NCLAT (24.01.2024) in UV Asset Reconstruction Company Ltd. Vs. UV Asset Electrosteel Castings Ltd. [Company Appeal (AT) (Insolvency) No. 975 of 2022] held that;
The authority which floats the contract or tender, and has authored the tender documents is the best judge as to how the documents have to be interpreted. If two interpretations are possible then the interpretation of the author must be accepted.
Whether any particular contractual promise is to be classified as a guarantee so as to attract all or any of the legal consequences to which I have referred depends upon the words in which the parties have expressed the promise.
Where the contractual promise can be correctly classified as a guarantee it is open to the parties expressly to exclude or vary any of their mutual rights or obligations which would otherwise result from its being classifiable as a guarantee.
Every case must depend upon the true construction of the actual words in which the promise is expressed.
From the above, it is clear that the contract of guarantee is a contract to perform the promise or discharge the liability of a third person in case of his default.
From the above, it is clear that the question as to whether the deed in question is a deed of guarantee or not depends upon the terms under which the guarantor binds himself. Under law, he cannot be made liable for more than what he has undertaken.
Reading the documents in their plain terms, the intent being clear, the same cannot be construed as letters of guarantee which necessarily requires, as per Section 126 of the Indian Contract Act, 1872, a promise to discharge the liability of a third person in case of his default.
It is also held that approval of a resolution plan relating to a corporate debtor does not operate so as to discharge the liabilities of personal guarantors (to corporate debtors).
The finding of the Adjudicating Authority that approval of Resolution Plan has led to extinguishment and effacement of the entire debt of ESL has to be held to be finding qua the Corporate Debtor only.
Excerpts of the order;
This Appeal by the Financial Creditor challenges the order dated 24.06.2022 passed by National Company Law Tribunal, Cuttack Bench, Cuttack rejecting Section 7 Application filed by the Appellant against Electrosteel Castings Limited (hereinafter referred to as “ECL”).
# 2. Brief facts giving rise to this Appeal are:
(i) Electrosteel Steels Limited (hereinafter referred to as “ESL”) was sanctioned a Financial Assistance by SREI Infrastructure Finance Limited (hereinafter referred to as “SREI”) for a sum of Rs.500 crores on 26.07.2011. A rupee Loan Agreement was executed between SREI and ESL. Clause (d) of Schedule IV of the Loan Agreement placed an obligation on the Promoter – “to arrange for infusion of funds in a form and manner acceptable to SREI at the end of each financial year to comply with the Financial Covenants in case of breach of such Financial Covenants”
(ii) The Respondent – Electrosteel Castings Limited (ECL), Promoter of the ESL, holding 34.40% shareholding in ESL entered into a Deed of Undertaking on 27.07.2011, which was entered between ESL, SREI and ECL, where the ECL was defined as ‘Obligor’ and Clause 2.2 of the Deed of Undertaking provided that “In the event the Borrower is not in a position to comply with the Financial Covenants provided in the Financing Documents, or has breached such Financial Covenants, the Obligors will arrange for the infusion of such amount of fund into the Borrower such that the Borrower is in a position to comply with the abovementioned Financial Covenants.”
(iii) A Supplementary Agreement was also entered into on 21.11.2011 among ESL, SREI and ECL whereunder ECL was referred to as ‘Obligor’ and agreed to create a mortgage on its land situated in Ponneri, Tamil Nadu in favour of SREI. On 23.11.2011, pursuant to Deed of Declaration, an exclusive mortgage over the factory land of the ECL at Elavur Village, Ponneri Taluk, Chingleput District, Tamil Nadu by deposit of the Title Deed was created by ECL.
(iv) In the year 2013, ESL committed default in repaying the Financial Facilities . On a request by ESL, SREI restructured the loan. On 30.06.2017/20.07.2017, the ECL made a payment of Rs.38 crores to SREI on behalf of ESL.
(v) On 21.07.2017, Section 7 Application filed by State Bank of India against ESL was admitted by NCLT, Kolkata. In the CIRP process of ESL, the SREI filed its claim of INR 577,90,00,000/- which was admitted by Resolution Professional (“RP”). In the CIRP, the Resolution Plan submitted by Vedanta was approved on 29.03.2018. The Adjudicating Authority vide order dated 17.04.2018 approved the Resolution Plan submitted by Vedanta Limited in respect of ESL.
(vi) As per the Resolution Plan the total admitted debt of Financial Creditors of ESL was classified as Sustainable Debt and Unsustainable Debt. Sustainable debt was to be paid upfront to the Financial Creditor with the funds arranged by the Resolution Applicant. Total admitted financial debt of the SREI was Rs.577.90 crores. The SREI received an amount of INR 241.71 crores as upfront payment under the Resolution Plan. The Resolution Plan proposed conversion of Unsustainable Debt to new equity shares of ESL having a face value of INR 10/- each and issuance of the same to the Financial Creditors in proportion to their respective portion of the Unsustainable Debt. SREI received 67,23,710 equity shares of ESL having face value of INR 10 per share. On 25.06.2018 SREI issued a No Objection Certificate to ESL confirming the receipt of an amount of INR 241,71,84,839.18 due and payable as the upfront payment by Vedanta Limited and the allotment of 67,23,710 equity shares in ESL.
(vii) On 30.06.2018, SREI executed an Assignment Deed in favour of UV Asset Reconstruction Company Limited (Appellant herein) assigning the loans (i.e. all Amounts in or payable under the Financing Documents by ESL to SREI) as also all rights, title and interest in respect of Financing Documents. The Respondent ECL after coming to know about the Assignment, wrote the Appellant that entire debt owed by ESL to SREI stood discharges as a result of payment in cash and equity transfer in favour of SREI in terms of the approved Resolution Plan.
