Excerpts of the order;
# 21. The only question arises for determination in this appeal is whether the application under Section 7 of the I&B Code is maintainable against the ‘corporate guarantor’ without initiation of ‘corporate insolvency resolution process’ against the ‘principal borrower’ (‘principal debtor’).
Facts of the Case;
# 22. The respondent – Rural Electrification Corporation Limited (financial creditor) sanctioned loan aggregating Rs.517.90 crores to FACOR Power Limited (principal borrower), a company incorporate under the Companies Act, 1956 under the ‘Loan Agreement’ dated 22nd May, 2009 (Rs. 140 crores); on 29th October, 2010 (Rs. 257.68 crores); on 28th June, 2013 (Rs. 69.36 crores) and on 12th November, 2014 (Rs. 50.86 crores) and disbursed an amount aggregating to Rs. 510.97 crores on various dates. For securing the above mentioned loan facility extended by the ‘financial creditor’ to ‘FACOR Power Limited’ (‘corporate debtor’ – ‘corporate guarantor’) a ‘Corporate Guarantee Agreement’ was signed and executed guarantee documents in favour of the ‘financial creditor’ on 24th August, 2009, as revised on 29th October, 2010, 21st June, 2013 and again on 22nd January, 2015.
# 23. ‘Ferro Alloys Corporation Limited’ (‘corporate guarantor’ – ‘corporate debtor’) as also borrower pledged 15,10,74,299 physical shares and 4,69,85,631 Demat shares of ‘FACOR Power Limited’ totaling to 19,80,59,930 shares through various deeds in favour of the ‘financial creditor’. The case of the ‘financial creditor’ was that M/s. FACOR Power Limited (principal borrower) defaulted in making repayment of dues and the account of M/s. FACOR Power Limited has since been classified as Non-Performing Asset (NPA). In view of the defaults committed in the repayment of loan, as per the terms and conditions of the ‘Loan Agreement’ and other financing documents, the ‘financial creditor’ recalled the facilities on 1st October, 2015 and demanded the entire amount of loan, interest and all other amounts due in respect thereof. Despite receipt of the same, no payment was made to the ‘financial creditor’. M/s. FACOR Power Limited (principal borrower) has admitted its liability to the extent of Rs. 604,99,91,539/- as on 31st March, 2016 in the audited balance-sheet for the financial year 2015-16. The ‘corporate guarantor’ – Ferro Alloys Corporation Limited in its audited balance-sheet for the financial year 2015-16 has acknowledged the debt to the tune of Rs.517.90 crores. The copy of the audited balance-sheet of the ‘Ferro Alloys Corporation Limited’ was also enclosed along with the application under Section 7 of the I&B Code (Form-1).
# 24. On being default in making the payment of the debt amount by the ‘principal borrower’, the ‘financial creditor’ invoked the corporate guarantee of the ‘Ferro Alloys Corporation Limited’ and called upon the ‘Ferro Alloys Corporation Limited’ (‘corporate guarantor’) to pay forthwith the amount due and payable by the ‘M/s. FACOR Power Limited’ (principal borrower’) amounting to Rs.564,63,50,544/- as on 30th September, 2015 along with future interest within a period of 21 days. M/s. Ferro Alloys Corporation (‘corporate guarantor’) issued a reply dated 26th November, 2015 but failed and neglected to pay the above sum.
# 25. The ‘financial creditor’ pleaded that the ‘corporate guarantee’ furnished by ‘Ferro Alloys Corporation Limited’ is an unconditional, continuing and irrevocable guarantee. As per the terms of the guarantee, the obligation of guarantor is separate, independent and is that of primary obligor and not merely as surety, on a full indemnity basis to indemnify the ‘financial creditor’. The ‘corporate guarantee’ provided by the ‘Ferro Alloys Corporation Limited’ is joint and several and co-extensive with that of the principal debtor and can be invoked even without exhausting the remedies against the principal debtor. Similar plea was taken before the Adjudicating Authority. The Adjudicating Authority taking into consideration the fact that there is a ‘debt’ and ‘default’ and the application under Section 7 being complete admitted the application by the impugned order dated 6th July, 2017.
# 26. We have heard the learned counsel for the parties and perused the record. The position of law is manifested in the I&B Code including the definitions which require harmonious and purposeful reading and reasoning.
# 27. The term ‘corporate person’, defined under Section 3(7) of the I&B Code, is as under :
“(7) "corporate person" means a company as defined in clause (20) of section 2 of the Companies Act, 2013, a limited liability partnership, as defined in clause (n) of sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008, or any other person incorporated with limited liability under any law for the time being in force but shall not include any financial service provider;”
Insolvency Resolution Process under Section 7 of the I&B Code can be initiated against the guarantor who is a ‘corporate person’ and who by operation of law ipso facto becomes a ‘corporate debtor’ by satisfying the ingredients of the terms as defined under Section 3(8).
