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TMI Blog2019 (3) TMI 124X X X X Extracts X X X X X X X X Extracts X X X X ..... Debtor') on the ground of default in discharging its obligations upon invocation of its guarantee. However, the Adjudicating Authority (National Company Law Tribunal), Principal Bench, New Delhi, dismissed the application on the finding that the Respondent's liability as a surety was not co-extensive with that of the 'principal borrower' by reason of Clause 4 of the 'Deed of Guarantee'. The Adjudicating Authority held that Clause 4 of the 'Deed of Guarantee' is an agreement contrary to the general law of surety's liability being co-extensive with that of the 'principal borrower' as provided in Section 128 of the 'Indian Contract Act, 1872' Stand of the Appellant- 'Export Import Bank of India' 2. Learned Senior Counsel for the Appellant submitted that the ground given by the Adjudicating Authority is untenable and the order is liable to be set aside for the following reasons: 3. According to the learned Senior Counsel for the Appellant, Clause 4 of the 'Deed of Guarantee' only stipulates the mode of discharge of the guarantee and not the nature of liability of the guarantor. Section 128 of the 'Indian Contract Act, 1872' relates to the liability of the surety which is co-ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edies or securities available to Exim Bank, or to enter into any composition or compound with or to promise to grant time or indulgence to or not to sue the Borrower, or make any other arrangement with the Borrower as Exim Bank may deem fit. The Guarantor shall not be discharged by exercise of any liberty by Exim bank with reference to the matters aforesaid or by Exim Bank releasing the Borrower or by any act or omission on the part of the Exim Bank, the legal consequence whereof may be to discharge the Guarantor or the Borrower or by any act of Exim Bank which would but for this provision be inconsistent with the Guarantor's right as surety, or by any omission on the part of the Exim Bank to do any act which but for this provision, Exim Bank's duty to the Guarantor would have required it to do. xxx ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Respondent was not co-extensive with that of the 'principal borrower'. 6. It was submitted that the Adjudicating Authority has relied on the decision of the Hon'ble Supreme Court in "Industrial Finance Corporation of India Ltd. vs. Cannanore Spinning and Weaving Mills Limited and Ors. [2002 (5) SCC 54]" (Para 24), but failed to note that on considering clauses similar to Clause 4 of the 'Deed of Guarantee' and Clauses 2 and 4 of the 'General Conditions', the Hon'ble Supreme Court recorded its conclusion in para 25 that the 'Contract of Guarantee' in that case did not provide any contra note pertaining to the liability of the surety so as to create an exception within the meaning of Section 128 of the 'Indian Contract Act'. Respectfully, the impugned order is clearly contrary to two decisions of the Hon'ble Supreme Court. 7. It was further submitted that suspension of the Loan Agreement do not discharge the Respondent from its obligations under the independent 'Contract of Guarantee'. According to him, although the 'Contract of Guarantee' is not a contract regarding a primary transaction, it is an independent transaction containing independent and reciprocal obligations o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arise between the Borrower and EXIM Bank under the Loan Agreement or under any document related thereto; ............." xxx xxx xxx "15. The Guarantee shall be in addition to and not in substitution for another security which Exim Bank may now or hereafter hold for the obligations of the Borrower under the Loan Agreement and may be- enforced without Exim Bank being first required to have recourse to any such security or take any steps or proceedings against the Borrower... ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis of evidence furnished by the financial creditor, is important. This it must do within 14 days of the receipt of the application. It is at the stage of Section 7(5), where the adjudicating authority is to be satisfied that a default has occurred, that the corporate debtor is entitled to point out that a default has not occurred in the sense that the "debt", which may also include a disputed claim, is not due. A debt may not be due if it is not payable in law or in fact. The moment the adjudicating authority is satisfied that a default has occurred, the application must be admitted unless it is incomplete, in 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." Stand of the Respondent- 'CHL Limited' 11. Learned Senior Counsel for the Respondent submitted that the Appellant's application under section 7 of the 'I&B Code' and the present appeal is premised on a 'corporate gu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... borrower'. Without the reconciliation, as on date, there is no determination of the actual amount of interest which is due and payable by the 'principal borrower' to the Appellant. In the absence of reconciliation, no demand has been made by the Appellant upon the 'principal borrower' to pay the amount of recalculated interest. Without such demand made on the 'principal borrower', there cannot be an assumption of default by the 'principal borrower'. 16. It was further submitted that in absence of default by the 'principal borrower', there can be no invocation of the 'corporate guarantee' of the Respondent in view of Clause 4 of the Guarantee. In terms of Clause 4 of the Guarantee Agreement, only in the event of default by the 'principal borrower', the Appellant can invoke the guarantee and is required to give a notice stating the default made by the 'principal borrower' along with amount payable specified in the notice. Admittedly, there is no demand made on the Respondent after the final judgment passed by the Dushanbe Court. Therefore, the liability of the Respondent is contingent and as on date there is no debt that is due and/or payable in terms of Section 3 (11) of the 'I&B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in violation of the order dated 6th January, 2017. Importantly, as on that date, the proceedings at Dushanbe were pending. The Loan Agreement was suspended and, as such, there could not be any 'default' by the 'principal borrower'. Further, prior to issuing this notice, only a Letter dated 4th January, 2017 was issued whereby outstanding interest including penal interest of USD 869,277.84 as on 3rd January, 2017 was sought from the 'principal borrower', within 7 days of the said demand, which demand also got suspended along with the loan agreement in view of the order dated 6th January, 2017. The aforesaid suspended amount of USD 869,277.84 was mystically increased to USD 35,164,530.13, when in fact the obligations of the 'principal borrower' in terms of the Loan Agreement stood suspended on 6th January, 2017. Despite the fact that there was no debt due and payable by the principal borrower, on 1st June, 2017, the Appellant sent guarantee invocation letter to the Respondent purportedly demanding an amount of USD 35,164,530.14. 21. The aforesaid chronology and the proceedings before the Economic Court, Dushanbe show that the Appellant has been restrained from taking any coercive p ..... 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