(viii) On 27.12.2018, the Appellant issued Notice under Section 13 (2) of the SARFAESI Act, 2002 against the ECL. Notice under Section 13(4) was also issued on 19.06.2019.
(ix) The ECL filed an Application No.4322 of 2019 before the Madras High Court under Section 12 of the Madras High Court Letters Patent seeking leave to institute a suit against the Appellant; seeking a declaration that the Assignment Agreement is bad, invalid, illegal, void ab initio and no legal effect and seeking permanent injunction restraining the Appellant and SREI from taking any action on the basis of Assignment Agreement. The Learned Single Judge of the Madras High Court on 20.09.2019 rejected the Application filed by Respondent holding that the suit was not maintainable. However, liberty was granted to the Respondent to approach the Tribunal for suitable reliefs. The ECL filed an Appeal being OSA No.292 of 2019 assailing the order of Single Judge. On 05.11.2019, Division bench of the Madras High Court granted an interim protection to the ECL.
(x) On 24.04.2021, the Appellant filed an Application under Section 7 against ECL before the National Company Law Tribunal, Cuttack Bench being C.P. No. (IB)16/CB/2021. The Division Bench of the Madras High Court dismissed the Appeal on 13.08.2021 holding that the jurisdiction of a civil court was ousted under Section 34 of the SARFAESI Act. ESL Filed an Appeal before the Hon’ble Supreme Court being Civil Appeal No.6669 of 2021, challenging the Division Bench’s order of the Madras High Court, which Civil Appeal was dismissed by the Hon’ble Supreme Court on 26.11.2021, observing that it will be open to the ECL to initiate appropriate proceedings before the DRT under Section 17 of the SARFAESI Act. ECL filed an Application under Section 17 of the SARFAESI Act before DRT, Chennai in December 2021.
(xi) Before the Adjudicating Authority, ECL filed an Application in Section 7 Petition seeking order of stay or keeping proceedings before it in abeyance until the matter filed ECL before the DRT is disposed of. The said Application was dismissed by the Adjudicating Authority. The Respondent filed Appeal being Company Appeal (AT) ((Ins.) No.159 of 2022 against the said order, which Appeal was also dismissed by this Tribunal.
(xii) DRT Chennai vide order dated 08.04.2022 dismissed the Application filed by ECL under Section 17 of the SARFAESI Act. The Appeal against the order dated 08.04.2022 before DRAT was filed, which is said to be pending.
(xiii) the Adjudicating Authority heard the parties on Section 7 Application and by the impugned order dated 24.06.2022, rejected Section 7 Application on the ground that Respondent – ECL was not a guarantor to the facilities availed by ESL from SREI and as such there was no financial debt, which was owed by the ECL to the Appellant. The Adjudicating Authority further held that due to approval of Resolution Plan of ESL and payment of debt to Financial Creditors under the Resolution Plan, liability of ECL has also extinguished. The order dated 24.06.2022 is under challenge in this Appeal by the Appellant, who were Applicant in Section 7 Application.
# 3. We have heard Shri Krishnendu Datta, learned Senior Counsel appearing for the Appellant and Shri Mihir Thakur, learned Senior Counsel with Shri Pulkit Deora, learned Counsel appearing for the Respondent.
9. From the submissions of learned Counsel for the parties and materials on record, following two questions arise for consideration in this Appeal:
(I) Whether the ECL is a ‘guarantor’ to the SREI for the financial facilities availed by ESL from SREI?
(II) Whether approval of ESL’s Resolution Plan by the Adjudicating Authority led to extinguishment of entire debt of ESL and no claim would lie against Respondent as guarantor/ third party surety in respect of the financial facilities availed by the ESL?
Question No.(I)
# 10. We may first notice the relevant clauses of Rupee Loan Agreement dated 26.07.2011, Deed of Undertaking, Warranty and Indemnity dated 27.07.2011 and Supplementary Agreement dated 21.11.2021 to find out as to whether the Respondent stood as ‘guarantor’ to the loan sanctioned by SREI to ESL.
# 11. The Rupee Loan Agreement was entered between SREI and ESL. The Respondent was Promoter of ESL to which there is no dispute. There were certain undertakings given by Promoter in the Rupee Loan Agreement, which is contained in Schedule IV under the heading ‘Other Terms and Conditions’. Schedule IV, with regard to the Promoter undertaking provides “To arrange for the infusion of funds in a form & manner acceptable to SREI at the end of each financial year to comply with the Financial Covenants in case of breach of such Financial Covenant”. The Deed of Undertaking, Warranty and Indemnity was executed on the next day, i.e., 27.07.2011 between SREI, ESL and ECL. The Appellant has placed reliance on Clause 2.2 – Financial Covenants, which is as follows:
“2. 2. Financial Covenants
In the event the Borrower is not in a position to comply with the Financial Covenants provided in the Financing Documents, or has breached such Financial Covenants, the Obligors will arrange for the infusion of such amount of fund into the Borrower such that the Borrower is in a position to comply with the abovementioned Financial Covenants.”
12. In reference to Clause 2.2, learned Counsel for the Respondent has also referred to and relied on Clauses 2.3.1 and 2.3.2, which are as follows:
“2.3.1. such additional funds as and when provided/ arranged by the Obligors to the Borrower in terms of sub-clause 2.2 above, shall be in such form i.e. by way of equity capital, unsecured loans, deposits and on such terms and conditions as may be acceptable to SREI;
2.3.2. in the event of such funds being provided/arranged by the Obligors to the Borrower by way of unsecured loans or deposits to the Borrower as stated above, the Obligors shall not, without the prior written approval of SREI, demand or withdraw such funds or any part thereof so long as any moneys remain outstanding to be payable by the Borrower to SREI under the Financing Documents;”
13. The name of Respondent No.1 was mentioned as ‘Obligor’ in Schedule 1. A Supplementary
Agreement was also entered between ESL, SREI and ECL, which contemplated modification of Facility Agreement as specified in Schedule-3. In Schedule 3 with reference to ‘Security Article’ under revised term 3.1.6, provides as follows:
“SCHEDULE III
Revised Terms
3.1.6 First mortgage on land owned by Electrosteel Castings Limited admeasuring Acre 102.3 Cents with factory building thereon together with all benefits and advantages accruing thereon at Elavur Village, Ponneri Taluk, Chinglepct District within the Sub-Registration District of Ponneri in the State of Tamil Nadu.”
