NCLAT (26.10.2021) In Intec Capital Limited Vs. Eastern Embroidery Collections Private Limited [Company Appeal (AT) (Insolvency) No. 428 of 2021] held that;
In Laxmi Pat Surana V Union Bank of India and Another 2021 SCC OnLine SC 267 Hon’ble Supreme Court has held that
31. A priori, we find no substance in the argument advanced before us that since the loan was offered to a proprietary firm (not a corporate person), action under Section 7 of the Code cannot be initiated against the corporate person even though it had offered Guarantee in respect of that transaction. Whereas, upon default committed by the principal Borrower, the liability of the company (corporate person), being the Guarantor, instantly triggers the right of the financial creditor to proceed against the corporate person (being a corporate debtor). Hence, the first question stands answered against the Appellant.” (Verbatim copy with emphasis supplied)
Excerpts of the order;
# 2. Brief Facts
The brief facts of the case are as follows:
2.1 The Appellant 'Intec Capital Ltd' for brevity ‘Intec’ filed an Application under Section 7 of the Insolvency and Bankruptcy Code, 2016 for initiation of Corporate Insolvency Resolution Process (CIRP) against the Corporate Guarantor / Corporate Debtor 'Eastern Embroidery Collections Private Limited' (EECPL) for the sum borrowed by the partnership firm M/s Eastern Overseas.
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2.8 The Adjudicating Authority rejected the prayer for initiation of CIRP against the Corporate Debtor mainly on two grounds.
Firstly, the Appellant/Creditor had applied under Section 7 of the IBC and not under Section 95 of IBC.
Secondly, the Appellant had filed the Application for Initiation of CIRP against the Personal Guarantor. But has not followed the applicable Rules, i.e. “The Insolvency and Bankruptcy (Application to Adjudicating Authority for Bankruptcy Process for Personal Guarantors to Corporate Debtors) Rules, 2019. Therefore, the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016” is not applicable in the instant case.
# 5. Point in issue The questions that arise for our consideration is as under;
1. Is the Eastern Embroidery Collections Private Limited, for brevity ‘EECPL’, the Personal Guarantor of the Principal Borrower ‘Eastern Overseas’?
2. Whether the ‘EECPL’ is the Corporate Guarantor and therefore ‘Corporate Debtor’ of the ‘Eastern Overseas, in terms of Subsection (7) and (8) of Sec 3 of I&B Code and the applicable Rules will be ‘Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016’?
# 7. Analysis
7.1 The Adjudicating Authority has held that the Insolvency and Bankruptcy (Application to Adjudicating Authorities for Bankruptcy Process for Personal Guarantors to Corporate Debtors” Rules, 2019 will be applicable instead of “the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules 2016. Under both the Rules, the conditions for the applicability of the Rules are provided.
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7.4 The Appellant contends that the Adjudicating Authority has curtailed the remedies available to the Appellant of making an Application for Resolution of Insolvency of the ‘Corporate Debtor’, who qualifies under the definition of ‘Corporate Person’ and ‘Corporate Debtor’ as stated under Section 3, Sub-section 7 and 8 of the IBC. Finding of the Adjudicating Authority that Section 5, Sub-section (22) of the IBC, which defines ‘Personal Guarantor’ comes into play, is against the law.
7.5 The definition of Corporate Person and Corporate Debtor as given under Section 3, Sub-section 7 and 8 of the Code is given below for ready reference;
7.6 Insolvency and Bankruptcy Code, 2016
Sec 3(7) "corporate person" means a company as defined in clause (20) of Section 2 of the Companies Act, 2013 (18 of 2013), a limited liability partnership, as defined in clause (n) of sub-section (1) of Section 2 of the Limited Liability Partnership Act, 2008 (6 of 2009), 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;
(8) "corporate debtor" means a corporate person who owes a debt to any person;
(22) “personal guarantor” means an individual who is the surety in a contract of Guarantee to a corporate debtor;
7.7 The Appellant further contends that Respondent is falling under the definition of ‘Corporate Person’ and ‘Corporate Debtor’ and is entirely outside the purview of the definition of ‘Personal Guarantor’ under Section 5 Subsection 22 of the Code.
