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TMI Blog2019 (1) TMI 579X X X X Extracts X X X X X X X X Extracts X X X X ..... by 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 R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rties, we find substance in the plea taken by Mr. Salve that the present appeal at the behest of the erstwhile Directors of the appellant is not maintainable. Dr. Singhvi stated that this is a technical point and he could move an application to amend the cause-title stating that the erstwhile Directors do not represent the Company, but are filing the appeal as persons aggrieved by the impugned order as their management right of the Company has been taken away and as they are otherwise affected as shareholders of the Company. According to us, once an insolvency professional is appointed to manage the Company, the erstwhile Directors who are no longer in management, obviously cannot maintain an appeal on behalf of the Company. In the present case, the Company is the sole appellant. This being the case, the present appeal is obviously not maintainable. However, we are not inclined to dismiss the appeal on this score alone. Having heard both the learned counsel at some length, and because this is the very first application that has been moved under the Code, we thought it necessary to deliver a detailed judgment so that all courts and tribunals may take notice of a paradigm shift in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e word guarantor in a general sense in Section 31 which mandates that a resolution plan will be binding on the guarantors this provision envisages a situation where the resolution plan has already been made for a principal debtor and which is binding on the guarantor i.e. a resolution plan of a principal borrower is prior in time; Section 43(2) and 44 (1)(e) is giving beneficial preference by a corporate debtor to a guarantor. Therefore, according to him a combined reading of Section 3(8) definition of corporate debtor and Section 3(11) definition of debt and Section 5(8)(i) definition of financial debt would imply that a liability in respect of a guarantee would form part of financial debt, however, while this may be so, the word corporate guarantor does not find mention in the I B Code. 9. It was next contended without conceding that a corporate guarantor is subsumed within the definition of a corporate debtor under the I B Code, an insolvency proceeding cannot be initiated first against the corporate guarantor without having proceeded (and exhausted) against the principal debtor . It was also submitted that this manner of proceeding in a bifurcate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... creditor to file an application for initiating corporate insolvency resolutions against one corporate debtor. This is evident from the use of the singular article a before a corporate debtor . According to him the I B Code framework, the interpretation of its provisions and keeping practical considerations in mind, the correct sequence would be to first proceed against (and exhaust) the principal debtor , failing which proceed against the corporate guarantor . Bank of India 11. The Bank of India, on its behalf and on behalf of other members Banks of its association, has made wide claim that the consortium being a prior and first charge holder, its right could not be defeated by the respondent Rural Electrification Corporation Limited , which not only was a subsequent guarantee-holder but even its authenticity of its guarantee was liable to be adjudicated. It was further submitted that the consortium of Banks are necessary and proper party, more so, the terms of the scheme under Sections 27 and 28 of the I B Code ought not to be ignored more particularly as the process was sought against the guarantor and the resolution process cannot be achieved witho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which case it may give notice to the applicant to rectify the defect within 7 days of receipt of a notice from the adjudicating authority. Under sub-section (7), the adjudicating authority shall then communicate the order passed to the financial creditor and corporate debtor within 7 days of admission or rejection of such application, as the case may be . 14. Therefore, it is clear that if the Adjudicating Authority is satisfied that there is a debt and default and otherwise if the application is in order is bound to admit the application. It is a corporate debtor who can only point out that it does not owe any debt either in law or in fact, which is not the case of the corporate debtor . Corporate debtor can also take a plea that the application has been filed by a person who is not a financial creditor but such issue having not raised, the consortium of banks have no role to play at the time of admission of application under Section 7 of the I B Code. The role of banks comes if they file claim after the admission of an application and when they are accepted as a financial creditors and made members of the Committee of Creditors in terms of Sections 27 and 28 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plication to be admitted. The Adjudicating Authority not being a court of law or Tribunal and corporate insolvency resolution process being not a litigation as held by this Appellate Tribunal in Binani Industries Limited vs. Bank of Baroda Anr. etc. Company Appeal (AT)(Insolvency) No. 82 of 2018 etc. , we hold that the Adjudicating Authority has no jurisdiction to decide any disputed question or claim based on evidence and at the stage of admission is only required to satisfy itself about existence of debt or not and if it is more than Rupees One Lakh and party has defaulted, and otherwise the application is complete, the Adjudicating Authority is required to admit the application. 20. Therefore, the ground taken by Raj Bahadur Shree Ram and Co. Pvt. Ltd. (Promoter) against the order of the Adjudicating Authority dated 6th July, 2017 is fit to be rejected. 