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TMI Blog2018 (12) TMI 1921X X X X Extracts X X X X X X X X Extracts X X X X ..... aking dated 27.03.2015 (Second Promoters Undertaking). A bare perusal of Section 126 of the Contract Act makes it patent that it demystify a contract of guarantee to mean a contract to perform the promise, or discharge the liability of a third person in case of his default. The parties involved are known as 'surety' 'principal debtor' and the 'creditor'. A contract of guarantee involves three parties: creditor, surety, and principal-debtor. A contract of guarantee must, therefore, involve a contract to which all those parties are privy. A guarantee is an undertaking to indemnify, if some other person does not fulfil his promise. The liability under a contract of guarantee is conditional on the default of the principal-debtor, and hence does not amount to a 'promise to pay' - It is evident from the facts of this case that Principal Debtor are EIIL and DHPL. The Corporate Debtor is the 'Surety' and the applicant is 'Creditor'. The essential ingredients of contract of guarantee are also fulfilled as is patent from the preceding paras. As per various clauses surety has stood guarantee for the facilities given in case of default by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ations undertaken by the Corporate Debtor under the credit facilities availed by EIIL and DHPL to the extent of INR 240.17 crores and INR 460.58 crores respectively. A consequential relief has also been claimed by seeking direction to the Resolution Professional to revise the list of financial creditors of the Corporate Debtor to include the claims of the ICICI Bank with respect to the facilities granted to EIIL and DHPL amounting to INR 700.75 crores. Thereafter credit the applicant-ICICI Bank in the COC by adding the aforesaid claims and grant it voting share in the COC in proportion to such claims with all consequential benefits arising therefrom. 2. Notice of the application was issued. Reply on behalf of the Corporate Debtor through the Resolution Professional has been filed. The applicant has also filed the rejoinder. 3. In order to put the controversy and issues in their proper perspective few facts may first be noticed. The Corporate Insolvency Resolution Process was initiated in respect of the Corporate Debtor on 08.05.2018 and Mr. Rajiv Chakraborty was appointed as an Interim Resolution Professional. He invited claims and the applicant lodged its claim by asserting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrangement - The applicant, the Corporate Debtor and IDBI Trusteeship Service Limited (EIIL Security Trustee) entered into a non-disposal arrangement (Annexure A 6) dated 16.06.2011. According to the terms incorporated in the non-disposal arrangement the Corporate Debtor agreed not to deal with or divest 30% equity share capital of EIIL held by it (N DU Shares), and deposit such number of shares in a designated trust and retention account (NDU). In addition to that, the Corporate Debtor executed an irrevocable power of attorney in favour of the EIIL Security Trustee, authorizing it to, inter alia, sell, transfer, assign, dispose of or encumber the NDU Shares on the terms and conditions specified in the NDU (POA). Afterwards the applicant, the Corporate Debtor and the EIIL Security Trustee entered into a designated account agreement dated 16.06.2011 (Annexure A-7). The Corporate Debtor through said designated account agreement agreed to open a trust and retention account with the applicant as required under the NDU for deposit of NDU shares. 3. Restructuring of EIIL RTL Facility: Restructured RTL Facility and FITL Facility 1. EIIL started defaulting in making payment toward ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceipt of aforesaid demand notices, EIIL and/or the Corporate Debtor failed to repay the outstanding amounts to the applicant. On account of persistent defaults, the account of EIIL was classified as an NPA on 28.09.2017 w.e.f. 30.06.2015 by the applicant. 3. Subsequently the applicant exercised its option/ right under the Loan Purchase Agreement to sell the Restructured Facilities at a purchase price of INR 199.5 crores to the Corporate Debtor, vide a loan purchase notice dated 15.11.2017 (Annexure A- 15) on the diverse grounds firstly not to maintain the debt service reserve requirements of INR 6.43 crores by the EIIL including others; secondly not to provide 30% of the equity share capital of EIIL, as security by the Corporate Debtor and lastly not to adhere to the payment schedule under the Restructured facilities. In view of the above, the applicant called upon the Corporate Debtor to purchase the Restructured facilities and pay the loan purchase exercise price within 10 days from the date of the Loan Purchase Notice. 4. Upon failure of the Corporate Debtor to purchase the Restructured facilities and pay the aforementioned amounts, the applicant was compelled to issue a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, vide CAL dated 29.03.2011 (DHPL Sanction Letter) (Annexure A-20). Said sanction letter was amended vide an amendatory CAL dated 02.12.2011 (Annexure A-21). (iii) Thereafter the applicant and DHPL entered into an ECB Facility agreement on 07.06.2011 (Annexure A-22). According to the terms incorporated in the aforesaid agreement the applicant undertook to extend a foreign currency loan facility up to USD 60 million (ECB Facility Agreement) to partly finance implementation of the aforesaid Project undertaken by the DHPL. Subsequently terms and conditions of the ECB Facility Agreement was modified through amendment agreements [Annexure A-23 (Colly)] on three tranches. (iv) Thereafter on the request of DHPL term loans aggregating to INR 528,45,00,000 