2025 (1) TMI 551 - AT - IBC

Dismissal of the Appellant s petition under Section 95 of IBC seeking initiation of insolvency proceedings against Respondent No. 1 - petition dismissed on the grounds that the guarantees were either unenforceable or time-barred. Whether revocation of guarantee by the personal guarantor is valid? - HELD THAT - The guarantee as is evident from Clause 2, 8, 11 and 12 of the 2013 Guarantee and Clause 5 and 14 of the 2014 Guarantee was intended to be irrevocable and continuous in nature and thus in accordance with the Syndicate Bank Judgment, the guarantee was intended to be applicable to all subsequent transactions as well - the unilateral revocation of guarantee by the Respondent No.1 does not absolve him from his obligations under the guarantee agreement as the Financial Creditor has not agreed to such revocation. The terms of contract agreement also clearly show that the contract was irrevocable. Whether changes in terms and conditions of the guarantee if any, would lead to novation? - HELD THAT - In the present case both deed of guarantees grant waiver from Section 133 in case of variance, hence, such variance would not lead to discharge of the surety, but it would only be to the extent of any variance with respect to transactions subsequent to variance. The 7th working capital consortium dated 25.07.2014 reduced the existing facilities of the CD from Rs. 292 crores to Rs. 106.64 crores. The aforesaid agreement therefore benefitted both Corporate Debtor as well as Respondent No.1. The liability of the Respondent No.1 due to subsequent amendments, if any, to the agreement to the extent they are beneficial to the Respondent No.1 would remain. The Respondent No.1 would continue to be liable for outstanding amount as per the guarantee agreement or subsequent amendments, whichever is lower, but it would not lead to discharge of his liability. Whether the CIRP proceedings against the guarantor are maintainable on the grounds of limitation? - HELD THAT - It is a settled law that the liability of the Corporate Debtor and the guarantor being Respondent No. 1 are co-terminus. Thus, liability for Respondent No. 1 would arise only when amounts became and went due by the Corporate Debtor. Consequently, any acknowledgement of debt by the principal borrower is also considered an acknowledgement by the guarantor under the Act of 1963. Since the last date of filing in the present case falls within the Covid exemption period, taking the exemption allowed by Hon ble SC the present CIRP petition has been filed well within the exempted period - It is therefore clear that the application for initiating CIRP proceedings against the Respondent No.1 was filed well in time and is maintainable. The Adjudicating Authority without going into the merits of the case had decided that the application was time barred. Conclusion - i) The guarantees executed by the guarantor were irrevocable, unconditional, and continuous, and the unilateral revocation was invalid. ii) The liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract. iii) The CIRP proceedings against the guarantor were maintainable and filed within the limitation period. Challenge to impugned order only to the extent of making adverse observations against the Appellant and holding that the conduct of Appellant as Resolution Professional needs to be inquired - violation of principles of natural justice - HELD THAT - The mistake, if any on part of RP was not deliberate or malafide. The Appellant has copied the list of events from the application filed by the SBI with given due disclaimer in the table giving the source of information. The Adjudicating Authority was free to seek clarifications from appellant regarding 06.02.2016 letter, which was not done. Without her version the Adjudicating Authority went ahead made adverse comments against the conduct of Appellant which clearly violates principles of natural justice.

1. ISSUES PRESENTED and CONSIDERED

The judgment addresses the following core legal questions:

Whether the revocation of the guarantee by the personal guarantor is valid under the circumstances.
Whether changes in the terms and conditions of the guarantee, if any, would lead to novation or discharge of the guarantor's obligations.
Whether the Corporate Insolvency Resolution Process (CIRP) proceedings against the guarantor are maintainable on the grounds of limitation.
Whether the adverse observations made against the Resolution Professional (RP) in the impugned order were justified and whether they should be expunged.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of Revocation of Guarantee

