Amended Section 14(3) of the Code ( w.e.f. 06.06.2018) reads as under
# Section 14(3) The provisions of sub-section (1) shall not apply to —
(a) such transaction as may be notified by the Central Government in consultation with any financial regulator;
(b) a surety in a contract of guarantee to a corporate debtor.
Excerpts of the order;
# 4. Axis Bank Ltd.- applicant made a claim before the Insolvency Resolution Professional. A communication was sent by the IRP vide email dated 20.07.2017 intimating that the claim cannot be verified as the corporate guarantee had not been invoked and the liability of the Corporate Debtor- respondent to the Axis Bank Ltd. applicant is contingent (Annexure A-5).
# 5. After the receipt of the communication from the IRP, the applicant vide letter dated 21.07.2017 invoked corporate guarantee in accordance with the terms of the corporate guarantee and intimation regarding the same was given to SBICAP vide letter dated 01.08.2017 (Annexure-5). The Corporate Debtor sent a letter to the Axis Bank Ltd.-applicant inter alia, stating that invocation of the guarantee could not be accepted on account of CIRP and the moratorium (Annexure-7).
# 6. The factum of invoking corporate guarantee was brought to the notice of the Insolvency Resolution professional vide email dated 21.07.2017, who responded by stating that the liability under the corporate guarantee was contingent as on the date of commencement of insolvency process on 27.06.2017, therefore, it could not be verifiable. Another objection raised by the Resolution professional was that the applicant did not submit fresh claim form subsequent to the invocation of the Corporate Guarantee, therefore, the claim could not be accepted and verified (Annexure-7) (Colly). The RP also raised objections to the invocation of the corporate guarantee by the applicant in view of the Security Trustee Agreement. Axis Bank Ltd.-applicant has submitted that each of the grounds for objecting to the tenability of applicant's claim and its consequent rejection were untenable and contrary to the provisions of the Code. In that regard, reliance has been placed on Regulations 12, 13 and 14 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations 2016 (for brevity "IBBI Regulations'). Axis Bank Ltd.-applicant has also placed reliance on the definition of Financial Creditor' as given in Section 5(7) to argue that it includes any person to whom financial debt is owed and also includes the person to whom the said debt has been legally assigned or transferred. Reliance has also been placed on the definition of 'financial debt under Section 5(8) of the Code and various clauses of the corporate guarantee like clauses 1.3 and 11.10.
# 7. In response to the claim made by the applicant, the resolution professional has filed reply raising many preliminary objections. The first objection raised is suppression of material facts and has sought dismissal of the application on that ground. According to the Resolution Professional, Axis Bank Ltd.-applicant has already claimed the amount of debt in the corporate insolvency resolution process of the principal borrower-Educomp Solutions Ltd., which has been subject matter of proceeding in C.P. No. 101(PB)/2017. According to the preliminary objection, this is a material fact which ought to have been disclosed in the application which has substantial bearing on the adjudication of the present application. It has also been suggested that Axis Bank Ltd.-applicant ought to have made other Financial Creditor of the Corporate Debtor as a party to the present proceeding as any alternation in the claims would materially prejudice the rights of such creditors.
# 11. The Resolution Professional has also raised the issue that invocation of corporate guarantee against the Corporate Debtor was patently in violation of the moratorium imposed under Section 14 of the Code. In that regard, reliance has been placed on the provisions of Section 14(1)(c) of the Code to argue that invoking the corporate guarantee vide letter dated 21.07.2017 would amount to an action to cover the amount from the Corporate Debtor as Section 14 creates a calm period in which the rights under the contracts are suspended. It has further been pointed out that the Resolution Professional moved C.A. No. 257(PB)/2017 in (IB)102(PB)/2017, and vide order dated 21.08.2017, this Bench has disposed of the application by observing that the issues raised in the application were entirely in the domain of the insolvency professional and it was not considered proper to opine either way by us (Annexure-1).
# 13. In the rejoinder filed by Axis Bank Ltd.-applicant, it has been asserted that the liability of the principal debtor and the corporate guarantor is co-extensive and reliance has been placed on Section 128 of the Indian Contract Act, 1872. The applicant has also placed reliance on the Judgments of the Hon'ble Supreme Court in the case of Central Bank of India & Ors. v. C.L. Vimla & Ors. (2015) 7 SCC 337 and State Bank of India v. Saksaria Mills Limited & Ors., AIR 1986 SC 868. Reliance has also been placed on various provisions of the Code, Rules and Regulations and other Judgments.
