2019 (5) TMI 1585 - Tri - Insolvency and Bankruptcy

Initiation of Corporate Insolvency Resolution Process (CIRP) - default in payment of loans extended to the principal borrowers - section 7 of Insolvency Bankruptcy Code, 2016 - Whether or not the creditor can initiate CIRP process under this Code against the guarantor company falling within the definition of company as envisaged under the Companies Act, 2013 especially when guarantee is given against the loans availed by a partnership firm and proprietary concerns and whether or not this debt is barred by limitation as stated by the Corporate Debtor counsel? HELD THAT - It is an admitted case that the principal borrowers availed loans from the Creditor Bank against the payment of interest on the guarantee given by the debtor, it is an admitted fact that since the principal borrowers failed to repay the loans availed by them, the creditor notified this fact to the debtor/guarantor, against which the debtor has also failed to discharge the liability, it is an admitted fact that all three principal borrowers acknowledged the debt payable by the principal borrowers on 3.10.2016, likewise the debtor has not even disputed the Creditor Bank sending demand notices to the principal borrowers, the Creditor Bank sending recall notice to the principal borrowers and the guarantors. Whether or not any debt is a financial debt, it does not entail who the parties are, the only requisite to determine that it is a financial debt is as to whether or not the obligation falls within the ambit of any of the sub clauses of clause 8 of section 5 of the Code. Once it is proved that the debt falling within the ambit of debt payable along with interest which is disbursed against the consideration for the time value of the money and debt falling under any of the sub-clauses mentioned in clause 8 of section 5 of the Code, then it becomes financial debt as envisaged under clause 8. In this case, the corporate debtor admittedly being corporate guarantor to the money borrowed by the principal borrowers against payment of interest, it is a financial debt falling under sub-clause (i) of Clause 8. In this case, the person in default as per sub-clause (i) of clause 8 of section 5 is a company as envisaged under clause 7 of section 3 of the Code, therefore this creditor can initiate section 7 proceedings against this corporate debtor. Indeed this corporate person in respect to this case will not be treated as corporate guarantor referred in clause (5A) of section 5 of the Code read with section 60(2) (3) of the Code. It is a case independently filed relying on Clause 8(i) of Section 5 of the Code. This Corporate Debtor clearly falls within the definition of Corporate Person because it is a company falling within the definition of because it is a company incorporated under the Companies Act, 1956 Act/Companies Act, 2013 as the case may be as envisaged under Clause 20 of Section 20 of the Companies Act, 2013. Therefore, this liability falls within the definition of Section (5)(8)(i) of the Code and since the Corporate Debtor is a Corporate Person, it makes no difference as to whether the Corporate Person stood as guarantor to an individual or a Corporate Person, and so long as the obligation in respect of a claim is due from a Corporate Person falling within the definition of Financial Debt, then it is obvious that the Creditor can proceed under section 7 of the Code against such Corporate Person, here the Corporate Debtor being a Corporate Person falling within section (5)(8)(i) of the Code, this Petition is maintainable against the Corporate Debtor. Time Limitation - HELD THAT - It is true that this Corporate Debtor has not executed fresh Guarantee Deed in respect to the loans availed by all three Principal Borrowers within three years before filing this Company Petition. But it is true that this Corporate Debtor executed individual Guarantee Deeds on behalf of each of the Principal Borrowers at the time these Principal Borrowers availed loans from the Creditors - It is a settled proposition of law as long as the debt has remained alive against the Principal Borrower, the liability of the Corporate Debtor need not be renewed from time to time so long as Principal Borrower keeps either acknowledging or making part payments within three years before proceeding against the Guarantor. Therefore, merely by not executing the fresh guarantee deed against each of the accounts, it cannot be said that the Creditor cannot proceed against the guarantors in respect to the loan account to which it has not executed fresh guarantee within three years before proceeding against the Corporate Debtor. Petition is admitted - Moratorium declared.

Summary

Issues Involved:
1. Maintainability of the petition against the Corporate Debtor under Section 7 of the Insolvency and Bankruptcy Code, 2016.
2. Definition and applicability of "Corporate Guarantor" under Section 5(5A) of the Code.
3. Limitation period for enforcing the guarantee.

Detailed Analysis:

1. Maintainability of the Petition:
The Financial Creditor filed a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016, against the Corporate Debtor for defaulting on a loan repayment of ?171.14 crores. The Corporate Debtor stood as a guarantor for loans extended to three entities: a partnership firm and two proprietary concerns. The Creditor argued that the Debtor, having executed multiple guarantee deeds and hypothecation agreements, was liable to pay the outstanding dues upon the principal borrowers' default. The Debtor's counsel contended that the petition was not maintainable as the Debtor was not a "Corporate Guarantor" as defined under Section 5(5A) of the Code, and thus, the proceedings under Section 7 were not applicable.

2. Definition and Applicability of "Corporate Guarantor":
The Tribunal examined the definition of "Corporate Guarantor" under Section 5(5A) of the Code, which was introduced to clarify the jurisdictional issues regarding the initiation of Corporate Insolvency Resolution Process (CIRP) against corporate guarantors. The Tribunal noted that the definition was intended to address ambiguities related to the territorial jurisdiction of NCLT but did not nullify the provisions under Section 5(8)(i) of the Code concerning financial debt. The Tribunal held that the Corporate Debtor, being a company incorporated under the Companies Act, 1956/2013, falls within the definition of a "Corporate Person" and thus, the petition under Section 7 is maintainable.

3. Limitation Period for Enforcing the Guarantee:
The Debtor's counsel argued that the guarantees had expired due to the lapse of three years from the date of execution, making the debt time-barred under Section 238A of the Limitation Act. The Creditor countered that the debt falls within the ambit of Section 5(8)(i) of the Code and that the proceedings before the Debt Recovery Tribunal (DRT) were initiated within the limitation period. The Tribunal clarified that the limitation period is extended if the principal borrowers acknowledge the debt or make part payments within three years. In this case, the principal borrowers acknowledged their debts on 3.10.2016, thus extending the limitation period to 3.10.2019. The petition, filed on 24.10.2018, was within the limitation period, making the claim valid.

Conclusion:
The Tribunal concluded that the Financial Creditor had established the existence of a financial debt and default by the Corporate Debtor. The petition under Section 7 of the Code was admitted, and a moratorium was declared, prohibiting various actions against the Corporate Debtor. Mrs. Aneetha Subramaniam was appointed as the Interim Resolution Professional to carry out the functions under the Insolvency and Bankruptcy Code. The Tribunal directed the Registry to communicate the order to the Financial Creditor, the Corporate Debtor, and the Interim Resolution Professional immediately.