PERSONAL GUARANTOR – A FINANCIAL CREDITOR?

[DR.MARIAPPAN GOVINDARAJAN]

In MR. SURESH KUMAR, MR. RAJ KUMAR VERSUS CENTRAL BANK OF INDIA - 2024 (11) TMI 1287 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL , PRINCIPAL BENCH , NEW DELHI - LB, Corporate Insolvency Resolution Process (‘CIRP’ for short) was initiated by an operational creditor against the corporate debtor Ram Hari Auto Private Limited.  The Adjudicating Authority admitted the application on 14.02.2020.  The Interim Resolution Professional caused a public announcement on 17.02.2020 fixing 02.03.2020 as last date for receipt of claims from the creditors of the corporate debtor.  The Interim Resolution Professional constituted a Committee of Creditors (‘CoC’ for short) containing unsecured financial creditors.  The first CoC meeting was held on 16.03.2020.

The Central Bank of India filed a claim to the Interim Resolution Professional, as a secured creditor, to the tune of Rs.12.15 crores on 09.03.2020.  The Interim Resolution Professional admitted its claim and informed the same to the bank on 19.03.2020.  The Bank was also informed about its eligibility to become the member of CoC.

The second CoC meeting was held on 28.05.2020.  The voting of the share of the bank is 51.37%.  The bank asked the Interim Resolution Professional about the details of admission of unsecured financial creditors as the members of CoC.  The Interim Resolution Professional sent a report to the Bank on 08.06.2020 on the reconstitution of the CoC by adding 2 more unsecured financial creditors, who gave guarantee to the bank to secure the loan taken by the Corporate Debtor from the Bank.  The said two persons are Suresh Kumar and Rajesh Kumar who are the appellants in the present appeal.

The above said persons also filed claim with the Interim Resolution Professional.  The same was admitted by him on the basis of Recovery Certificate issued upon them by the Debt Recovery Tribunal, Chandigarh, in the original application filed by the Central Bank of India. 

The Central Bank of India filed an IA before the Adjudicating Authority seeking the following reliefs-

• Documentary evidence to be provided by IRP, based on which the claims of the Unsecured Financial Creditors were admitted and the CoC was constituted and financials pertaining to the Corporate Debtor to the Applicant Bank in pursuance of Section 21(9) and 21(10) of the Code.
• Re-constitution of the CoC after proper verification of claims and re-initiation of the CIRP in view of the fraudulent, illegal actions taken by the IRP in collusion with other CoC members.
• Release of the land/building/assets other than that in the name of the Corporate Debtor in the possession of IRP, and
• Replacement of the current IRP/RP with another resolution professional, ensuring maximization of the value.

The Adjudicating Authority allowed the application filed by the Bank on 01.07.2024.  The Adjudicating Authority held that the Appellants having not paid anything to the Creditor, they cannot be Member of the CoC.  The Adjudicating Authority further directed for the reconstitution of the CoC.  The appellants filed the appeal before the National Company Law Appellate Tribunal, New Delhi (‘NCLAT’ for short). 

The appellants submitted the following before the NCLAT-

• The Adjudicating Authority has committed an error by misinterpreting provisions of Section 140 of the Indian Contract Act.
• Section 140 establishes two distinct conditions for the surety to step into the shoe of the Creditor either to repaying the debt or by performing the act for which the principal debtor is liable.
• Even though the appellants have not made any payment towards discharge of the guarantee, but in event the Bank proceeded to dispose of appellant’s mortgage property, whether by auction or otherwise, the same shall continue fulfilment of performance by the appellant in repayment of the loan.
• The appellant has created mortgage of the immovable assets to secure the loan of the corporate debtor.
• Therefore, the appellant has assumed the creditors rights against the Corporate Debtor.
• The claim of the appellants ought to have been recognised as contingent or other Creditors.
• In the application filed by the Central Bank of India, the appellants were not heard and the Order passed by the Adjudicating Authority is in violation of principle of natural Justice.

The Central Bank of India submitted the following before the NCLAT-

• The appellants who had given personal guarantee to the loan obtained by the Corporate Debtor from the Central Bank of India, have not paid any amount, even though decree has been issued by the DRT, hence they cannot claim to become Financial Creditor of the Corporate Debtor.
• The claim of the appellants and admitted by the Interim Resolution Professional was wholly unsustainable.
• The voting share of the Bank has been fixed @ 51.37% and the same was reduced to 26.86% on the admission of the appellants as financial credits.
• The appellants were given 26.86% each which is illegal.

The NCLAT, after considering the submissions of the parties, proposed to decide the question as to whether the appellants are the Financial Creditors of the Corporate Debtor and whether they are eligible to become the members of the CoC.

The NCLAT observed that the appellants are personal guarantors to the corporate debtor.  The Recovery Certificates were issued by the Debt Recovery Tribunal, on the application filed by the Central Bank of India.  The appellants did not pay any money to the bank. The appellants were not initially the members of CoC but later the Interim Resolution Professional included them in the CoC. 

The NCLAT analysed the provisions of Section 3(6), 3(11) and Section 5(8) of the Code.  Section 5(8) (i) provides that the amount of any liability in respect of any of the guarantee or indemnity is also a Financial Debt.  The guarantee given by the appellants is plain and simple and cannot be considered as ‘Financial debt’, since there is no liability arises out of in respect of the guarantees.   The Guarantor is liable for payment of the debt of the Bank, hence the appellant cannot contend that he has any right of payment against the Principal Borrower so that its claim may be accepted as Financial Debt.

Then the NCLAT analysed the provisions of Section 140 of the Contract Act.  According to this section surety is on payment of the amount due by the principal debtor entitled to be put in the same position in which the Creditors is in relation to the principal debtor.

The NCLAT held that the personal guarantors who have not made any payment in discharge of their guarantee given to the Central Bank of India cannot be accepted as Financial Creditor of the Corporate Debtor, nor any voting share can be allocated to them in the CIRP of the Corporate Debtor.  The NCLAT did not find any error in the Order of the Adjudicating Authority holding that Appellants who have not made any payment to the Creditor cannot be treated to be a Financial Creditor.  In regard to the submissions of the appellant that the appellant’s claim shall be treated as contingent claim, the NCLAT held that in event any amount is recovered from the appellant before the close of the CIRP, it is always open for the appellant to bring such material before the Interim Resolution Professional to be placed before the CoC to take a decision regarding contingent claim of the appellant.