# 16. We have heard learned Counsel for the parties at a considerable length and have perused the records with the able assistance.
# 17. The question which needs determination in the present proceedings is whether the Axis Bank Ltd.-applicant is entitled to make a claim by invoking the corporate guarantee after the date of commencement of the insolvency process. In order to appreciate the aforesaid issue, we may first refer to certain terms and conditions of the corporate guarantee executed between the parties on 03.06.2015 (Annexure-2). Under the caption '1.3 Terms of the Guarantee clause-3 provides as under:
"In the event of any default on the part of the Borrower in payment / repayment and in reimbursement of any of the monies referred to above, or in the event of any default on the part of the Borrower to comply with or perform any of the terms, conditions and covenants contained in the Restructuring Documents, the Guarantor shall, upon demand from the Security Trustee/ Lenders, forthwith pay to the Security Trustee/ Lenders without demur all the amounts payable by the Borrower under the Restructuring Documents".
A perusal of the aforesaid clause clearly postulates that in the event of any default on the part of the Borrower, i.e. Educomp Solutions Ltd. in payment/repayment or in the event of any default to comply with or perform any of the terms, conditions and covenants in the Restructuring Documents, the Guarantor under obligation upon demand from the Security Trustee/Lenders to forthwith pay to the Security Trustee/Lenders without demur all the amounts payable by the Borrower under the Restructuring Documents.
# 21. The argument of Ms. Misha, learned Counsel for the applicant-Axis Bank Ltd. may now be noticed. It was submitted that the liability of the guarantor under Section 128 of the Indian Contract Act, 1872 is joint and severable. In other words, the applicant-Axis Bank Ltd. could invoke the guarantee against the principal borrower namely, Educomp Solutions Ltd. and/or against the Corporate Debtor. There can be no quarrel with the aforesaid proposition of law.
However, the issue before us is whether the debt was crystallised and it was due and payable on the date of commencement of resolution process, which is 27.06.2017. The aforesaid issue stands already answered against the applicant. In equity also, the applicant-Axis Bank Ltd. would not suffer any prejudice as it has already claimed the amount of debt in CIRP of the principal borrower-Educomp Solutions Ltd. in a separate proceedings initiated by admission of C.P. No. (IB)-101(PB)/2017. We are therefore, not inclined to examine the contention in detail on the facts and circumstances of the present case although the judgment in the cases of Central Bank of India & Ors. v. C.L. Vimla & Ors. (2015) 7 SCC 337 and State Bank of India v. Saksaria Mills Limited & Ors., AIR 1986 SC 868 were cited before us.
# 22. We are also not impressed with the arguments based on Regulations 12 & 13 of the IBBI Regulations. The aforesaid Regulation provides that a creditor must submit proof of claim on or before the last date mentioned in the public announcement. However, those who failed to submit proof of claim have been still held entitled to do so later but before the approval of Resolution Plan by the committee. A careful perusal of Regulation 12 read with Regulation 13 would show that the Resolution Professional has to verify every claim as on the insolvency commencement date and maintain a list of creditors containing names of all such creditors alongwith the amount claimed. Therefore, the applicant Axis Bank Ltd. would not qualify to the consideration of its claim He as it has become due and payable after the insolvency commencement date. The provisions of Regulations 12 and 13 would not come to the rescue of the applicant-Axis Bank Ltd. An ancillary submission is that there was no intention to conceal the claim made in the CIRP initiated against the Educomp Solutions Ltd.-principal borrower would also not require any detailed consideration as we are not proceeding to decide the application on the aforesaid issue.
# 23. ……….. In our view, Section 14 would clearly cover the invocation of guarantee after the insolvency commencement date. The moratorium prohibiting a number of things has been contemplated and for the present case clause (c) of sub-section (1) of Section 14 would be suffice and the same reads as under:
14. (1) Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely:
(a) .............
(b) ............
(c) any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;
A perusal of the aforesaid provision makes it absolutely clear that there would be moratorium prohibiting any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property. It appears to us that invocation of corporate guarantee against the Corporate Debtor- respondent would result in enforcing of security interest and it would thus be in violation of the moratorium provision of Section 14(1)(c) of the Code. Therefore, we do not find any substance in the submission.
# 25. As a sequel to the above discussion, this application fails and the same is dismissed. However, in the peculiar facts and circumstances of the case, we leave the parties to bear their own costs.
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