2019 (1) TMI 579 - AT - Insolvency and Bankruptcy

Initiation of Corporate Insolvency Resolution Process against the Principal Borrower - admission of an application under Section 7 - Held that - Insolvency Resolution Process under Section 7 of the I&B Code can be initiated against the guarantor who is a corporate person and who by operation of law ipso facto becomes a corporate debtor by satisfying the ingredients of the terms as defined under Section 3(8) - In the present case as per clause 1.2 of the Deed of Guarantee dated 22nd January, 2015, on the failure of principal borrower to pay and/or discharge the obligations, the guarantor shall, forthwith upon demand, pay to Rural Electrification Corporation Limited (Financial Creditor) without demur or protest , the amount stated in the demand made by Rural Electrification Corporation Limited to the guarantor thereby invoking the guarantee. Admittedly, the guarantee was invoked by Rural Electrification Corporation Limited against Ferro Alloys Corporation Ltd. and demand was raised on 27th October, 2015 calling upon Ferro Alloys Corporation Ltd. to pay the amount due within 21 days. Since then, Ferro Alloys Corporation Ltd. (Corporate Guarantor) became a corporate debtor of Rural Electrification Corporation Limited (Financial Creditor) - In its Annual Report for the year ending 2016-17, Ferro Alloys Corporation Ltd. has shown a sum of ₹ 517.90 crores payable to the financial creditor . Therefore, it is clear that Ferro Alloys Corporation Ltd. admitted the debt and in absence of payment, we hold that there is a default . The provision of the I&B Code do not bar a financial creditor from initiating corporate insolvency resolution process against the guarantor , who comes within the meaning of corporate debtor . It is not necessary to initiate Corporate Insolvency Resolution Process against the Principal Borrower before initiating Corporate Insolvency Resolution Process against the Corporate Guarantors . Without initiating any Corporate Insolvency Resolution Process against the Principal Borrower , it is always open to the Financial Creditor to initiate Corporate Insolvency Resolution Process under Section 7 against the Corporate Guarantors , as the creditor is also the Financial Creditor qua Corporate Guarantor . The first question is thus answered against the Appellant - appeal dismissed.

Issues Involved:
1. Maintainability of the appeal by the suspended Board of Directors of the Corporate Debtor.
2. Definition and applicability of the term "Corporate Guarantor" under the Insolvency & Bankruptcy Code (I&B Code).
3. The right of a financial creditor to initiate insolvency proceedings against a corporate guarantor without first proceeding against the principal debtor.
4. The necessity of impleading consortium banks at the stage of admission of the application under Section 7 of the I&B Code.
5. Dispute regarding the quantum of debt and its impact on the admission of the application under Section 7 of the I&B Code.

Issue-Wise Detailed Analysis:

1. Maintainability of the Appeal by the Suspended Board of Directors:
The appeal by the Corporate Debtor, through its suspended Board of Directors, is deemed not maintainable. This is in line with the Supreme Court's ruling in "Innoventive Industries Ltd. v. ICICI Bank," which states that once an insolvency professional is appointed, the erstwhile Directors cannot maintain an appeal on behalf of the company. The Tribunal reiterated that the suspended Board of Directors has no right to move an appeal on behalf of the Corporate Debtor, although individual directors or shareholders may challenge the order.

2. Definition and Applicability of "Corporate Guarantor":
The I&B Code does not explicitly define "Corporate Guarantor," but it does define "Personal Guarantor" under Section 5(22). The appellant argued that the absence of the term "Corporate Guarantor" implies it is not covered under the Code. However, the Tribunal held that the term "Corporate Debtor" includes any corporate person who owes a debt, which can include a corporate guarantor. Therefore, the liability in respect of a guarantee forms part of the financial debt.

3. Right to Initiate Insolvency Proceedings Against Corporate Guarantor:
The Tribunal held that insolvency proceedings could be initiated against a corporate guarantor without first proceeding against the principal debtor. This is supported by the Supreme Court's rulings in "Bank of Bihar Ltd. vs. Dr. Damodar Prasad" and "State Bank of India v. Indexport Registered," which state that a creditor is not required to exhaust remedies against the principal debtor before proceeding against the guarantor. The Tribunal emphasized that the liability of the guarantor is co-extensive with that of the principal debtor.

4. Necessity of Impleading Consortium Banks:
The Tribunal rejected the argument that consortium banks must be impleaded at the stage of admission of the application under Section 7. It held that at the initial stage, only the corporate debtor needs to be impleaded. The role of other creditors, including consortium banks, comes into play after the admission of the application when claims are filed and the Committee of Creditors is formed.

5. Dispute Regarding Quantum of Debt:
The Tribunal dismissed the argument that the dispute regarding the quantum of debt affects the admission of the application under Section 7. According to the Supreme Court's ruling in "Innoventive Industries Ltd.," the Adjudicating Authority only needs to be satisfied that there is a debt and default. A mere dispute over the quantum of debt cannot be a ground to reject the application if the debt exceeds one lakh rupees and there is a default.

Conclusion:
The Tribunal dismissed the appeals, holding that the application under Section 7 of the I&B Code against the corporate guarantor is maintainable without initiating insolvency proceedings against the principal debtor. The Tribunal affirmed that the financial creditor has the right to proceed against the corporate guarantor independently. The appeals were accordingly dismissed with no costs.

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