2022 (11) TMI 1095 - AT - Insolvency and Bankruptcy

Validity of Guarantee Agreement - contravention of Section 185 186 of the Companies Act, 2013 - HELD THAT - It is very much clear that the fresh guarantee executed on 06.05.2017 between the Bank and the Corporate Debtor of Rs.3007.85 lakh is still existing and Corporate Debtor is liable to that extent to repay the same together with interest as stipulated in the loan documents and so executed between the parties - It is clearly written that the Guarantor has agreed to indemnify the bank against all loss and repay and satisfy the bank on demand, the general balance due from the borrower. It is also very much clear that the second Deed of Guarantee executed on 06.05.2017 is not in continuation of earlier deed of guarantee dated 28.06.2013 as elaborately explained in para 74 of the impugned order - As far as the issue of contravention of provision of Section 185 of the Act prevailing as on that date (pre -07.05.2018 amendment to the Act) is concerned, it is very much clear that this is the provision which the company has to comply internally and if they fail to comply the necessary punishment is available in the same section i.e. Section 185, both monetary penalty and /or imprisonment. As far as bank is concerned, they have been provided time to time the Board Resolution showing the approval of the Board. Hence, if there is any irregularity then for that the Members of the Board are responsible. If the official of the bank have committed some irregularity, then it is the Bank who has to prosecute these officers against the provisions laid down under the law applicable to them. There are no inconformity in the impugned order and constraint to uphold the impugned order - appeal disposed off.

Summary

Issues:
1. Cross appeals filed under Section 61 of the Insolvency and Bankruptcy Code, 2016 against the order passed by the National Company Law Tribunal.
2. Dispute regarding the Guarantee Agreement and compliance with Sections 185 & 186 of the Companies Act, 2013.
3. Classification of the Appellant Bank as a secured financial creditor.
4. Validity and enforceability of the security documents and corporate guarantee.
5. Interpretation of Section 185 of the Companies Act, 2013.
6. Adjudication of claims by the Resolution Professional/Liquidator.

Analysis:

1. The Appellants filed cross appeals challenging the order of the National Company Law Tribunal under Section 61 of the Insolvency and Bankruptcy Code, 2016. The appeals pertained to the Guarantee Agreement and compliance with Sections 185 & 186 of the Companies Act, 2013. The Appellant Bank sought reliefs related to setting aside observations of the Adjudicating Authority and granting necessary reliefs. The Resolution Professional/Liquidator also sought similar reliefs in their appeal.

2. The dispute centered around whether the Appellant Bank could be classified as a secured financial creditor. The Resolution Professional argued that the lenders of the Holding Company did not directly advance any facility to the Corporate Debtor, hence disputing the CD's financial debt owed to them. The Appellant Bank contended that it held valid security and provided evidence of the security held, emphasizing the industrial land and building as collateral.

3. The validity and enforceability of the security documents, particularly the corporate guarantee, were crucial aspects of the case. The Appellant Bank argued that the guarantee executed in 2017 was still in force, making the Corporate Debtor liable to repay the amount. The Guarantor's obligation to indemnify the bank against losses and repay the balance due was highlighted.

4. The interpretation of Section 185 of the Companies Act, 2013 was pivotal in determining compliance. The Tribunal examined the provisions of the Act and the obligations imposed on companies regarding loans, guarantees, and securities. The Tribunal clarified that any contravention of Section 185 would entail penalties as stipulated in the Act.

5. The Tribunal analyzed the submissions made by both sides regarding the compliance with Section 185 and the execution of the guarantee agreements. It was observed that the fresh guarantee executed in 2017 was still valid, and the Corporate Debtor remained liable to repay the amount. The Tribunal emphasized that any irregularities in compliance were the responsibility of the Board members.

6. Ultimately, the Tribunal upheld the impugned order passed by the Adjudicating Authority, dismissing one Company Appeal and disposing of the other accordingly. The interim order, if any, was vacated, concluding the legal proceedings in the matter.