2021 (10) TMI 1086 - AT - Insolvency and Bankruptcy

Maintainability of application - initiation of CIRP - Corporate Debtor failed to make repayment of its dues - Financial Creditors - Personal Guarantor of the Principal Borrower - existence of debt and dispute or not - service of demand notice - Whether the EECPL is the Corporate Guarantor and therefore Corporate Debtor of the Eastern Overseas, in terms of Sub-section (7) and (8) of Sec 3 of I B Code and the applicable Rules will be Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 ? HELD THAT - The Adjudicating Authority has held that the Insolvency and Bankruptcy (Application to Adjudicating Authorities for Bankruptcy Process for Personal Guarantors to Corporate Debtors Rules, 2019 will be applicable instead of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules 2016. Under both the Rules, the conditions for the applicability of the Rules are provided. The learned Adjudicating Authority had failed to notice that the Financial Creditor had taken Personal Guarantee of Mr Mahendra Singh Narang and Mrs Manjit Kaur in addition to the Corporate Guarantee given by the Corporate Debtor - on the occurrence of default, it was the sole prerogative of the Financial Creditor to initiate action against the Principal Borrower or the Personal Guarantor of the Corporate Guarantor. Since the Appellant Financial Creditor had initiated action under the Insolvency and Bankruptcy Code against the Corporate Guarantor, the Application could not have been dismissed on the erroneous assumption that the Application should have been filed against the Personal Guarantor under Section 95 of the Code. It is clear that Respondent Eastern Embroidery Collections Private Limited was the Corporate Guarantor of the Principal Borrower Eastern Overseas , and not a Personal Guarantor. Therefore, in terms of Sub-section (7) and (8) of Sec 3 of I B Code, 2016 is a Corporate Debtor. Further, the applicable Rules would be Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 . The Adjudicating Authority committed an error in holding that action should have been initiated against the Personal Guarantor of the Corporate Debtor under Section 95 of the Code instead of proceeding against the Corporate Debtor - Appeal allowed.

Issues Involved:
1. Whether Eastern Embroidery Collections Private Limited (EECPL) is the personal guarantor of the principal borrower, Eastern Overseas.
2. Whether EECPL is the corporate guarantor and thus the corporate debtor of Eastern Overseas under Section 3(7) and (8) of the Insolvency and Bankruptcy Code, 2016 (IBC), and whether the applicable rules are the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016.

Issue-wise Detailed Analysis:

1. Personal Guarantor vs. Corporate Guarantor:
The Adjudicating Authority initially rejected the application under Section 7 of the IBC, concluding that EECPL was a personal guarantor of Eastern Overseas and that the appellant should have filed under Section 95 of the IBC. The Authority cited the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019, which require a demand notice and application in Form C under Section 95(4) of the IBC. The Authority found that the appellant did not serve the required demand notice to the personal guarantor before filing the application.

2. Corporate Guarantor and Corporate Debtor Status:
The appellant argued that EECPL is a corporate guarantor and therefore qualifies as a corporate debtor under Sections 3(7) and (8) of the IBC. The appellant contended that the applicable rules should be the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, not the 2019 Rules for personal guarantors. The appellant emphasized that EECPL, being a corporate entity, falls outside the definition of a personal guarantor under Section 5(22) of the IBC.

3. Legal Definitions and Interpretation:
The judgment examined the definitions under the IBC:
- Section 3(7) defines a "corporate person" as a company or LLP but excludes financial service providers.
- Section 3(8) defines a "corporate debtor" as a corporate person who owes a debt.
- Section 5(22) defines a "personal guarantor" as an individual surety to a corporate debtor.

The Tribunal found that EECPL, being a corporate entity, does not fit the definition of a personal guarantor but rather that of a corporate guarantor and corporate debtor.

4. Precedent and Legal Reasoning:
The Tribunal referred to the Supreme Court's decision in Laxmi Pat Surana v. Union Bank of India, which held that action under Section 7 of the IBC can be initiated against a corporate person (corporate debtor) concerning a guarantee offered for a loan to a non-corporate principal borrower. The Tribunal applied this precedent, concluding that the financial creditor has the right to proceed against the corporate guarantor under Section 7 of the IBC.

Conclusion:
The Tribunal concluded that EECPL is the corporate guarantor of Eastern Overseas and qualifies as a corporate debtor under Sections 3(7) and (8) of the IBC. Therefore, the applicable rules are the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. The Tribunal held that the Adjudicating Authority erred in requiring the application to be filed under Section 95 for personal guarantors.

Order:
The appeal was allowed, and the impugned order dated 27 April 2021 was set aside. The case was remanded back to the Adjudicating Authority to decide afresh in light of the Tribunal's directions, preferably within two months.

← Previous Next →