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2025 (2) TMI 1020 - AT - IBCViolation of principles of natural justice - non-speaking order - no privity of contract between the Appellant and Respondent No.1 - Impugned Order passed based on invocation of personal guarantee by 3rd party - guarantee was not invoked by proper party - valid appointment of Respondent No. 2 - valid Board Resolution to show that the Respondent No. 1 was authorised to file its Application u/s 95 of the Code or not - liability of Appellant as Guarantor for outstanding dues. Whether there was no privity of contract between the Appellant and Respondent No.1? - Whether the Adjudicating Authority could have passed the Impugned Order based on invocation of personal guarantee by 3rd party? - HELD THAT - Section 95 of the Code provides right to the creditors to file application to initiate Personal Insolvency Resolution Process ( PIRP ). The security trustee is merely holding security in favour of the Financial Creditor or consortium of creditors and therefore either the trust or creditors may file application under Section 95 of the Code. The wording of Section 95(1) of the Code clearly stipulates that creditor may apply either by himself or generally with other creditors . Therefore the creditor i.e. Respondent No. 1 is within his right to initiate Section 95 application and does not prevent him based on alleged lack of privity of contract with the Appellant. It is settled law that a party can enforce the contract made for its benefit. The Assignment Agreement and the transfer of rights and obligations under the Facility Agreement were binding on the Corporate Debtor and accordingly the Appellant could not seek to escape his obligations thereunder. Whether the guarantee was not invoked by proper party as Demand Notice dated 21.04.2021 was issued by PHL Fininvest Private Limited whereas the Guarantee was executed into between the Appellant and Piramal Trusteeship Services Private Limited? - HELD THAT - The clauses of the Personal Guarantee dated 20.07.2017 are loud and vocal and establish the independent rights of creditors in addition to Trust. By no way of imagination it can be argued by the Appellant (as guarantor) that creditor (including its assignee) can not pursue his rights against the Appellant. The pleading of the Appellant does not stand to any logic and need to be dismissed. There are no merit in the pleadings of the Appellant on their issue and stand rejected. Whether the Impugned Order is a non-speaking order and contravene the principal of natural justice? - HELD THAT - The proceedings under the Code are summary and time-bound and thus the Adjudicating Authority is not required to conduct proceedings akin to civil proceedings. The Adjudicating Authority s role is limited in considering whether a debt is due and payable and whether a default has occurred. In the present case the amount of default is not in dispute nor has the Appellant disputed signing the personal guarantee with the Financial Creditor by admitting to being a signatory to the personal guarantee the privity of contract is established. Hon ble Supreme Court of India in case of Dilip B. Jiwarjka vs. Union of India Ors. 2024 (1) TMI 33 - SUPREME COURT cautioned that the principles of natural justice cannot be mechanically applied in a straightjacket formula and stipulated that based on the facts and circumstances principles of natural justice on some occasions may extend to the right to a full-fledged evidentiary hearing while in certain cases may be circumscribed to a bare minimum opportunity to furnish an explanation by the affected party. The Impugned Order is found to be valid and was passed while keeping in mind the principles of natural justice and equity. Whether the appointment of Respondent No. 2 was not in accordance with provision of the Code? - HELD THAT - The Respondent No. 2 was appointed as the Resolution Professional by the Adjudicating Authority vide order dated 08.04.2022 which has not been challenged by the Appellant and thus attained finality - there are no merit in the contention of the Appellant on this issue. Whether there was no valid Board Resolution to show that the Respondent No. 1 is authorised to file its Application u/s 95 of the Code? - HELD THAT - The Board Resolution was valid and wide enough to cover the proceedings and any objections raised by the Appellant were addressed by a fresh Board Resolution ratifying previous actions. Whether when adequate securities are already available with the Respondent No. 1 by way of first and exclusive mortgage of various properties (both immoveable and moveable) charged in favour of the Piramal Finance Limited at the time of execution of the Facility Agreement dated 20.07.2017 by Corporate Debtor (HEIL) and therefore the Appellant as Guarantor is not liable for outstanding dues? - HELD THAT - In terms of Section 128 of the Indian Contract Act 1872 the liability of the surety is co-extensive with that of the principal debtor. The Supreme Court in the case of Industrial Investment Bank of India Ltd. v. Biswanath Jhunjhunwala 2009 (8) TMI 1186 - SUPREME COURT while examining the issue of the term co extensive liability has held that the liability of a surety is not in alternative to the principal borrower or Corporate Debtor and further it is not necessary for a creditor to first proceed against the principal borrower or Corporate Debtor before initiating legal proceedings against the surety. Section 5(22) of the Code defines personal guarantor as an individual who is the surety in a contract of guarantee to a corporate debtor who provides guarantee in his personal capacity against the loans availed by the corporate debtor with co-extensive liabilities alongwith the corporate debtor. Conclusion - i) The Assignment Agreement and the transfer of rights and obligations under the Facility Agreement were binding and the Appellant could not escape his obligations. ii) The creditors have the right to enforce the contract made for their benefit and the Facility Agreement allowed for the assignment of rights without the consent of the Corporate Debtor. iii) The terms of the Personal Guarantee allowed both the Lender and the Trustee to initiate action against the Appellant. iv) The Adjudicating Authority had considered the Resolution Professional s report and provided reasonable opportunities for objections. The Impugned Order was deemed valid adhering to the principles of natural justice. v) The appointment was within the discretion of the Adjudicating Authority and that the provisions of the Code are directory in nature. vi) The Board Resolution was valid and wide enough to cover the proceedings and any objections raised by the Appellant were addressed by a fresh Board Resolution ratifying previous actions. vii) The liability of the surety is co-extensive with that of the principal debtor and the creditor is not required to first proceed against the principal borrower. There are no merits in the appeal - appeal dismissed.
