Friday, 8 April 2022

Bank of Baroda Vs. Ms. Divya Jalan - There is no provision in the code which envisages the concept of legal heirs stepping into the shoes of the deceased Personal Guarantor.

 NCLT Kolkata (11.02.2022) in Bank of Baroda Vs. Ms. Divya Jalan [CP (IB) No. 363/KB/2021] held that;

  • Firstly, as defined in section 5 (22) – personal guarantor refers to an individual who gives surety in a contract of guarantee on behalf of the Corporate Debtor.

  • A personal guarantor to a Corporate Debtor is a person against whom guarantee has been invoked and there is outstanding dues left, partly or fully. The definition does not include the ‘legal heirs’.

  • However, there is no provision in the code which envisages the concept of legal heirs stepping into the shoes of the deceased Personal Guarantor.

  • In this instant case the petitioner can take appropriate steps to recover the guaranteed amount from the assets/estates of the deceased Personal Guarantor rather than the personal assets of the legal heirs of the Personal Guarantor


Excerpts of the order;

# 1. The Court convened via video conference.

 

# 2. Under consideration is a Petition CP (IB) No. 363/KB/2021 filed under section 95(1) of the Insolvency and Bankruptcy Code, 2016 (‘Code’) read with rule 7(2) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution process for Personal Guarantors to Corporate Debtor) Rules, 2019 (‘Personal Guarantors Rules’) and regulation 4(2) of IBBI (Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Regulations, 2019 (‘Personal Guarantors Regulations’) filed by Bank of Baroda, Stressed Asset Management Branch (SAMB) (‘Petitioner’) a Body Corporate constituted under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, for initiating the Insolvency Resolution Process (‘IR Process’) against viz., Ms. Divya Jalan, legal heir of Personal Guarantor, late Sandeep Kumar Jalan, residing at Saket 14, Dover Park, Kolkara – 700019 (‘Respondent).

 

# 3. Kilburn Chemicals Limited [CIN L24117WB1990PLC199409] (‘Corporate Debtor’) had approached the Petitioner to provide credit facilities for setting up of Rutile Grade Titanium Dioxide manufacturing plant. Thereafter, a term loan consortium Agreement was executed on 14 January, 2016, further amended on 05 November, 2016, was executed between the Corporate Debtor, Petitioner and State Bank of India (‘SBI’)

 

# 4. At the request of the Corporate Debtor, the Petitioner extended the credit facilities by way of working capital cash credit. Subsequently, an Agreement dated 27 April, 2018 was executed the Corporate Debtor, Petitioner and SBI (‘Agreement’). The Petitioner had sanctioned total credit facilities to a sum of Rs.103,90,00,000/- (Rupees One Hundred Three Crore Ninety Lakh only). The details of the Credit Facilities are as follows:

 

SL. No

Particulars of the Credit Facilities availed

by the Corporate Debtor

Limit (in crores)

1)

Term Loan

Rs.83.00

2)

Working Capital by way of Cash Credit 

Rs.20.00

3)

Bank Guarantee

Rs.0.90


TOTAL 

Rs.103.90

 

# 5. The Petitioner has filed this Petition through Mr. Gauri Shankar Bhaiya, Chief Manager, Bank of Baroda, Stressed Asset Management Branch (SAMB). In this factual conspectus, the Petitioner prays for initiation of Insolvency Resolution Processof the Personal Guarantor on failure to pay a sum of Rs.112,35,09,310/- (Rupees One Hundred Twelve Crore Thirty Five Lakh Nine Thousand Three Hundred Ten only) including unapplied interest, legal charges and others as on 30 October, 2021, against the personal guarantee.

Ld. Counsel appearing on behalf of the Petitioner submits as follows:

 

# 6. To avail the service of Credit Facilities two guarantees were executed by the Corporate Debtor. One of the guarantees was executed by the deceased Personal Guarantor, viz., Mr. Sandeep Kumar Jalan, residing at Saket, 14 Dover Park, Ballygunge, Kolkata –700019, vide dated 14 January, 20164 (Personal Guarantee Agreement).

 

# 7. The Petitioner had issued a demand notice on 13 August, 2021 under rule 7(1) of theCode, which was delivered to the legal heir of the deceased Personal Guarantor on 14December, 2020 as per tracking information placed at page 335 of the Petition.

 

# 8. Clause 21 and clause 24 (k) of the Personal Guarantee Agreements dated 14 January, 2016 and April 24, 2018 provides an exhaustive list of legal heirs of the Personal Guarantors. Further, the clause also states that in case of demise of the Personal Guarantor the Petitioner is entitled to recover dues of the Corporate Debtor from the legal heirs of the Personal Guarantors.