The term of ‘corporate debtor’ which is defined under Section 3(8) means a ‘corporate person’ who owes a debt to any person,
The term ‘debt’, as used in Section 3(8) is defined under Section 3(11) of the Code,
As per Section 3(8), the term ‘corporate debtor’ can be a debtor who may be any person. The term ‘person’, defined under Section 3(23),
Thus, a ‘corporate debtor’ must be a ‘corporate person’, [Section 3(7)] who owes a ‘debt’ [Section 3(11)], to any person [Section 3(23)]. The ‘debt’ as used in Section 3(8) has to be a ‘debt’ defined under Section 3(11) as quoted above. It must be the ‘liability’ or ‘obligation’ in respect of a ‘claim’ [Section 3(6)] which is due from any person [Section 3(23)] – which means even a corporate entity and shall include ‘financial debt’ and ‘operational debt’ as defined under section 5(8) and 5(21), ….
A guarantee becomes a debt or as soon as the guarantee is invoked against it wherein-after a guarantor (‘corporate guarantor’) becomes a ‘corporate debtor’ in terms of the I&B Code.
# 28. In ‘Bank of Bihar Ltd. vs. Dr. Damodar Prasad & Anr. – (1969) 1 SCR 620’, the Apex Court held :
“3. The demand for payment of the liability of the principal debtor was the only condition for the enforcement of the bond. That condition was fulfilled. Neither the principal debtor nor the surety discharged the admitted liability of the principal debtor in spite of demands. Under Section 128 of the Indian Contract Act, save as provided in the contract, the liability of the surety is coextensive with that of the principal debtor. The surety became thus liable to pay the entire amount. His liability was immediate. It was not deferred until the creditor exhausted his remedies against the principal debtor.”
# 29. In ‘Ram Bahadur Thakur vs. Sabu Jain Limited – [1981 (51) Comp Cas 301]’, the Hon’ble High Court of Delhi relying on the decision of Hon’ble Supreme Court in ‘Kesoram Mills Case – [(1966) 59 ITR 767]’, held that under the ‘deed of guarantee’ the liability of the company to pay debt arose when the borrower defaulted in making payments and the creditor sent a demand/notice invoking the guarantee.
# 30. In the present case as per clause 1.2 of the ‘Deed of Guarantee’ dated 22nd January, 2015, “on the failure of principal borrower to pay and/or discharge the obligations, the guarantor shall, forthwith upon demand, pay to Rural Electrification Corporation Limited (Financial Creditor) without demur or protest”, the amount stated in the demand made by Rural Electrification Corporation Limited to the guarantor thereby invoking the guarantee.
# 32. Admittedly, the guarantee was invoked by ‘Rural Electrification Corporation Limited’ against ‘Ferro Alloys Corporation Ltd.’ and demand was raised on 27th October, 2015 calling upon ‘Ferro Alloys Corporation Ltd.’ to pay the amount due within 21 days. Since then, Ferro Alloys Corporation Ltd. (Corporate Guarantor) became a ‘corporate debtor’ of ‘Rural Electrification Corporation Limited’ (Financial Creditor).
# 33. In its Annual Report for the year ending 2016-17, ‘Ferro Alloys Corporation Ltd.’ has shown a sum of Rs. 517.90 crores payable to the ‘financial creditor’. Therefore, it is clear that ‘Ferro Alloys Corporation Ltd.’ admitted the ‘debt’ and in absence of payment, we hold that there is a ‘default’.
# 36. In “Bank of Bihar v. Damodar Prasad and Anr.− (1969) 1 SCR 620” the Hon’ble Supreme Court referred to a judgment of Hon’ble Bombay High Court in “Lachhman Joharimal v. Bapu Khandu and Tukaram Khandoji− (1869) 6 Bom HCR 241”, in which the Division Bench of the Hon’ble Bombay High Court held as under:-
“The court is of opinion that a creditor is not bound to exhaust his remedy against the principal debtor before suing the surety and that when a decree is obtained against a surety, it may be enforced in the same manner as a decree for any other debt.”
# 37. The Hon’ble Supreme Court while approving the said judgment, observed that, “the very object of the guarantee is defeated if the creditor is asked to postpone his remedies against the surety. In the present case the creditor is a banking company. A guarantee is a collateral security usually taken by a banker. The security will become useless if his rights against the surety can be so easily cut down.”
# 38. In “State Bank of India v. Indexport Registered and Ors.− (1992) 3 SCC 159”, the Hon’ble Supreme Court held that the decree holder bank can execute the decree first against the guarantor without proceeding against the ‘Principal Borrower’.
# 39. In view of the aforesaid decision of the Hon’ble Supreme Court, we hold that it is not necessary to initiate ‘Corporate Insolvency Resolution Process’ against the ‘Principal Borrower’ before initiating ‘Corporate Insolvency Resolution Process’ against the ‘Corporate Guarantors’. Without initiating any ‘Corporate Insolvency Resolution Process’ against the ‘Principal Borrower’, it is always open to the ‘Financial Creditor’ to initiate ‘Corporate Insolvency Resolution Process’ under Section 7 against the ‘Corporate Guarantors’, as the creditor is also the ‘Financial Creditor’ qua ‘Corporate Guarantor’. The first question is thus answered against the Appellant.
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