that :

“Clause (i) of sub-section (8) of Section 5 shows that any liability in respect of any 'guarantee' or 'indemnity' for any of the items referred to in sub-clauses (a) to (h) comes within the meaning of 'Financial Debt'. The 'Corporate Debtor' having given 'guarantee' on behalf of the principal borrower for the items referred to in sub-clause (a), guarantor company will also come within the meaning of 'Corporate Debtor' qua 'Financial Creditor' in whose favour the guarantee has been given.” and dismissed the appeal.

Excerpts of the order;

The Appeal has been preferred by Mr. Ajay Chaturvedi, Shareholder of ‘Yes Power & Infrastructure Ltd.’- (‘Corporate Debtor’) against the order dated 11th May, 2018 passed by the Adjudicating Authority (National Company Law Tribunal), Mumbai Bench, Mumbai, whereby and whereunder, the application under Section 7 of the ‘Insolvency and Bankruptcy Code, 2016 (‘I&B Code’ for short) preferred by the Respondent ‘JM Financial Asset Reconstruction Company Ltd.’- (‘Financial Creditor’) has been admitted.

# 2. The main plea taken by the counsel for the Appellant is that in spite of the order passed by the Adjudicating Authority no ‘substituted service’ has been made by the Respondent- ‘JM Financial Asset Reconstruction Company Ltd.’- (‘Financial Creditor’) and they sent the notice by Speed Post, which was never received by the Appellant. Therefore, according to Appellant, the admission order dated 11th May, 2018 is bad having been passed ex parte by misleading the Adjudicating Authority.

 

# 3. Learned counsel for the Appellant submitted that there was no provision for filing an application under Section 7 of the ‘I&B Code’ against the ‘Corporate Guarantor’ except against the ‘Personal Guarantor’. However, such submission cannot be accepted, in view of the definition of ‘Financial Creditor’ as defined in Section 5(7) read with Section 5(8) of the ‘I&B Code’, which reads as follows:

 

# 4. Clause (i) of sub-section (8) of Section 5 shows that any liability in respect of any ‘guarantee’ or ‘indemnity’ for any of the items referred to in sub-clauses (a) to (h) comes within the meaning of ‘Financial Debt’. The ‘Corporate Debtor’ having given ‘guarantee’ on behalf of the principal borrower for the items referred to in sub-clause (a), guarantor company will also come within the meaning of ‘Corporate Debtor’ qua the ‘Financial Creditor’ in whose favour the guarantee has been given.

 

# 5. Learned counsel for the Appellant placed reliance on notice issued under the ‘SARFAESI Act, 2002’ on 18th November, 2013, from which it is clear that the ‘Financial Creditor’ has already invoked the guarantee against the ‘Corporate Debtor’ and, therefore, it cannot take plea that the guarantor does not come within the meaning of the ‘Corporate Debtor’.

 

# 6. In so far as the service of notice of admission is concerned, even if it is accepted that it was not served, we are not inclined to remit the case on such ground as it will be mere formality, as admittedly debt is payable by the ‘Corporate Debtor’ and the ‘Corporate Debtor’ defaulted to pay. It is not the case of the Appellant that if the notice would have been served before admission of the application under Section 7, the ‘Corporate Debtor’ would have cleared the debt amount.

 

# 7. In view of the aforesaid facts and findings, no relief can be granted. In absence of any merit, the appeal is dismissed. No costs.

 

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The sole purpose of this post is to create awareness on the "IBC - Case Law" and to provide synopsis of the concerned case law, must not be used as a guide for taking or recommending any action or decision. A reader must refer to the full citation of the order & do one's own research and seek professional advice if he intends to take any action or decision in the matters covered in this post.