# 14. In pursuance of the Supplementary Agreement, Respondent – ECL executed mortgage of immovable property by depositing of title with respect to land at village Elavur, Ponneri Taluk, Chinglepct District, state of Tamil Nadu. The question to be answered is as to whether the Clauses of Rupee Loan Agreement, Deed of Undertaking and Supplementary Agreement cast an obligation on guarantor/ Respondent to discharge the liabilities of ESL to SREI in reference to Rupee Loan Agreement. Section 126 of the Contract Act, defines ‘Contract of guarantee’ in following words:
“126. “Contract of guarantee”, “surety”, “principal debtor” and “creditor”.—A “contract of guarantee” is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the “surety”; the person in respect of whose default the guarantee is given is called the “principal debtor”, and the person to whom the guarantee is given is called the “creditor”. A guarantee may be either oral or written.
# 15. When we look into Clause 2.2 as extracted above it placed an obligation on the Promoter to arrange for the infusion of funds in a form & manner acceptable to SREI at the end of each financial year to comply with the Financial Covenants in case of breach of such Financial Covenant. As per Clause 2.3.1 and 2.3.2, additional funds, which were to be provided by the Promoters/ Borrower were by way of equity capital, unsecured loans or deposits. Obligation was on Respondent to arrange the infusion of funds to ESL. No obligation was undertaken by ECL to discharge the liabilities accrued on ESL as per Financial Covenants to the SREI. The SREI had no recourse against the ECL in event of ESL not fulfilling the Financial Covenants. The obligation was taken by Promoters to infuse funds in the ESL, which cannot be read to mean that any guarantee was given to the SREI by ECL to discharge the obligation of ESL. There is a contemporaneous letter dated 26.07.2011 issued by SREI on same day on which Rupee Loan Agreement was executed by SREI and ESL. In the letter, which was issued after sanction letter dated 26.07.2011 to the Respondent, following was stated:
“We would like to further confirm that, as on date, as per the terms of the Sanction Letter and other Financing Documents, no personal guarantee from Mr. Umang Kejriwal or corporate guarantee from Electrosteel Castings Limited is required for security the Facility.”
# 16. The above letter clarifies that Sanction Letter does not contemplate any corporate guarantee from Respondent. The letter was issued on the same day and clearly reflects the interpretation of Rupee Loan Agreement. It is also relevant not to notice that the Rupee Loan Agreement dated 26.07.2011 in Schedule IV as noted above contemplated an undertaking by Promoter. The letter dated 26.07.2011 was issued after fully knowing the contents of Rupee Loan Agreement dated 26.07.2011 by the SREI. The aforesaid clearly indicates that undertaking as contemplated in Schedule IV was not an undertaking as corporate guarantee by Respondent . It is well settled that author of documents is best judge and knows the true nature and content of document and documents has to be interpretated as author interpreted. We may refer to judgment of Hon’ble Supreme Court in (2020) 16 SCC 489 – Silppi Constructions Contractors v. Union of India, where in paragraph 20, following has been laid down:
“20. The essence of the law laid down in the judgments referred to above is the exercise of restraint and caution; the need for overwhelming public interest to justify judicial intervention in matters of contract involving the State instrumentalities; the courts should give way to the opinion of the experts unless the decision is totally arbitrary or unreasonable; the court does not sit like a court of appeal over the appropriate authority; the court must realise that the authority floating the tender is the best judge of its requirements and, therefore, the court’s interference should be minimal. The authority which floats the contract or tender, and has authored the tender documents is the best judge as to how the documents have to be interpreted. If two interpretations are possible then the interpretation of the author must be accepted. The courts will only interfere to prevent arbitrariness, irrationality, bias, mala fides or perversity. With this approach in mind we shall deal with the present case.”
# 17. Learned Counsel for the Respondent also placed reliance on Information Memorandum issued in CIRP of the ESL, where there was no mention of guarantee. The learned Senior Counsel for the Appellant has tried to counter the said submission on the ground that Information Memorandum was issued with a disclaimer that Information Memorandum is prepared on the basis of materials and documents provided by Ex-Management of ESL. What was understood by ESL with regard to Financial Facility advanced by SREI was also a relevant fact and how the ESL understood the Financing Document, cannot be said to be irrelevant. The Information Memorandum, which was prepared by RP, an Officers appointed by Adjudicating Authority, after perusal of all the documents did not find any guarantee as is now sought to be contended by the Appellant. We, thus, cannot ignore the Information Memorandum, which does not mention about guarantee of ECL as one of the documents. It is also relevant to notice the Assignment Deed executed by SREI in favour of UVARC, also did not mention any guarantee by ECL in reference to Rupee Loan Agreement between SREI and ESL. The Assignment Agreement dated 30.06.2018 in favour of UVARC is on the record, wherein in Clause (c), following has been stated:
(C) The Assignor is desirous of assigning to the Assignee, the Loans disbursed under the aforesaid Financing Documents together with all its rights, title and interest in the Financing Documents and any underlying Security Interests, pledges and/ or guarantees in respect of such Loans. Further, the Assignee on the basis of the Due Diligence Exercise is desirous of acquiring/ purchasing the Loans together with all the rights, title and interest of the Assignor in the Financing Documents and any underlying Security Interests, pledges and/or guarantees in respect of such Loans, upon the terms and subject to the conditions hereinafter mentioned and as envisaged under Section 5(1)(b) of the SARFAESI.”