was cumulatively extended by various Banks to it vide a common loan agreement dated 23.07.2010 (Common Loan Agreement I). Under the said agreement undrawn commitment to extent the INR 270 crores was also made. In the wake of aforesaid commitment, DHPL requested the applicant for extending a rupee term loan totalling to INR 270 crores which was agreed by the applicant on the terms and conditions set out in the amended and restated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the following guarantees/ securities were executed by the Corporate Debtor: a. The Deed of Pledge was modified by way of an addendum dated 27.03.2015 to also secure amounts extended under the DHPL RTL-2 Facility. b. The Corporate Debtor executed an undertaking dated 27.03.2015 (Second Promoter Undertaking) (Annexure A-32) as an additional contractual comfort. Through said additional contractual comfort, the Corporate Debtor undertook to inter alia arrange for funding any cost overrun in the Project and shortfall in payment to lenders in the event of termination of the Concession Agreement. 3. Due to failure by the DHPL's to adhere to timelines and milestones, NHAI issued an intention to terminate the Concession Agreement on 23.05.2016. Due to which, the Senior Lenders agreed that DHPL would avail bridge-financing from NHAI to complete the balance work of the Project. NHAI granted approval for one-time fund infusion to the extent of INR 279.88 crores subject to signing of a tripartite agreement between DHPL, NHAI and Bank of India being a lead bank of the Senior Lenders. 4. Due to the default in payment of interest under the DHPL facilities, the applicant issued a de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecord [Annexure A-37 (Colly)]. 4. The Resolution Professional made a public announcement on 15.05.2018 inviting the claims from all and sundry creditors against the Corporate Debtor. Accordingly, the applicant placing reliance on the securities and contractual comforts provided by the Corporate Debtor towards the facilities disbursed by the applicant to the entities/ group related to the Corporate Debtor along with proof claiming that the applicant is a Financial Creditor. The claims were duly filed on 28.05.2018 on the proforma, Form-C (Annexure A-38) prescribed under the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process to Corporate Persons) Regulations, 2016. Pursuant to the filing of the claims the Resolution Professional sought clarifications with respect to the claims and responses were entered by the Resolution Professional. It is asserted by the applicant that initially the Resolution Professional admitted the claims pertaining to the facilities availed by HRRPPL, ABL and EIIL which is evident from a bare perusal of e-mail dated 11.06.2018, sent by the Resolution Professional to the applicant. Thereafter the claims were rejected. It is pertinent to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and as is a common practice with the banks to get a corporate guarantee executed. The fact that parties chose to enter into Loan Purchase Agreement instead of a deed of guarantee/ corporate guarantee makes the intention of parties clear that the same was not to be construed as a guarantee per se and should be treated as contractual obligation of EIEL as set out in terms of the Loan Purchase Agreement. d. The judgment of the Hon'ble Bombay High Court rendered in the case of IL FS Financial Services Limited v. Vandana GZobaZ Limited (2018) 207 Comp Cas 668(Bom),has been distinguished on the ground that there the purchasing party had admitted its liability as the guarantor in its reply affidavit, clarifying its intention to be bound by the terms of the option agreement in the capacity of a guarantor which is a major deviation from the facts of the case in hand as the EIEL being a purchasing party has never expressed its intention to be treated as guarantor and therefore, the claim cannot be treated as a Financial Debt since it is not covered by the provisions of Section 5 (8) of the Code. e. The non-disposal undertaking cannot be firstly treated as security interest and even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents to DHPL and consequently, indicating the shortfall in payments arising to the Senior Lenders therefore, the RP, would be happy to reconsider the claim. d. The pledge agreement cannot be construed as akin to guarantee as every form of security interest cannot fall within the expression 'guarantee'. e. The question concerning the percentage of voting right would be determined after admission of the claim of DHPL and it would be premature to deliberate upon such an issue at this stage. The allocation of voting rights to ICICI would also have bearing on the voting rights of the financial creditors of EIEL and therefore, the voting rights to the applicant cannot be allocated pre-maturely. 7. We have heard learned counsel for the parties at considerable length and have perused various clauses of Loan Purchase Agreement, Non-Disposal Arrangement and the Pre-Restructuring RTL Facilities provided by the Credit Arrangement Letter (for brevity 'CAL') and also similar clauses in Facility Agreement provided to DHPL RTL-I, Promoter's Undertaking, Deed of pledge and facilities provided to DHPL RTL-2 coupled with other facts. It would therefore be apposite to reco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levant Loan Purchase Event; ii. Loan Purchase Exercise Price (as calculated in accordance with Clause 5 (Settlement of Loan Purchase Right); iii. the name of all the Purchasing Party (ies) who will, either jointly or severally, fulfil the required obligations under the Loan Purchase Right; and iv. the Loan Purchase Settlement Date, which shall be a business day falling not less than ten days after the delivery of that Loan Purchase Notice. 