 

# 9. The Corporate Debtor has also executed security documents in favor of the Petitioner by way of 1st Pari-passu charge on the fixed assets of the project including land and building and hypothecation of all plant and machinery and other fixed assets and collateral security of property.

 

# 10. As per the Agreements, the Corporate Debtor and its guarantors were mandated to repay the outstanding sums for Term Loan facility and Cash Credit facility and Bank Guarantee. However, the Corporate Debtor and its guarantor failed to adhere to the terms of the Agreement and committed breach of terms and conditions. Hence, the account of the Corporate Debtor was declared as Non-Performing Assets (‘NPA’) on 31 December, 2018, as per the Reserve Bank of India guidelines. Subsequently, the account of the Corporate Debtor was transferred to Stressed Asset Management Branch (SAMB).

 

# 11. Thereafter, a Petition under Section 7 of the Insolvency and Bankruptcy Code was filed before this Adjudicating Authority and vide order dated 10 August, 2020 the Corporate Debtor was admitted into Corporate Insolvency Resolution Process. The Petitioner being one of the Creditor submitted its claim before the Interim-Resolution Professional amounting to Rs.1,05,03,75,271.85P and the same was admitted.

 

# 12. Further, Resolution Professional invited plans from the prospective Resolution Appllicant and the plan of Meghmani Organics Limited was approved by the Committee of Creditors with 100% voting rights.

 

# 13. In the meantime, due to the demise of the personal guarantor Mr. Sandeep Kumar Jalan, the Petitioner issued a demand notice dated 13 August, 2021, under rule 7(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution process for Personal Guarantors to Corporate Debtor) Rules, 2019, to the legal heirs of Mr. Sandeep Kumar Jalan.

 

# 14. On receiving such notice the legal heir of Mr. Sandeep Kumar Jalan replied vide letter dated 08 September, 2021, which is not tenable in the eye of law. Hence, this Application. 

Analysis and Findings

 

# 15. Upon perusal of the record, the question arising before this Adjudicating Authority is that ‘Whether Petitioner is entitled to recover dues of the Corporate Debtor from the legal heirs of the Personal Guarantors?’

 

# 16. With regard to the above contention it is pertinent to throw light on the following provisions/regulations from the Code:

  • (a) Firstly, as defined in section 5 (22) – personal guarantor refers to an individual who gives surety in a contract of guarantee on behalf of the Corporate Debtor.

  • (b) Secondly, as per regulation 3 (1)(a)(e) of Application to Adjudicating Authorty for Insolvency Resolution Process for Personal Guarantors to Corporate Debtor Regulation, 2019, clearly defines that a personal guarantor to a Corporate Debtor is a person against whom guarantee has been invoked and there is outstanding dues left, partly or fully. The definition does not include the ‘legal heirs’.

  • (c) Last but not the least as envisaged in section 238 of the Code and opined by Hon’ble Apex Court in a catena of Judgments. It is apparent that section 238 has over riding effects on laws inconsistent with the Code or any instrument having effect by virtue of such laws.

 

# 17. When a section 95 application is filed the assets of the Personal Guarantor is hit by moratorium and if we put the legal heirs of the deceased Personal Guarantor into the shoes of the Personal Guarantor then their personal assets will also get automatically hit by moratorium, which will cause grave prejudice to the rights of the third party. However, there is no provision in the code which envisages that the concept of legal heirs stepping into the shoes of the deceased Personal Guarantor.

 

# 18. In this instant case the petitioner can take appropriate steps to recover the guaranteed amount from the assets/estates of the deceased Personal Guarantor rather than the personal assets of the legal heirs of the Personal Guarantor. Further, the legislature is very much clear in defining the term ‘Personal Guarantor’, the Code talks about the estate/assets of the Personal Guarantor only.

 

# 19. Therefore, we hold that the instant application cannot be maintained against the legal heirs of the Personal Guarantor under the Code, and the remedies may lie elsewhere. Hence, clause 21 and clause 24 (k) of the Personal Guarantee Agreements dated 14 January, 2016 and April 24, 2018 is inconsistent with the definitions of the Personal Guarantor as defined in the Code.

 

# 20. In this view of the matter, C.P. (IB) No.363/KB/2021 is dismissed. The Petitioner is, however, at liberty to pursue other recovery measures available means under the law.

 

# 21. A certified copy of this order may be issued, if applied for, upon compliance with all requisite formalities.

 

# 22. File to be consigned to the records. 

 

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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.