7.8 Therefore, the Application against the Respondent Corporate Person is to be filed as per the Insolvency and Bankruptcy (Application to Adjudicating Authority Rules, 2016, not as per “the Insolvency and Bankruptcy (Application to Adjudicating Authority Rules for Bankruptcy Process for Personal Guarantors to Corporate Debtor) Rules, 2019 as Rule 2 and 3 are both Rules clearly define the applicability of the part of IBC.
7.9 It is further contended that the learned Adjudicating Authority under the wrong apprehension considered Respondent to be a Personal Guarantor while the Respondent is a Corporate Guarantor.
7.10 It is pertinent to mention that the Appellant had not filed an Application against a Personal Guarantor under Section 95 of the Code; instead, the Application is filed against the Corporate Guarantor/Corporate Debtor.
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7.12 The learned Adjudicating Authority had failed to notice that the Financial Creditor had taken Personal Guarantee of Mr Mahendra Singh Narang and Mrs Manjit Kaur in addition to the Corporate Guarantee given by the Corporate Debtor.
7.13 Therefore, on the occurrence of default, it was the sole prerogative of the Financial Creditor to initiate action against the Principal Borrower or the Personal Guarantor of the Corporate Guarantor.
7.14 Since the Appellant Financial Creditor had initiated action under the Insolvency and Bankruptcy Code against the Corporate Guarantor, the Application could not have been dismissed on the erroneous assumption that the Application should have been filed against the Personal Guarantor under Section 95 of the Code.
7.15 In Laxmi Pat Surana V Union Bank of India and Another 2021 SCC OnLine SC 267 Hon’ble Supreme Court has held that;
“1. Two central issues arise for our determination in this Appeal, as follows:—
(i) Whether an action under Section 7 of the Insolvency and Bankruptcy Code, 20161 can be initiated by the financial creditor (Bank) against a corporate person (being a corporate debtor) concerning Guarantee offered by it in respect of a loan account of the principal Borrower, who had committed default and is not a “corporate person” within the meaning of the Code ?
(ii) Whether an application under Section 7 of the Code filed after three years from the date of declaration of the loan account as Non-performing Asset2, being the date of default, is not barred by limitation?
31. A priori, we find no substance in the argument advanced before us that since the loan was offered to a proprietary firm (not a corporate person), action under Section 7 of the Code cannot be initiated against the corporate person even though it had offered Guarantee in respect of that transaction. Whereas, upon default committed by the principal Borrower, the liability of the company (corporate person), being the Guarantor, instantly triggers the right of the financial creditor to proceed against the corporate person (being a corporate debtor). Hence, the first question stands answered against the Appellant.” (Verbatim copy with emphasis supplied)
7.16 The law laid down by the Hon’ble Supreme Court in the above mentioned case is fully applicable in the instant case. In the case mentioned above, Hon’ble Supreme Court has rejected the contention of the Appellant that since the loan was offered to the proprietary firm (not a corporate person), action under Section 7 of the Code cannot be initiated against the Corporate Person even though it had offered Guarantee in respect of the transaction. In this case, also Principal Borrower is a proprietary firm, and the Corporate Debtor had given the Corporate Guarantee for the said loan.
# 8. Conclusion
8.1 Based on the above discussion, it is clear that Respondent ‘Eastern Embroidery Collections Private Limited’ was the Corporate Guarantor of the Principal Borrower ‘Eastern Overseas’, and not a Personal Guarantor. Therefore, in terms of Sub-section (7) and (8) of Sec 3 of I&B Code, 2016 is a Corporate Debtor. Further, the applicable Rules would be ‘Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016’.
8.2 Therefore, we are of the considered opinion that the Adjudicating Authority committed an error in holding that action should have been initiated against the Personal Guarantor of the Corporate Debtor under Section 95 of the Code instead of proceeding against the Corporate Debtor.
8.3 In the circumstances stated above, Appeal deserves to be allowed, and the impugned order passed by the learned Adjudicating Authority is liable to be set aside.
ORDER
Company Appeal (AT) (Insolvency) No 428 of 2021 is allowed. No order as to costs. The impugned order dated 27 April 2021 is set aside. The case is remanded back to the learned Adjudicating Authority for deciding afresh in the light of the directions given above, preferably within two months from the date of receipt of the order.
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