Clause (E), refers to Financing Documents, which is as follows:
(E) The Parties are desirous of setting forth the terms and conditions, representations, warranties, covenants, and principles relating to the assignment of the. Loans and all the rights, title and interest under the Financing Documents and to the underlying Security Interests, pledges and / or guarantees in respect of such Loans by the Assignor to the Assignee.”
“2.3.1. such additional funds as and when provided/ arranged by the Obligors to the Borrower in terms of sub-clause 2.2 above, shall be in such form i.e. by way of equity capital, unsecured loans, deposits and on such terms and conditions as may be acceptable to SREI;
2.3.2. in the event of such funds being provided/arranged by the Obligors to the Borrower by way of unsecured loans or deposits to the Borrower as stated above, the Obligors shall not, without the prior written approval of SREI, demand or withdraw such funds or any part thereof so long as any moneys remain outstanding to be payable by the Borrower to SREI under the Financing Documents;”
# 18. It is relevant to notice that Clause (i) also refer to any writings creating/ evidencing a Security Interest, pledge and/ or guarantee. Reference to Schedule-1 was given and in the Schedule-1, ‘details of guarantor / coborrower’ is mentioned, which is as follows:
19. It is also relevant to notice that in Column 10, ‘Details of Security Documents’, List of Documents, were also mentioned, which contained the Deed of Undertaking, Warranty & Indemnity, which was separately mentioned in Column, 10, which is as follows:
# 20. The above Assignment by SREI to UVARC indicate that in Rupee Term Loan and in Deed of Undertaking, ECL was never treated as guarantor of the loan. In the Assignment to which both SREI and UVARC are party, against the Column ‘Details of guarantor/ co-borrower’ it is mentioned ‘Nil’. The Deed of Assignment, which is genesis of birth of Appellant, throws considerable light on nature of transaction between the parties and the Appellant, cannot be heard to contend that non-mention of guarantee in the Deed of Assignment is irrelevant. We, thus, are of the view that Assignment Agreement, Schedule-1, did not mention name of ECL as guarantor in reference to Rupee Loan Agreement is a relevant fact and proves that ECL was not the guarantor to the Rupee Loan Agreement.
21. The learned Counsel for both the parties in support of their submissions have placed reliance on large number of judgments, which also need to be considered.
# 22. The learned Senior Counsel for the Appellant has placed reliance on few English cases to support his submission that clauses of an Agreement where guarantors undertake debt/ obligation of Principal Borrower, which guarantee is called “see to it” guarantee is also a guarantee and the transaction documents in the present case specially Deed of Undertaking executed by Respondent is “see to it” guarantee. The learned Senior Counsel for the Appellant has placed reliance on judgment of House of Lords in Moschi vs. KEP Air Services Ltd. and Ors. – 2 W.L.R. 1175. In the above case, the Appellant before the House of Lords has given a personal guarantee for performance by Rolloswin Investments Ltd. On breach of said guarantee an action for damages was brought, which was allowed. Appeal filed against allowing the damages claim was dismissed by the House of Lords. The clause, which came for consideration as extracted in the judgment and noticed in the judgment is Clause XIII, which is as follows:
“(XIII) In further consideration of the above Mr. Moschi has personally guaranteed the performance by Rolloswin Investments Limited of its obligation to make the payments at the rate of £ 6,000 per week together with the final payment of £4,000 as hereinbefore set out so however that Mr. Moschi’s total obligation under this guarantee shall not exceed the total sum of £40,000 of which approximately £3,820 has already been paid as aforesaid”.
# 23. The learned Senior Counsel for the Appellant has relied on judgment of Lord Diplock, where the obligation undertaken by the Appellant was held to be as “see to it” obligation. The House of Lords held that every case must depend upon the true construction of the actual words in which the promise is expressed. The House of Lords made following observations in the above judgment:
“It follows from the legal nature of the obligation of the guarantor to which a contract of guarantee rise that it is not an obligation himself to pay a sum of money to the creditor, but an obligation to see to it that another person, the debtor, does something; and that the creditor’s remedy for the guarantor’s failure to perform it lies in damages for breach of contract only. That this was so, even where the debtor’s own obligation that was the subject of the guarantee was to pay a sum of money is clear from the fact that formerly the form of action against the guarantor which was available to the creditor was in special assumpsit and not in indebitatus assumpsit: Mines v. Sculthrope (1809) 2 Camp. 215.
The legal consequence of this is that whenever the debtor has failed voluntarily to perform an obligation which is the subject of the guarantees the creditor can recover form the guarantor as damages for breach of his contract of guarantee whatever sum the creditor could have recovered from the debtor himself as a consequence of that failure. The debtor’s liability to the creditor is also the measure of the guarantor’s.
Whether any particular contractual promise is to be classified as a guarantee so as to attract all or any of the legal consequences to which I have referred depends upon the words in which the parties have expressed the promise. Even the use of words “guarantee” is not in itself conclusive. It is often used loosely in ordinary commercial dealings to mean an ordinary warranty. It is sometimes used to mis-describe what is in law a contract of indemnity and not a guarantee. Where the contractual promise can be correctly classified as a guarantee it is open to the parties expressly to exclude or vary any of their mutual rights or obligations which would otherwise result from its being classifiable as a guarantee. Every case must depend upon the true construction of the actual words in which the promise is expressed.”
