Wednesday, 28 October 2020

Lalit Mishra & Ors. Vs Sharon Bio Medicine Ltd. & Ors - Right of Subrogation

 NCLAT (19.12.2018) in Lalit Mishra & Ors. Vs Sharon Bio Medicine Ltd. & Ors. [Company Appeal (AT) (Insolvency) No. 164 of 2018 ] held that; all the stakeholders have already been cleared by the 3rd Respondent - ‘Successful Resolution Applicant’. It was open to them to say that the personal guarantee will not result into any liability towards the ‘Company’ or the ‘Resolution Applicant’.

 

Excerpts of the order;

# 2. The Appellants have challenged the order of approval of the ‘Resolution Plan’ on two counts namely—

  • (i) The Appellants, promoters were the shareholders and for them no amount has been provided under the ‘Resolution Plan’; and

  • (ii) Some of the Appellants, promoters are also ‘personal guarantors’ who have been discriminated.

 

# 3. Learned counsel appearing on behalf of the Appellants submitted that the payment terms provided in the ‘Resolution Plan’ is in contravention to the applicable provisions of law. The 3rd Respondent- ‘Successful

Resolution Applicant’ has arbitrarily reduced or written off substantial

liabilities of the promoters/ shareholders without any legal basis.

 

# 4. It was further submitted that the lenders have not been treated similarly and restructuring for its entire claims of the ‘Corporate Debtor’ is against the provisions of the ‘I&B Code’.

 

# 5. It was submitted that the security interest which include the personal guarantees of the Appellants have been reduced to ‘nil’ and thereby the ‘Resolution Plan’ have been submitted against the provisions of Sections 133 and 140 of the ‘Indian Contract Act’.

 

# 6. The submissions made on behalf of the Appellants have been disputed by the learned counsel appearing on behalf of the ‘Resolution Professional’ and the 3rd Respondent.

 

# 7. Section 4 of the ‘Resolution Plan’ deals with ‘raising of funds under the proposed plan’. Under Clause 1 therein, the ‘reduction of share capital’  has been proposed and it is proposed that the Company undertakes a selective capital reduction of (i) the entire shareholding held by the Promoter Group and Secured Lenders; and (ii) up to 90% of the Equity Shares held by the public shareholders. It is mentioned that the minimum public shareholding requirement of 25% under Indian securities laws shall be adhered to.

 

# 8. The restructuring of the financial debt as part of the ‘Resolution Plan’ approved by the Adjudicating Authority under the ‘I&B Code’ does not envisage complete discharge of the liability of personal guarantors of the ‘Corporate Debtor’. This will be evident from Clause 12 of Section 5 of the ‘Resolution Plan’ which deals with ‘treatment of security’. Therein it is mentioned that all securities/ collaterals/ margin money/ fixed deposit with lien provided by the Company shall be deemed to be released immediately on Effective Date. It is subsequently mentioned that the personal guarantee provided by the existing promoters of the Company, shall result in no liability towards the ‘Company’ or the ‘Resolution Applicants’. This ‘treatment of security’ and with regard to personal guarantee provided by the existing promoters of the Company is alleged to be in violation of Section 140 and Section 133 of the ‘Indian Contract Act’.

However, the aforesaid submissions cannot be accepted, as on approval of the ‘Resolution Plan’, the claim of the entire stakeholders stand cleared and the ‘Personal Guarantor’ thereafter cannot claim that they have been discriminated. All the stakeholders have already been cleared by the 3rd Respondent- ‘Successful Resolution Applicant’. It was open to them to say that the personal guarantee will not result into any liability towards the ‘Company’ or the ‘Resolution Applicant’.

 

# 9. It was not the intention of the legislature to benefit the ‘Personal Guarantors’ by excluding exercise of legal remedies available in law by the creditors, to recover legitimate dues by enforcing the personal guarantees, which are independent contracts. It is a settled position of law that the liabilities of guarantors is co-extensive with the borrower. This Appellate Tribunal held that the resolution under the ‘I&B Code’ is not a recovery suit. The object of the ‘I&B Code’ is, inter alia, maximization of the value of the assets of the ‘Corporate Debtor’, then to balance all the creditors and make availability of credit and for promotion of entrepreneurship of the ‘Corporate Debtor’. While considering the ‘Resolution Plan’, the creditors focus on resolution of the borrower ‘Corporate Debtor’, in line with the spirit of the ‘I&B Code’.


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Disclaimer:

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.