2024 (8) TMI 477 - HC - Insolvency and Bankruptcy

Declarations of the petitioner as Wilful Defaulter by the Identification Committee as well as the Review Committee - Liability of the personal guarantor post-assignment of debt under the approved Resolution Plan - whether the NBFC, simultaneously with the original financial creditor/bank, can recover the debt from the guarantors? - HELD THAT - The answer is a resounding No , since the Resolution Plan itself contemplates that the assignment, including the security interests, in favour of the NBFC is confined only to the CD-company, categorically excluding the guarantors. In fact, it is further clarified in the Resolution Plan that it does not deal at all with personal guarantors or corporate guarantees given by other persons than the company. The personal guarantors, being excluded from the purview of the Resolution Plan, are by default also excluded from the assignment of the right to recover debt in favour of the assignee. Insofar as the surviving liability for the debt is concerned, the same is retained by the financial creditors, including the respondent no.1-bank herein, to be exercised in respect of the guarantors only - The CD is absolved by operation of law in terms of the Resolution Plan and the assignee of the debt never gets any right to recover the debt from the guarantors, since the guarantors are excluded from the Resolution Plan as well as from the process of assignment itself. The debt survives only between the financial creditors/bank and the guarantors - the argument of the petitioner that its liabilities are transferred to the assignee is not borne out by the Resolution Plan and the corresponding provisions of the IBC. There is an element of continuity in the liability of the borrower to repay the debt. Seen from such perspective, a borrower may very well make good the loan taken by it even subsequent to the classification of its account as NPA, thereby regularizing the account - By a logical corollary, the converse is also true, that is, if the borrower, despite having the means, fails to repay the loan and continues the violations as envisaged in Clause 2.1.3 read with Clause 2.2 of the Master Circular, there is no bar in declaring the borrower and the other entities contemplated in the Master Circular as Wilful Defaulters. Petition is allowed on contest, thereby setting aside the impugned decision dated December 30, 2022, whereby the Review Committee confirmed the decision of the Wilful Defaulter Identification Committee that the petitioner is a Wilful Defaulter under the RBI Master Circular dated July 1, 2015.

Summary

Issues Involved
1. Liability of the personal guarantor post-assignment of debt under the approved Resolution Plan.
2. Applicability of the Master Circular on Wilful Defaulters to the petitioner.
3. Nature of the proceedings under the Master Circular and whether they are in rem or in personam.
4. Validity of the Wilful Defaulter declaration post-NPA classification.
5. Interpretation of Clause 2.6 of the Master Circular regarding the date of guarantee execution.

Detailed Analysis

1. Liability of the Personal Guarantor Post-Assignment of Debt:
The petitioner argued that upon assignment of the debt to DRP Trading and Investment Private Limited (NBFC), the liability towards the State Bank of India (SBI) ceased. The bank contended that the liability of the personal guarantor remained intact as per the approved Resolution Plan, which excluded personal guarantees from the assignment. The court examined the Resolution Plan and concluded that the entire admitted debt of the Corporate Debtor (CD) was assigned to the NBFC, but this assignment did not include the liabilities of personal guarantors. Therefore, the financial creditors, including SBI, retained the right to recover the debt from the personal guarantors.

2. Applicability of the Master Circular on Wilful Defaulters:
The petitioner claimed that the proceedings under the Master Circular could not be initiated against personal guarantors for guarantees given before September 9, 2014, as per Clause 2.6 of the Circular. The court agreed with this interpretation, noting that the petitioner's guarantee was executed on March 28, 2014, and thus, the declaration of the petitioner as a Wilful Defaulter was invalid under Clause 2.6.

3. Nature of the Proceedings Under the Master Circular:
The petitioner argued that the proceedings under the Master Circular were not in rem but in personam. The court disagreed, stating that the Master Circular's purpose was to disseminate credit information to caution banks and financial institutions against further financing to Wilful Defaulters, thereby having an effect in rem.

4. Validity of the Wilful Defaulter Declaration Post-NPA Classification:
The petitioner contended that the acts of default occurred after the account was classified as NPA, making the Wilful Defaulter declaration invalid. The court found no restriction in the Master Circular against declaring a borrower as a Wilful Defaulter even after NPA classification, provided the borrower continued to default despite having the means to repay.

5. Interpretation of Clause 2.6 of the Master Circular:
The court emphasized the clear language of Clause 2.6, which applies to guarantees given on or after September 9, 2014. Since the petitioner's guarantee was executed on March 28, 2014, Clause 2.6 did not apply, rendering the Wilful Defaulter declaration against the petitioner invalid.

Conclusion
The court allowed the petition, setting aside the decision of the Review Committee declaring the petitioner as a Wilful Defaulter. The respondents were directed to reverse any consequential actions and remove the petitioner's name from the Wilful Defaulter's list within a fortnight. There was no order as to costs.