# 24. The submission of learned Counsel for the Respondent is that the above judgment of the House of Lords is distinguishable and not attracted, since the Guarantee Agreement between the parties is not “see to it” guarantee. In the present case, it is clear that ECL has not agreed to be liable to see to it that ECL discharges its debt obligations towards SREI, rather the obligation undertaken by the ECL was limited to enabling ESL to discharge it own obligations by arranging for infusion of funds by way of equity/ debt. The Clause-XIII, which came for consideration in Moschi’s case (supra) indicate that Moschi has personally guaranteed the performance of Rolloswin Investments Ltd. of its obligation. In the present case, the ECL has undertaken only to infuse funds. The relationship between ECL and ESL as per guarantee agreement is not one of guarantor and principal debtor. Further, in the judgment of Moschi’s case, what was held that in case of breach of agreement liability is of damages. As noted above, it was held by House of Lords that every case must depend upon the true construction of the actual words in which the promise is expressed. As noted above, clauses of agreement have to be interpreted on the basis of contemporaneous understanding of the parties and subsequent actions. In the present case, we have noticed that the SREI never contemplated that any kind of guarantee was given by Respondent-ECL.
30. The learned Counsel for the Respondent in support of his submissions has relied on judgment of Bombay High Court, Karnataka High Court and Delhi High Court. The learned Counsel for the Respondent has relied on judgment of Bombay High Court in Yes Bank Limited v. Zee Entertainment Enterprises Limited and Ors. – 2020 SCC OnLine Bom 11763. In the above case, Letter of Comfort was claimed to be a guarantee given on behalf of Zee Entertainment Enterprises Ltd. In paragraph 32 the Court has noticed the security document in third column and following was noticed:
# 31. The Bombay High Court examined the Letter of Comfort, which came for consideration and held that support in form of infusion of equity/ debt into ATL, does not amount to guarantee. In paragraph 50 to 53, following was held:
XXXXX
53. It is also equally clear that the conduct of the parties is always a guide to the construction of contracts. I note this briefly because, until its notice of 31 March 2020 – coincidentally, very soon after its Board was reconstituted by the Central Government – YES Bank does not seem to have ever approached the LoC as a ‘guarantee’ by Zee for repayment of the LELM debt. Instead, the previous notices indicate that it asked Zee to do precisely what the LoC says : fund ATL to honour the by-then invoked Put Option.”
# 32. The above judgment support the submission of Respondent.
# 33. The next judgment relied by learned Counsel for the Respondent is of Karnataka High Court in United Breweries (Holding) Ltd. vs. Karnataka State Industrial Investment and Development Corporation Ltd. and Ors. – (2011) SCC OnLine Kar 4012. The relevant document, which came for consideration in the above judgment is noted in paragraph-4, which is as follows:
“4. In order to decide this matter, the relevant document to be considered is exhibit P14 which read thus:
“We understand you have sanctioned a corporate loan of Rs. 75 lakhs (rupees seventy five lakhs only) vide your letter ACCTS/CL/7842/95-96, dated February 29, 1996, to M/s. Dominion Chemical Company Appeal (AT) (Insolvency) No.975 of 2022 37 Industries Ltd., Hosur Road, Bommanahalli, Bangalore-560068.
M/s. Dominion Chemical Industries Ltd., is one of our associate companies. We hereby confirm that it our normal practice to see that all our associates companies meet their financial and contractual obligations and this end we will undertake all reasonable steps to ensure that M/s. Dominion Chemical Industries Ltd., conducts its operations efficiently to meet its obligations in the usual course of business.
We are convinced that the company concerned has the capabilities to fully cater to its financial commitments.”
34. The Letter of Comfort, which was examined by the Karnataka High Court was held not as a guarantee. In paragraph 6, 7 and 9, following was held:
“6. The said letter of comfort nowhere reveals that the appellant stood as guarantor for the loan disbursed by respondent No. 1 in favour of respondent No. 2. It merely states that the associate company (debtor company) will meet the financial and contractual obligations and that the appellant herein undertakes all reasonable steps to ensure that the debtor company conducts its operations efficiently to meet its obligations in the usual course of business. The comfort letter is more in the nature of recommendatory letter. If a person has not stood as guarantor or surety, he cannot be treated a guarantor or surety without there being a specific undertaking by him that he would discharge the liability of the third person, in case of his default. In this context, it is relevant to note the provisions of section 126 of the Indian Contract Act, 1872, which read thus: . . . . .
7. From the above, it is clear that the contract of guarantee is a contract to perform the promise or discharge the liability of a third person in case of his default. If the entire document in question, i.e., exhibit P14 is read as a whole, the same nowhere reveals that the appellant has entered into a contract or an agreement with respondent No. 1 to discharge the liability of respondent No. 2 herein (principal debtor) in case of its default.
9. From the above, it is clear that the question as to whether the deed in question is a deed of guarantee or not depends upon the terms under which the guarantor binds himself. Under law, he cannot be made liable for more than what he has undertaken. In our considered opinion, there is no ambiguity in exhibit P14. Under exhibit P14 the appellant has not undertaken that he would repay the loans of respondent No. 2, in case, if respondent No. 2 fails to discharge its liability. Therefore, the appellant cannot be made liable for more than what it has undertaken. It is not in dispute that respondent No. 1 herein has insisted on “letter of comfort” of appellant herein while disbursing the loan in favour of respondent No. 2 herein. Accordingly, the appellant herein being the holding company has given letter of comfort as suggested by the first respondent.”
# 35. The Karnataka High Court held that the Agreement nowhere reveals that the Appellant stood as guarantor for the loan disbursed by Respondent No.1 in favour of Respondent No.2 in case of default. In the facts, of the present case also, there is no undertaking by Respondent No.1 to discharge liability of ESL and that it would repay the loan of ESL in case of ESL fails to discharge its liability.
