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2019 (3) TMI 124 - AT - Insolvency and BankruptcyInitiation of the Corporate Insolvency Resolution Process - invoking Corporate Guarantee - HELD THAT - The principal borrower has already made representations to the Appellant for reconciliation of account but the Appellant has not come forward to reconcile till date. Only upon this reconciliation, the Appellant is entitled to demand the recalculated interest component from the principal borrower , if any or adjust any surplus amount which have been received by the Appellant. If in the event, the principal borrower fails to pay the interest component, if any, as per the fresh demand made on reconciliation, only then the Appellant will be entitled to invoke the corporate guarantee of the Respondent in terms of specific and contingent contract between the Appellant and the Respondent. Significantly, the Corporate Guarantees given by the Respondent can be invoked only In the event of a default on the part of the borrower . The said Corporate Guarantee cannot be invoked as on date, since there is no fresh demand made by the Appellant to the principal borrower for the recalculated interest and consequently there is no debt that is due and/or payable hence there is no default by the principal borrower with respect to interest. Which disentitles the Appellant to proceed in the present appeal. The process under the I&B Code , once set in motion, is irreversible and leads to exceptional and serious consequences. If the appeal is allowed that would mean suspension of the Board of Directors of the Corporate Guarantor , appointment of Interim Resolution Professional , so on and so forth. A running business, which has made no default, would be put under resolution process. On the other hand, if the principal borrower pays the amount, if any, found payable upon reconciliation of accounts, it would confirm that there never existed any debt which is due and payable or defaulted by the Corporate Guarantor . The actions that would follow on allowing of this appeal cannot be reversed and the Corporate Guarantor cannot be compensated in any manner.
Issues Involved:
1. Liability of the guarantor under the 'Deed of Guarantee.' 2. Applicability of Section 128 of the Indian Contract Act, 1872. 3. Suspension of obligations under the Loan Agreement by the Economic Court of Dushanbe. 4. Validity of the invocation of the corporate guarantee by the Appellant. 5. Determination of debt due and payable by the principal borrower. 6. Impact of the reconciliation of accounts between the principal borrower and the Appellant. 7. Consequences of initiating the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (I&B Code). Detailed Analysis: 1. Liability of the Guarantor under the 'Deed of Guarantee': The Appellant, as a 'Financial Creditor,' filed an application under Section 7 of the I&B Code for initiating the Corporate Insolvency Resolution Process (CIRP) against the Respondent on the ground of default in discharging its obligations upon invocation of its guarantee. The Adjudicating Authority dismissed the application, finding that the Respondent's liability as a surety was not co-extensive with that of the principal borrower due to Clause 4 of the 'Deed of Guarantee.' The Appellant contended that Clause 4 only stipulates the mode of discharge of the guarantee and not the nature of the guarantor's liability. 2. Applicability of Section 128 of the Indian Contract Act, 1872: The Appellant argued that Section 128 of the Indian Contract Act, 1872, which states that the liability of the surety is co-extensive with that of the principal debtor unless otherwise provided by the contract, was not considered by the Adjudicating Authority. The Appellant relied on the Supreme Court's decision in "Industrial Investment Bank of India vs. Bishwanath Jhunjhunwala," which held that similar clauses in the guarantee were co-extensive. The Adjudicating Authority, however, dismissed the application based on its interpretation of Clause 4 of the 'Deed of Guarantee.' 3. Suspension of Obligations under the Loan Agreement by the Economic Court of Dushanbe: The Respondent argued that the obligations under the loan agreements and security documents were suspended by the Economic Court of Dushanbe, and therefore, the invocation of the guarantee was invalid. The Economic Court had directed the suspension of obligations until the claim was considered on its merits. The Appellant had submitted itself to the jurisdiction of the Economic Court and participated in the proceedings. 4. Validity of the Invocation of the Corporate Guarantee by the Appellant: The Respondent contended that the Appellant's invocation of the guarantee was illegal as the obligations under the loan agreements were suspended. The Appellant had issued a letter on 2nd May 2017, recalling the loans and demanding payment, despite the suspension order. The Respondent argued that there was no debt due and payable by the principal borrower, and therefore, the invocation of the guarantee was invalid. 5. Determination of Debt Due and Payable by the Principal Borrower: The Respondent submitted that the final order of the Economic Court of Dushanbe required the parties to reconcile the accounts and determine the liabilities arising from the loan agreements. No reconciliation had been done, and therefore, there was no determination of the actual amount of interest due and payable by the principal borrower. In the absence of such determination, there was no default by the principal borrower, and consequently, no invocation of the corporate guarantee was possible. 6. Impact of the Reconciliation of Accounts between the Principal Borrower and the Appellant: The Respondent argued that only upon reconciliation of accounts would the Appellant be entitled to demand the recalculated interest from the principal borrower. If the principal borrower failed to pay the interest, only then could the Appellant invoke the corporate guarantee. The Respondent emphasized that the guarantee could only be invoked in the event of a default by the borrower. 7. Consequences of Initiating the Corporate Insolvency Resolution Process (CIRP) under the I&B Code: The Tribunal noted that initiating the CIRP would lead to serious consequences, including the suspension of the Board of Directors of the Corporate Guarantor and the appointment of an Interim Resolution Professional. A running business with no default would be put under the resolution process, which would be irreversible and could not be compensated if the principal borrower eventually paid the amount upon reconciliation. Conclusion: The Tribunal dismissed the appeal, finding no merit in the Appellant's arguments. The Tribunal held that the invocation of the corporate guarantee was invalid due to the suspension of obligations under the loan agreements and the lack of reconciliation of accounts. The Tribunal emphasized that the CIRP could not be initiated in the absence of a determined debt due and payable by the principal borrower. The appeal was dismissed without any order as to costs.
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