Relevant legal framework and precedents: The judgment examines the provisions under the Indian Contract Act, 1872, particularly Sections 130 and 133, and relevant case law such as Industrial Finance Corporation of India Ltd. v. Cannanore Spinning and Weaving Mills Ltd. and Allahabad Bank, Nagpur v. Hemantkumar.
Court's interpretation and reasoning: The court concluded that the guarantees executed were irrevocable, unconditional, and continuous, thus not subject to unilateral revocation by the guarantor without the creditor's consent.
Key evidence and findings: The 2013 and 2014 Deeds of Guarantee contained clauses that explicitly stated their irrevocable and continuous nature, binding the guarantor until the debt was fully discharged.
Application of law to facts: The court found that the guarantor's attempt to revoke the guarantee was not legally sustainable as the creditor did not accept the revocation, and the terms of the guarantee precluded such action.
Treatment of competing arguments: The guarantor's argument of coercion and duress was rejected, as he had voluntarily signed the 2014 guarantee after his resignation as a director was accepted.
Conclusions: The unilateral revocation of the guarantee by the guarantor was deemed invalid, and the guarantor remained liable under the terms of the guarantee.

Issue 2: Changes in Terms and Conditions Leading to Novation

Relevant legal framework and precedents: The court referenced Sections 133 and 134 of the Indian Contract Act, 1872, and the judgment in BRS Ventures Investments Ltd. v. SREI Infrastructure Finance Ltd.
Court's interpretation and reasoning: The court held that any variation in the terms of the financial facilities did not discharge the guarantor's liability, as he had waived his rights under Section 133 in the guarantee agreements.
Key evidence and findings: The court noted that the guarantees explicitly allowed for variations in terms without affecting the guarantor's obligations.
Application of law to facts: The court found that subsequent amendments to the financial facilities were beneficial to the guarantor and did not constitute a novation of the original contract.
Treatment of competing arguments: The guarantor's argument that changes in terms discharged his liability was dismissed based on the waivers in the guarantee agreements.
Conclusions: The guarantor's liability was not discharged by changes in terms, and he remained liable for the outstanding amount.

Issue 3: Limitation for CIRP Proceedings

Relevant legal framework and precedents: The court considered the Limitation Act, 1963, and relevant judgments such as Laxmi Pat Surana v. Union Bank of India.
Court's interpretation and reasoning: The court held that the limitation period for initiating CIRP proceedings was not expired, as the demand notice was issued within the limitation period, and the COVID-19 period was excluded from the limitation calculation.
Key evidence and findings: The court noted the acknowledgment of debt by the Corporate Debtor and the continuous nature of the guarantee as factors extending the limitation period.
Application of law to facts: The court found that the application for CIRP proceedings was filed within the permissible period, considering the COVID-19 extensions.
Treatment of competing arguments: The guarantor's argument of limitation was rejected based on the acknowledgment of debt and the continuous guarantee.
Conclusions: The CIRP proceedings were deemed maintainable, and the application was filed within the limitation period.

Issue 4: Adverse Observations Against the Resolution Professional

Relevant legal framework and precedents: The court considered principles of natural justice and prior cases where remarks against RPs were expunged.
Court's interpretation and reasoning: The court found that the adverse observations were made without giving the RP an opportunity to explain, thus violating principles of natural justice.
Key evidence and findings: The error in the RP's report was attributed to a mistake in the creditor's application, and the RP had included a disclaimer regarding the source of information.
Application of law to facts: The court found that the adverse remarks were unwarranted and caused undue prejudice to the RP.
Treatment of competing arguments: The respondent did not contest the appeal regarding the adverse observations, acknowledging the error in their application.
Conclusions: The adverse observations against the RP were expunged, and the order for inquiry by the IBBI was set aside.

3. SIGNIFICANT HOLDINGS

The court held that the guarantees executed by the guarantor were irrevocable, unconditional, and continuous, and the unilateral revocation was invalid.
"The liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract."
The court found that changes in the terms of the financial facilities did not discharge the guarantor's liability due to the waivers in the guarantee agreements.
The CIRP proceedings against the guarantor were maintainable and filed within the limitation period.
The adverse observations against the RP were expunged due to the lack of opportunity for the RP to explain and the error being attributable to the creditor's application.

The judgment restored the application for CIRP proceedings and directed the parties to appear before the Tribunal, while also expunging the adverse remarks against the RP and halting any inquiry by the IBBI.

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