ISSUES PRESENTED and CONSIDERED
The Tribunal identified several core legal issues that needed examination to decide the present appeal: Issue No. I (a) Whether there was no privity of contract between the Appellant and Respondent No.1. (b) Whether the Adjudicating Authority could have passed the Impugned Order based on the invocation of personal guarantee by a third party. (c) Whether the guarantee was not invoked by the proper party as the Demand Notice was issued by PHL Fininvest Private Limited, whereas the Guarantee was executed between the Appellant and Piramal Trusteeship Services Private Limited. Issue No. II Whether the Impugned Order is a non-speaking order and contravenes the principle of natural justice. Issue No. III Whether the appointment of Respondent No. 2 was not in accordance with the provisions of the Code. Issue No. IV Whether there was no valid Board Resolution to show that Respondent No. 1 was authorized to file its Application under Section 95 of the Code. Issue No. V Whether, when adequate securities are already available with Respondent No. 1 by way of a first and exclusive mortgage of various properties charged in favor of Piramal Finance Limited, the Appellant as Guarantor is not liable for outstanding dues. ISSUE-WISE DETAILED ANALYSIS Issue No. I (a) The Tribunal noted that the concept of trusteeship involves acting on behalf of creditors or lenders, and such deeds are generally signed between the trust and the personal or corporate guarantor of the principal borrower. The lenders or Financial Creditors are the true beneficiaries of such deeds of guarantee. Section 95 of the Code allows creditors to file applications to initiate Personal Insolvency Resolution Processes. The security trustee holds security in favor of the Financial Creditor, and either the trust or creditors may file an application under Section 95. The Tribunal concluded that the Assignment Agreement and the transfer of rights and obligations under the Facility Agreement were binding, and the Appellant could not escape his obligations. (b) The Tribunal examined whether the Adjudicating Authority could pass the Impugned Order based on the invocation of a personal guarantee by a third party. It was determined that the creditors have the right to enforce the contract made for their benefit, and the Facility Agreement allowed for the assignment of rights without the consent of the Corporate Debtor. (c) Regarding the proper party to invoke the guarantee, the Tribunal noted that all notices and demand letters were issued by the Lender to the Appellant, and no objections were raised by the Appellant. The terms of the Personal Guarantee allowed both the 'Lender' and the 'Trustee' to initiate action against the Appellant. The Tribunal found no merit in the Appellant's arguments. Issue No. II The Tribunal addressed whether the Impugned Order was a non-speaking order. It was noted that the proceedings under the Code are summary and time-bound, and the Adjudicating Authority is not required to conduct proceedings akin to civil proceedings. The Tribunal found that the Adjudicating Authority had considered the Resolution Professional's report and provided reasonable opportunities for objections. The Impugned Order was deemed valid, adhering to the principles of natural justice. Issue No. III The Tribunal examined the appointment of Respondent No. 2 as the Resolution Professional. It was noted that the appointment was within the discretion of the Adjudicating Authority and that the provisions of the Code are directory in nature. The Tribunal found no merit in the Appellant's contention regarding the appointment. Issue No. IV The Tribunal considered the validity of the Board Resolution authorizing Respondent No. 1 to file its application under Section 95. It was determined that the Board Resolution was valid and wide enough to cover the proceedings, and any objections raised by the Appellant were addressed by a fresh Board Resolution ratifying previous actions. Issue No. V The Tribunal addressed whether the existence of adequate securities relieved the Appellant of liability. It was noted that the creditor has the prerogative to initiate insolvency processes against the principal borrower or the personal guarantor or both. The liability of the surety is co-extensive with that of the principal debtor, and the creditor is not required to first proceed against the principal borrower. The Tribunal found no merit in the Appellant's argument that the existence of securities negated the need for insolvency proceedings against the personal guarantor. SIGNIFICANT HOLDINGS The Tribunal upheld the Impugned Order, finding no merit in the Appellant's arguments. The core principles established include the rights of creditors to enforce contracts for their benefit, the summary nature of proceedings under the Code, and the co-extensive liability of guarantors with principal debtors. The Tribunal concluded that the appeal was devoid of merit and dismissed it with no costs.
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