# 36. The learned Counsel for the Respondent has also relied on Delhi High Court judgment in Aditya Birla Finance Limited vs. Siti Networks Limited and Ors. – (2023) SCC OnLine Del 1290. In paragraph 26 of the judgment, the letter, which was claimed to be a guarantee has been extracted, which is as follows:
“26. It is stated that pursuant to this, the respondent Nos. 2 and 3 issued the alleged Letters of Guarantee dated June 26, 2018 to the petitioner, inter alia stating the following:
a. “We are aware that Aditya Birla Finance Limited (ABFL) has sanctioned and disbursed a Rupee Term Loan Facility of INR150,00,00,000 (Rupees One Hundred and Fifty Crore) [-Facility”] to our group company, Siti Networks Limited, pursuant to Credit Arrangement Letter dated January 16, 2017 bearing reference number ABFL/PFSG/ CAL/000894, Facility Agreement dated February 23, 2017 and other transaction documents in connection therewith.
b. Pursuant to our discussions, we hereby assure you and confirm that we shall ensure that Siti Network Limited services and repays the Facility on the relevant due dates.” (Emphasis Supplied)”
# 37. The Delhi High Court examined the said letter and in paragraphs 237 and 238 returned the following findings:
“237. In the case in hand, on perusal of the letters dated June 26, 2018, it can be seen that there is no assurance in the letters that respondent Nos. 2 and 3 shall pay the credit facility to the petitioner on the failure of respondent No. 1 to repay the petitioner. In the absence of such stipulation the letters do not meet the requirement of Section 126 of the Indian Contract Act, 1872. This I say so because the letter only states that the respondent Nos. 2 and 3 shall assure and confirm that the petitioner is repaid the facilities on the relevant due dates.
238. Reading the documents in their plain terms, the intent being clear, the same cannot be construed as letters of guarantee which necessarily requires, as per Section 126 of the Indian Contract Act, 1872, a promise to discharge the liability of a third person in case of his default.”
# 38. The Delhi High Court held that the letter cannot he held to be a guarantee within the meaning of Section 126 of the Indian Contract Act. There was no promise to discharge the liability of a third person in case of default, which is fully applicable in the present case.
# 39. The learned Senior Counsel for the Appellant also supported his submission on the basis of alleged admission of Respondent No.1 in different judicial proceedings. It is submitted that Respondent No.1 having admitted before Madras High Court as well as before the Hon’ble Supreme Court that he is a guarantor of ESL, he cannot be allowed to take a different stand in the proceeding before the Adjudicating Authority. Respondent No.1 is fully bound by its admission made before the Madras High Court and Hon’ble Supreme Court.
45. From the aforesaid affidavit, it is clear that it was pleaded that in event the ESL fail to repay the credit facilities to SREI, the SREI has right to enforce the security interest created over the scheduled properties. It is also relevant to notice that issue which was before the Madras High Court was as to whether the leave should be granted to Respondent No.1 to institute a suit. Leave was declined on the ground that as per provisions of SARFAESI Act, suit is barred. The question as to whether Respondent No.1 stood ‘guarantor’ to the Financial Facilities extended by SREI to ESL was neither gone into, nor decided. The learned Counsel for the Respondent has rightly referred to following observations of the Hon’ble Supreme Court in the SLP, which was filed against the order of the Madras High Court, refusing to institute the suit, where the Hon’ble Supreme Court observed following in paragraph-9:
“It is made clear that we have not expressed anything on merits in favour of either of the parties”
# 46. In view of the above, we are of the considered opinion that the submission of the Appellant cannot be accepted that there was clear and categorical admission of Respondent No.1 in the pleadings before Madras High Court and the Hon’ble Supreme Court that Respondent No.1 stood guarantor of the Financial Facilities extended by SREI to ESL. As noted above, the pleadings made in those proceedings have to be looked into the background that Application for Leave was filed in the Madras High Court seeking leave to institute a suit, challenging the proceedings initiated by UVARC under SARFAESI Act. Admittedly, Respondent No.1 mortgaged its immovable property as per the Supplementary Agreement as noted above and pleadings have to be looked into the background that mortgage was made by Respondent No.1 of his immovable property to secure the Facilities.
# 47. The issue directly arose in proceeding under Section 7, as to whether Respondent No.1 stood guarantor to SREI in reference to Financial Facilities extended to ESL, which has been answered by the Adjudicating Authority taking into consideration all relevant facts. Neither the issue was decided in proceedings before Madras High Court or by the Hon’ble Supreme Court, nor any such admission can be pressed into service as claimed by the Appellant. The Adjudicating Authority in the impugned order after considering all facts and circumstances of the present case has rightly come to conclusion that Respondent No.1 cannot be held to be guarantor to the Financial Facilities extended by Financial Creditor to the ESL. In paragraph 11 of the judgment of the Adjudicating Authority, detailed consideration and reasons have been given for holding that Respondent No.1 is not guarantor of the Financial Facilities. We record our concurrence in the above reference in the light of what have been stated above by us.
Question No.(II)
# 48. The findings recorded by Adjudicating Authority that after approval of Resolution Plan, entire debt stood extinguished, has been questioned by the Appellant in this Appeal. The Adjudicating Authority in the impugned order with regard to debt extinguishment has considered the issue under heading (C). The question framed under heading (C) is as follows:
“C. Whether the approval of the Resolution Plan has led to extinguishment and effacement of the entire debt of ESL (including the liability owed by the CD) and thus there is no surviving debt which could be assigned by SREI to the FC – in other words, there is no debt for which there could be a default”
# 49. In paragraphs 15 and 16 of the judgment the Adjudicating Authority has recorded following finding:
15. Therefore, going by the aforesaid facts, it is evident that in terms of the Resolution Plan approved by the Kolkata bench of this Tribunal, the entire claim of SREI gets discharged at the Step 1 under the resolution plan. FC has further argued during the hearing that aforesaid Step 1 is a dummy step and the ultimate effect on their claim shall come into effect after Step 2, wherein the face value of shares gets reduced from Rs.10/- to Rs.0.20. However, this Tribunal notes that such capital reduction has been effected in terms of the approved resolution plan. Step 2 is a subsequent step which can be effected only after completion of Step 1 and at Step 1 level only all the sustainable as well as unsustainable debt of the financial creditors including that of SREI gets discharged. Therefore, once the sustainable and unsustainable debts have been discharged as aforesaid at Step 1 level only, FC cannot make a claim based on capital reduction implications, which is a subsequent step in terms of the approved resolution plan. Since, without implementing step 1, the step 2 cannot be implemented in terms of the Resolution Plan, therefore, the claim of FC that on conversion of the balance debt of ESL into enquiry shares under the Resolution Plan on 06.06.2018, SREI did not receive any equity shares of Rs.10/- for its entire share of the balance debt being Rs.336.18 Crore is not true as is evident from the documents and relevant details produced by the CD. Accordingly, based on the aforesaid terms of the resolution plan we agree with the contention of the CD that approval of the Resolution Plan has led to extinguishment and effacement of the entire debt of ESL.