11. A perusal of the aforesaid clause would show that the applicant has the right to sell the whole or part of the outstanding EIIL RTL Facility to the Corporate Debtor at the loan purchase exercise price who is under an obligation to purchase. 12. Likewise, the clauses in the Non-Disposal Arrangement and an irrevocable power of attorney in favour of the EIIL Security Trustee, authorized the applicant to sell, transfer, assign, dispose of or encumber the NDU Shares on the terms and conditions specified in the Power of Attorney. The applicant, the Corporate Debtor and the EIIL Security Trustee entered into a designated account agreement dated 16.06.2011 wherein the Corporate Debtor agreed to open a trust and retention account with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hase the Restructured facilities and pay the aforesaid amounts, the applicant issued a recall cum invocation of guarantee notice dated 27.11.2017 to EIIL and the Corporate Debtor calling upon them to pay the entire outstanding arnount under the Restructured facilities as on 31.10.2017 which amounts to INR 198.8 crores together with interest and other charges. Despite Recall cum Invocation Notice, the Corporate Debtor failed to repay the outstanding dues under the Restructured facilities to the applicant. The applicant vide a letter dated 24.05.2018 issued to EIIL and th Corporate Debtor, revoked the Restructuring Agreement with immediate effect, and the liability of EIIL and the Corporate Debtor under the EIIL RTL Facility stand restored. However, no amount has been paid to the applicant towards the aforesaid facilities granted to EIIL and the claim has been rejected by the Resolution Professional. 14. In respect of Dehradun Highways Project Limited the story is no different. The facility granted by the applicant to DHPL were sought to be secured by the guarantees/ securities executed by the Corporate Debtor in the form of Promoter's Undertaking executed on 08.12.2011 and su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aw which arises for consideration is whether the undertaking of the Corporate Debtor to purchase the loan in part or whole in pursuance of clauses 2 and 4.2 of the Loan Purchase Agreement (Annexure A/ 5) amounts to guarantee within the meaning of Section 126 of the Contract Act and; whether the Corporate Debtor by executing the Promoter's undertaking, deed of pledge and undertaking dated 27.03.2015 as an additional contractual comforts providing that the Corporate Debtor undertook to arrange for funding any cost overrun in the project and shortfall in payment to lenders in the event of termination of the Concession Agreement would arnount to 'Guarantee'. There is no doubt left that Concession Agreement was terminated by the NHAI on 25.05.2018 resulting in the emergence of right provided in the Promoter's Undertaking, Deed of Pledge and the Corporate Debtor undertaking dated 27.03.2015 (Second Promoters Undertaking). 18. In order to determine whether the agreements, arrangements, undertaking etc. involved in this matter would qualify to be called 'Contract of Guarantee' we must dwell on Section 126 of the Contract Act, 1872 which reads as under: Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cised by the Lender. Placing reliance on Section 126 of the Contract Act, the Division Bench proceeded to observe as under:- The legal position can be clearly noted from Section 126 of the Contract Act which defines a contract of guarantee to mean a contract to perform the promise, or discharge the liability, of a third person in case of his default. It is well settled that a contract of guarantee involves principally three parties namely the creditor, the surety and the principal debtor, where liability may be actual or prospective. Thus necessarily the ingredients of a contract of guarantee are clearly present in the option agreement which are reflected from the unambiguous nature of Article Il the Put Option whereby the appellant has irrevocably, absolutely and unconditionally without demur or protest agreed to make payment of the exercise price to the respondent. It this be the case, then considering the provisions of Section 126 of the Contract Act, it is imperative to accept the 'option agreement' as a 'contract of guarantee'. There can be no other interpretation. Thus, we are of the considered opinion, the learned Single Judge is correct in observing th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng was not to be treated as security interest and every form of security interest was not to be construed akin to guarantee and therefore, it could not be treated as a guarantee. Again, the argument proceeds on fallacious assumption. It may be true that every security interest would not be a guarantee but in the present case as already held that 'NonDisposal Undertaking' coupled with other would amount to Guarantee. Therefore, we are unable to accept the submission. 23. Another submission made by learned counsel for the Resolution Professional is that the amount due cannot be considered as 'financial debt' within the meaning of Section 5 (7) (8) of the Code. A bare perusal of the aforesaid provision makes it patent that a 'financial creditor' is a person to whom financial debt is owed and the financial debt means a debt along with interest which is disbursed against consideration for the time value of money. The financial debt in the present case is the amount of liability in respect of any of the guarantee as referred in clauses (a) to (h) of Section 5 (7) of the Code. Therefore, any amount raised under any other transaction which has the commercial ef ..... X X X X Extracts X X X X X X X X Extracts X X X X
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