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2024 (3) TMI 1317 - AT - Insolvency and BankruptcyDoctrine of subrogation - Allowing recourse to the Financial Creditors against the Personal Guarantors of Asian Colour Coated Ispat Limited - Resolution Plan approved - whether the Financial Creditor can proceed against the Personal Guarantors in absence of any debt after extinguishment of such debts upon assignment in terms of the RBI Prudential Framework for Resolution of Stressed Assets dated 07.06.2019 and as stipulated in the approved Resolution Plan? - HELD THAT - As a general rule, the doctrine of subrogation is an absolute right of the guarantor, however, the issue becomes different, if it falls within the domain of the Code in the context of CIRP proceedings. We note that as per notification dated 15.11.2019, the Personal Guarantors became liable under the Code and therefore, the treatment of Personal Guarantors under the Code are to be treated differently vis- -vis under the contract of guarantees under the Indian Contract Act, 1872. The denial of right of subrogation is no more res-judicata and has been decided in catena of the judgments by the Hon ble Supreme Court of India. Hon ble Supreme Court of India in COMMITTEE OF CREDITORS OF ESSAR STEEL INDIA LIMITED THROUGH AUTHORISED SIGNATORY VERSUS SATISH KUMAR GUPTA OTHERS 2019 (11) TMI 731 - SUPREME COURT noted that the Financial Creditors can pursue their claims against the Personal Guarantors to the Corporate Debtor and right of subrogation gets extinguished, although the apex Court decided not to express conclusive opinion which might have affected them pending litigations on account of invocation of such guarantees. It is now well settled law, in light of the Essar Case that rights of subrogation that may arise against the Corporate Debtor can be extinguished under the Resolution Plan and therefore the arguments of the Appellant on issue of rights of subrogation s are not convincing. If the rights of subrogation are allowed to continue against the Corporate Debtor under the management of the new SRA, the same would have the effect of putting the SRA and the Corporate Debtor in the same position as prior to its insolvency resolution. The allegation of the Appellant pertaining to differential treatment due to extinguishing their rights of subrogation under the approved Resolution Plan against the Corporate Debtor is unfounded, which is only to ensure that the SRA takes control of the Corporate Debtor on a clean slate without carrying any previous liability baggage. The extinguishment of Personal Guarantors right of subrogation is unavoidable and inaccessible fact in insolvency cases and it requires to be respected by all stakeholders and any departure from such principles will have adverse impact on revival of the Corporate Debtors, interest of the Financial Creditors and overall negative impact on the national economy. The financial creditors have reserved the rights to proceed against the personal guarantors like the Appellant herein in terms of the Excluded Rights in approved Resolution Plan. There is no question of transfer of a mere right to sue and in such circumstances, we feel that it is a structured financial deal in form of Resolution Plan exercised based on the commercial wisdom, with aim of resolution of a corporate debtor, as well as to ensure that financial creditors are able to recover their outstanding debts as guaranteed by the Personal Guarantors, the Appellants herein. Alleged non existing of debts in the books of the Financial Creditors and regarding treatment in the books of the financial creditors with respect to such continuing rights of the financial creditors against the personal guarantors of the Corporate Debtor after the approval of the Resolution Plan - HELD THAT - The treatment in the Books of the Financial Creditors is based on RBI Prudential norms which were issued with several purposes, including and not limited to, discouraging the Financial Creditors to resort to ever greening of loans. We feel that such RBI guidelines do not intent to give undue benefits to the Personal Guarantors of the Corporate Debtors or debar the Financial Creditors in pursuing their legal rights to recover their outstanding debts from the Personal Guarantors to the Corporate Debtor. After all, it cannot be anyone s case to write off public money by such circuitous route or hypothetical legal assumption. The Hon'ble Supreme Court, in SWISS RIBBONS PVT. LTD. AND ANR. VERSUS UNION OF INDIA AND ORS. 2019 (1) TMI 1508 - SUPREME COURT , has categorically recognised the concept of preserving the corporate debtor as a going concern while ensuring maximum recovery for all creditors to be the intent of the Code. Thus, commercial wisdom of the CoC has been given supremacy and no grounds exist for the Adjudicating Authority or Appellate Tribunal to interfere. There are no error in the Impugned Order - appeal dismissed.
Issues Involved:
1. Validity of the Resolution Plan. 2. Rights of Financial Creditors against Personal Guarantors. 3. Applicability of the Indian Contract Act, 1872, and Transfer of Property Act, 1882. 4. Commercial Wisdom of Committee of Creditors (CoC). Summary: 1. Validity of the Resolution Plan: The Appellants challenged the Impugned Order dated 26.10.2020 approving the Resolution Plan, arguing that the inclusion of "Excluded Rights" allowing Financial Creditors to pursue Personal Guarantors was illegal. The Tribunal noted that the Resolution Plan was approved with 79.3% voting by the CoC and the debt was assigned to the SPV, Hasaud Steels Limited. The Tribunal found that the Plan's approval was within the ambit of the Insolvency & Bankruptcy Code, 2016 (IBC) and did not contravene any provisions of the law. 2. Rights of Financial Creditors against Personal Guarantors: The Appellants argued that once the debt was assigned to the SPV, Financial Creditors could not retain rights to pursue Personal Guarantors. The Tribunal held that Financial Creditors have the right to proceed against Personal Guarantors under the "Excluded Rights" clause in the Resolution Plan. The Tribunal emphasized that the IBC allows for the continuation of personal guarantees and that such provisions do not need confirmation from Personal Guarantors. 3. Applicability of the Indian Contract Act, 1872, and Transfer of Property Act, 1882: The Appellants contended that the approval of the Resolution Plan violated Sections 140 and 141 of the Indian Contract Act, 1872, and Section 6(e) of the Transfer of Property Act, 1882. The Tribunal clarified that the right of subrogation does not survive under the IBC, and the Code takes precedence over other laws due to Section 238. The Tribunal also found that the "Excluded Rights" do not constitute a "mere right to sue," which is non-transferable under Section 6(e) of the Transfer of Property Act, 1882. 4. Commercial Wisdom of Committee of Creditors (CoC): The Respondent No. 2 and CoC argued that the Resolution Plan was approved based on commercial wisdom, which is paramount and non-justiciable. The Tribunal reiterated that the commercial decisions of the CoC, including the retention of "Excluded Rights," are beyond judicial review as long as they comply with the IBC. The Tribunal cited the Supreme Court's judgments in K. Shashidhar Vs. Indian Overseas Bank and other cases to support this position. Findings: The Tribunal concluded that the Resolution Plan's approval was legal and valid, and the Financial Creditors retained the right to pursue Personal Guarantors. The Tribunal dismissed the appeals, emphasizing that the IBC's objective is the revival of the Corporate Debtor and that Personal Guarantors cannot escape their liabilities. The Tribunal upheld the commercial wisdom of the CoC and found no error in the Impugned Order. The appeals were rejected with no costs.
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