21. The only question arises for determination in this appeal is whether the application under Section 7 of the I B Code is maintainable against the corporate guarantor without initiation of corporate insolvency resolution process against the principal borrower ( principal debtor ). FACTS OF THE CASE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t amount by the principal borrower , the financial creditor invoked the corporate guarantee of the Ferro Allows Corporation Limited and called upon the Ferro Alloys Corporation Limited ( corporate guarantor ) to pay forthwith the amount due and payable by the M/s. FACOR Power Limited (principal borrower ) amounting to ₹ 564,63,50,544/- as on 30th September, 2015 along with future interest within a period of 21 days. M/s. Ferro Alloys Corporation ( corporate guarantor ) issued a reply dated 26th November, 2015 but failed and neglected to pay the above sum. 25. The financial creditor pleaded that the corporate guarantee furnished by Ferro Alloys Corporation Limited is an unconditional, continuing and irrevocable guarantee. As per the terms of the guarantee, the obligation of guarantor is separate, independent and is that of primary obligor and not merely as surety, on a full indemnity basis to indemnify the financial creditor . The corporate guarantee provided by the Ferro Alloys Corporation Limited is joint and several and co-extensive with that of the principal debtor and can be invoked even without exhausting the remedies against the principal debtor. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as used in Section 3(8) has to be a debt defined under Section 3(11) as quoted above. It must be the liability or obligation in respect of a claim [Section 3(6)] which is due from any person [Section 3(23)] which means even a corporate entity and shall include financial debt and operational debt as defined under section 5(8) and 5(21) as quoted hereunder: ( 6) claim means- ( a) a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured; ( b) right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured; ( 8) financial debt means a debt alongwith interest, if any, which is disbursed against the consideration for the time value of money and includes- ( a) money borrowed against the payment of interest; ( b) any amount raised by acceptance under any acceptance credit facility or its de-materialised equivalent; ( c) any amount raised pursuant to any note pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial creditor is defined under Section 5(7) which reads as under: (7) financial creditor means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to; The term default is defined under Section 3(12) which encompasses default, both by principal borrower and principal guarantor, which reads as under: ( 12) default means non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not repaid by the debtor or the corporate debtor, as the case may be; A guarantee becomes a debt or as soon as the guarantee is invoked against it whereinafter a guarantor ( corporate guarantor ) becomes a corporate debtor in terms of the I B Code. 28. In Bank of Bihar Ltd. vs. Dr. Damodar Prasad Anr. (1969) 1 SCR 620 , the Apex Court held : 3. The demand for payment of the liability of the principal debtor was the only condition for the enforcement of the bond. That condition was fulfilled. Neither the principal debtor nor the surety discharged the admitted liability of the principal debtor in spite of demands. Under Section 128 of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s defined under the Indian Contract Act); or (ii) Guarantor qua financial creditor. 35. The I B Code does not exclusively delineates and/or prescribes any inter-se rights, obligation and liabilities of a guarantor qua financial creditor . Thus, in absence of any express provision providing for inter-se rights, obligation and liabilities of guarantor qua financial creditor under the Code, the same will have to be noticed from the provisions of the Indian Contract Act, which exclusively and elaborately deals with the same. 36. In Bank of Bihar v. Damodar Prasad and Anr. (1969) 1 SCR 620 the Hon ble Supreme Court referred to a judgment of Hon ble Bombay High Court in Lachhman Joharimal v. Bapu Khandu and Tukaram Khandoji (1869) 6 Bom HCR 241 , in which the Division Bench of the Hon ble Bombay High Court held as under: The court is of opinion that a creditor is not bound to exhaust his remedy against the principal debtor before suing the surety and that when a decree is obtained against a surety, it may be enforced in the same manner as a decree for any other debt. 37. The Hon ble Supreme Court while approving the said judgment, observed that, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t even suing the principal debtor there is no reason, even if the decretal amount is covered by the mortgaged decree, to force the decree-holder to proceed against the mortgaged property first and then to proceed against the guarantor. It appears the above-quoted observations in Manku Narayana case [(1987) 2 SCC 335 : AIR 1987 SC 1078] are not based on any established principle of law and/or reasons, and in fact, are contrary to law. It, of course depends on the facts of each case how the composite decree is drawn up. But if the composite decree is a decree which is both a personal decree as well as a mortgage decree, without any limitation on its execution, the decree- holder, in principle, cannot be forced to first exhaust the remedy by way of execution of the mortgage decree alone and told that only if the amount recovered is insufficient, he can be permitted to take recourse to the execution of the personal decree. 39. In view of the aforesaid decision of the Hon ble Supreme Court, we hold that it is not necessary to initiate Corporate Insolvency Resolution Process against the Principal Borrower before initiating Corporate Insolvency Resolution Process against the ..... 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