2019 (12) TMI 1366 - Tri - Insolvency and Bankruptcy

Re-constitution of Committee of Creditors - Corporate Guarantee not invoked - whether the amount of uninvoked corporate guarantee could be considered as claim as per the provisions of Insolvency Bankruptcy Code 2016? - HELD THAT - The action of RP is not correct in law. Moreover having regard to the general importance of the issue we consider it pertinent to discuss few aspects which have got a great bearing on such types of matters. Unless a claim becomes due only then it gets converted into debt. Further debt must be due and payable in law or fact for occurrence of event of default. Thus there is a marked difference between both the terms i.e. claim and debt . Both have got different implications on various aspects/process which are undertaken under the Insolvency and Bankruptcy Code 2016 - an uninvoked corporate guarantee or counter corporate guarantee is of the nature of contingent liability which may or may not arise. As per established accounting practices as well as accounting standard in some cases where principal borrower might have defaulted but if the guarantee holder has not invoked such guarantee then a provision fair valuation on the basis of prudence or as per accounting standard AS 29 or Ind AS 37 may be made. Therefore even accounting and business practice do not recognise uninvoked corporate guarantee as a debt due or ascertained liability as on a particular date. Hence when viewed from this angle uninvoked corporate guarantee cannot be considered as debt due and payable. Admittedly corporate guarantee has been issued by the corporate debtor and it cannot be considered as a debt due and payable then the question arises as to whether this can be ignored at all? In our considered view this cannot be done for the simple reason that some financial commitment exists in law which may have implications for viability and implementation of resolution plan. Resolution applicant has to submit a plan which should be prepared on the basis of information memorandum provided to him by the resolution applicant in consultation/after approval of CoC. If details uninvoked corporate guarantee(s) are not disclosed then a situation may arise in future whereby the resolution applicant may not implement the resolution plan and back out in case guarantee is invoked. Meaning of the term financial debt owed - HELD THAT - This term has been used in Sec. 5(7) which defines who will be a financial creditor. Similarly in Sec. 5(20) operational creditor has been meant as a person to whom an operational debt is owed. In Sec. 3(11) debt has been defined as a liability obligation in respect of a claim which is due. Sec. 3(12) prescribes a situation of default on non-payment of debt which has become due and payable. Thus the rights of a person are obligations to other persons to that transaction hence debt due and payable by a person is debt owed to a person. Thus when the scheme of the Code is read as a whole it can be safely concluded that voting rights are to be determined only on the basis of financial debt owed. A complete mechanism has been provided in the Insolvency and Bankruptcy Code 2016 as to how and when claims become due and payable/debt owed and consequently how voting share of a financial creditor is to be determined. As stated earlier in the present case there is a violation of this mechanism - even if uninvoked corporate guarantee is found to be considered as claim the same cannot be taken into consideration for determining the voting share of a financial creditor. Whether the decision of the RP can be said to be in line with the scheme and objects of Insolvency and Bankruptcy Code 2016? - HELD THAT - The role of IRP/RP is very crucial. IRP has to constitute CoC as per the provisions of Sec. 18(1)(c) of Insolvency and Bankruptcy Code 2016. The IRP is also obliged to make every endeavour to protect and preserve the value of property of the corporate debtor and manage the operations of corporate debtor as a going concern. The RP is required to conduct CIRP and convene the meeting of CoC as well as to chair the same. As per Sec. 24(6) each creditor is required to vote with the voting share assigned to him based on the financial debt owed to such creditor. As per Sec. 24(7) the resolution professional has been given authority to determine the voting share to be assigned to each creditor in the manner specified by the Board. If resolution professional assigns higher voting share to any creditor then such creditor gets an added advantage. In the present case the facts have already been narrated and findings have been given as regard to both contentions of the applicant in his favour which also refers to mode and manner of process which has been adopted. The other facts are that in one of the meetings of the CoC this issue was discussed and it was agreed that for assigning voting shares one of rights RP would take a legal opinion which he has not done till date. The uninvoked corporate guarantee cannot be considered a claim as per the provisions of Code 2016 hence not to be concluded in the list of claims maintained and updated by the RP - Uninvoked corporate guarantee would also not be considered as a debt due and payable or financial debt owed to financial creditor hence the same would not be taken into consideration in determining voting share of financial creditor. This remains so assuming that a view is taken that uninvoked corporate guarantee is categorised as a claim. Application disposed off.

Summary

Issues Involved:
1. Whether the amount of uninvoked corporate guarantee could be considered as a claim under the Insolvency & Bankruptcy Code, 2016.
2. Whether the uninvoked corporate guarantee can be taken into consideration for determining the voting share of a financial creditor.
3. Whether the decision of the Resolution Professional (RP) aligns with the scheme and objects of the Insolvency & Bankruptcy Code, 2016.

Issue-wise Detailed Analysis:

1. Uninvoked Corporate Guarantee as a Claim:
The tribunal examined whether an uninvoked corporate guarantee could be considered a claim under the Insolvency & Bankruptcy Code, 2016. It was argued that the corporate debtor had given a corporate guarantee for a loan to Skipper Furnishings Pvt. Ltd., which had not been invoked, nor had the principal borrower defaulted. The tribunal referenced judicial decisions, noting that in the case of Export Import Bank of India, the guarantee had been invoked, making it factually different. The tribunal also considered the decision in Axis Bank Ltd. vs. Edu Smart Services Pvt. Ltd., which was overruled by a subsequent decision in Edelweiss Asset Reconstruction Company Ltd. vs. Orissa Manganese and Minerals Ltd., indicating that uninvoked guarantees do not qualify as claims. The tribunal concluded that a claim must be due to be considered a debt, and an uninvoked corporate guarantee does not meet this criterion.

2. Uninvoked Corporate Guarantee and Voting Share:
The tribunal then addressed whether an uninvoked corporate guarantee could be used to determine the voting share of a financial creditor. It was emphasized that voting rights are based on the financial debt owed to a creditor, not on claims. The tribunal referred to Section 5(28) of the Insolvency & Bankruptcy Code, 2016, which defines voting share based on the proportion of financial debt owed. Since an uninvoked guarantee is not a debt owed, it should not influence voting rights. The tribunal also rejected the argument based on the IBBI circular, stating that circulars cannot override substantive provisions of the Code. It was concluded that contingent claims like uninvoked guarantees should not impact voting shares as they are inferior to actual claims.

3. Decision of the RP and Scheme of the Code:
Finally, the tribunal assessed whether the RP's actions were consistent with the Code's objectives. The RP had included the uninvoked corporate guarantee in determining voting shares, which was contested by other financial creditors. The tribunal noted that the RP had not sought a legal opinion as agreed upon in a CoC meeting and had inconsistently treated similar claims from different creditors. The tribunal found this approach problematic and decided to replace the RP to ensure smooth implementation of the CIRP. The new RP was appointed, and the tribunal ordered the recomputation of ICICI Bank's claim and voting share.

Summary of Findings:
a) Uninvoked corporate guarantees cannot be considered claims under the Code.
b) Uninvoked corporate guarantees should not influence the determination of voting shares.
c) ICICI Bank's claim and voting share must be recomputed.
d) The current RP is to be replaced, and all documents/assets handed over to the new RP.

The tribunal disposed of the application accordingly, with no order as to costs.