16. With the aforesaid discussions we conclude on this aspect that all debts owed by ESL, the principal borrower, stood paid and all liabilities stood extinguished by virtue of an approved and binding resolution plan under which such payment has been made by the successful resolution applicant Vedanta, through a combination of cash and equity. SREI having accepted the payment in cash and having been allotted equity proportionate to its balance debt, all debt owed to SREI (and consequently to FC) stood satisfied/ extinguished.”
# 50. Law on extinguishment of claim against personal guarantor and third party on approval of Resolution Plan has been settled by Hon’ble Supreme Court in its judgment in Lalit Kumar Jain vs. Union of India and Ors. – (2021) 9 SCC 321, where the Hon’ble Supreme Court held that approval of resolution plan does not ipso facto discharge a personal guarantor (of a Corporate Debtor) of her or his liabilities under the contract of guarantee. In paragraph 126 the Hon’ble Supreme Court held following:
“126. For the foregoing reasons, it is held that the impugned notification is legal and valid. It is also held that approval of a resolution plan relating to a corporate debtor does not operate so as to discharge the liabilities of personal guarantors (to corporate debtors). The writ petitions, transferred cases and transfer petitions are accordingly dismissed in the above terms, without order on costs.”
# 51. There cannot be any dispute to the proposition that after the approval of the Resolution Plan, entire debt of the Corporate Debtor against the Financial Creditor stand discharged and after approval of Resolution Plan, Financial Creditor can have no further recourse against the Corporate Debtor. But the question as to whether debt of personal guarantor or third party which arises out of different contract shall also automatically extinguished after the approval of Resolution Plan is a question to be answered in the present case. As noted above, the law laid down by the Hon’ble Supreme Court is categorical that approval of a Resolution Plan does not ipso facto discharge a personal guarantor. We have to look into the Resolution Plan to find out as to whether approval of Resolution Plan discharge guarantor or third parties or not. The learned Senior Counsel for the Appellant has relied on Clause 3.2 of the Resolution Plan, under heading ‘Proposal for Workmen and Financial Creditor’. Sub-clause (ix) of Clause 3.2 has been relied, which clearly mentions that Company shall stand discharged of any default, but on the same time it has been mentioned that any rights against any third party shall not be extinguished. It is relevant to extract following relevant part of sub-clause (ix):
“… Furthermore, the Company shall stand discharged of any default or event of default under any loan documents or other financing agreements or arrangements (including any side letter, letter of comfort, letter of undertaking etc.) and all rights/ remedies of the creditors shall stand permanently extinguished except any rights against any third party (including the Existing Promoter) in relation to any portion of Unsustainable Debt secured or guaranteed by third parties. Furthermore, it is hereby clarified that upon approval of the Resolution Plan by the NCLT,….”
# 52. The learned Senior Counsel for the Appellant has also referred to the Minutes of the 9th Meeting of the Committee of Creditors (“CoC”) dated 29.03.2018, where the CoC while putting the Resolution Plan submitted by Vedanta for voting, put a caveat in following words:
“The members took note of the final Restated Resolution Plan submitted by Vedanta to the RP and placed by the RP before the COC and agreed to vote on the same as part of Agenda Item No.15, but without prejudice to all the claims and rights of the CoC against the guarantors of Electrosteel Steels Limited and their respective assets and relevant securities provided by such Guarantors, or any other person, over their relevant assets, if any under the relevant existing Financing Documents.”
# 53. The learned Counsel for the Respondent has submitted that the above Minutes of the CoC are not relevant and it is the Resolution Plan, which is final and has to be looked into. There can be no dispute that terms and conditions of Resolution Plan are the final after approval of the CoC and have to be given fullest meaning and effect, but the Minutes of the CoC under which Resolution Plan was put for voting notices a caveat as noted above and it is in line with Clause 3.2 (ix), only reflects and reinforces the interpretation, which is being put in Clause 3.2 (ix). The Minutes of the CoC throws light on the true interpretation of Clause 3.2 (ix) and cannot be said to be not relevant. When Clause 3.2 (ix) of the Resolution Plan expressly provides that all the debt shall be extinguished against the Company, but it shall not extinguish against personal guarantor and third party, nothing more is required to be looked into. The Respondent cannot be allowed to raise the submission contrary to above Clause of the Resolution Plan, which has received approval.
# 54. The learned Senior Counsel for the Appellant has relied on judgment of this Tribunal in Company Appeal (AT) (Insolvency) No.172-173 of 2022 – Committee of Creditors of Ushdev International Limited through State Bank of India vs. Mr. Subodh Kumar Agrawal, Resolution Professional of Ushdev International Limited and Ors., where this Tribunal had occasion to consider a Resolution Plan, where securities were excluded. The question arose as to whether recourse can be made by the Financial Creditor against the excluded security. In the above case also, unpaid debt was converted into non-convertible redeemable preference shares and on which basis it was argued that excluded securities are no longer enforceable, repelling the contention, following was held in paragraph 16 and 18 of the judgment:
“16. The view which was taken by the Adjudicating Authority both in the Order dated 03.02.2022 approving the Resolution Plan and Clarification Order was that in view of the fact that unpaid debt shall stand converted into non-convertible redeemable preference share hence the excluded securities are no longer enforceable. The Adjudicating Authority held that excluded securities are subsumed under Clause 3.3.(iii). The Adjudicating Authority obviously referred to Paragraph 3.3. (e) (H) which provided that balance Financial Debt forming part of the Admitted Debt shall stand converted into non-convertible redeemable preference shares of the company which shall be issued to the Financial Creditors upon conversion of the unpaid debt. The above provision in the Plan for conversion into nonconvertible redeemable preference shares of the balance financial debt has no bearing on specific provisions in the plan by 3.3.(iii)(g) which clearly provided that excluded securities shall not be extinguished or waived under this Resolution Plan. When the Resolution Plan itself states that excluded securities shall not be extinguished under the Resolution Plan which is the provisions in the plan made in 3.3.(iii)(h). Further as noted in 3.3.(v) there was again clear provision that excluded securities shall continue to survive. When the plan is ready as a whole it is clear that excluded securities were to continue and no contrary intention is reflected in the plan. It is due to the above contents of the plan that Learned Counsel for the Resolution Applicant also does not dispute that the Plan never contemplated for extinguishment of excluded securities. Both the parties had argued that plan never contemplated for extinguishment of the excluded securities. The Adjudicating Authority thus committed error in making observation in issuing direction no. 1 of the Impugned Order under the heading ‘Reliefs, Concessions, and Dispensations. Hence the following part of the Direction no. 1 “ Hence, excluded securities are no longer enforceable as defined under the resolution plan” are deleted from the Order. The deletion of the above Direction No. 1 shall in no manner affect the approval of the Resolution Plan vide Order dated 03.02.2022. The Order dated 03.02.2022 is untouched with regard to other aspects of the Impugned Order.
18. In the clarification Order dated 03.02.2022, the Adjudicating Authority in Paragraph 29 has again observed that excluded securities are subsumed under Clause 3.3(iii)(c)(h) wherein the plan proposed that any balance financial debt forming part of admitted debt shall be converted into non-convertible redeemable preference share, for the reasons which we have noticed above, the above observations in Paragraph 29 of the Clarification Order also cannot be sustained and deserves to be deleted. The observations of the Adjudicating Authority in Paragraph 29 that ‘the approval of the resolution plan ipso facto discharge the enforcement of excluded securities’ is not in accordance with the Resolution Plan and is hereby deleted.”
# 55. The learned Counsel for the Respondent sought to distinguish the above case on the ground that in the said case, the question that securities were excluded was not an issue and all parties agreed for the said. Whereas in the present case, the issue is being raised by the Respondent and it is not an uncontested situation as was in Ushdev case. We are of the view that mere fact that Respondent is now raising objection, shall not make any difference and any objection by the Respondent, cannot be allowed to sustain, in view of the clear and categorical Clause 3.2 (ix) of the Resolution Plan. The judgment support the submission of the Appellant that even if the debt was converted into non-convertible redeemable preference shares, like equity shares in the present case, securities can be excluded.
# 56. We, thus, are of the view that in view of Clause 3.2 (ix) of the Resolution Plan, when read in the light of the CoC Meeting dated 29.03.2018, which throws considerable light on the meaning and content of Clause 3.2 (ix), the submission of the Respondent cannot be accepted that after approval of Resolution Plan, the entire debt stand extinguished and no recourse can be taken by the Financial Creditor against third party.
# 57. As noted above in Question (C), which was framed by the Adjudicating Authority was ‘Whether the approval of the Resolution Plan has led to extinguishment and effacement of the entire debt of ESL (including the liability owed by the CD)…’. Although, the Adjudicating Authority has returned the finding in paragraph 15 as noted above that “approval of Resolution Plan has led to extinguishment and effacement of the entire debt of ESL”, but no finding has been returned as to the liability owed by the Corporate Debtor also stood extinguished or not. In view of our observation as above specially in view of Clause 3.2 of the Resolution Plan, which clearly contemplated that all rights/ remedies of the creditors shall stand permanently extinguished against the Company, except any rights against any third party (including the Existing Promoter) in relation to any portion of unsustainable debt secured or guaranteed by third parties. The finding of the Adjudicating Authority that approval of Resolution Plan has led to extinguishment and effacement of the entire debt of ESL has to be held to be finding qua the Corporate Debtor only. We hold that there is no finding recorded by the Adjudicating Authority in the impugned order that after approval of the Resolution Plan, it would lead to extinguishment and effacement of the entire debt of third party including the Corporate Debtor.
# 58. In view of the foregoing discussions and conclusion, we uphold the order of Adjudicating Authority rejecting Section 7 Application filed by the Financial Creditor. However, finding on Question (C) has to be held to be confined to the debt extinguishment qua the Corporate Debtor only.
# 59. In result, the Appeal is disposed of in following terms:
(I) The impugned order of Adjudicating Authority dated 24.06.2022 rejecting Section 7 Application filed by the Appellant is upheld.
(II) The findings recorded by the Adjudicating Authority in respect of Question (C) in paragraph 15 that “approval of the Resolution Plan has led to extinguishment and effacement of the entire debt of ESL” has to confine to the finding qua Corporate Debtor only and the finding cannot be read to mean that approval of Resolution Plan has led to extinguishment and effacement of entire debt against third party as was clearly contemplated in Clause 3.2 of the Resolution Plan.
The parties shall bear their own costs.
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