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TMI BlogCORPORATE INSOLVENCY RESOLUTION PROCESS MAY BE INITIATED AGAINST THE TWO BORROWERS IF THEY FALL WILTHIN THE AMBIT OF CORPORATE DEBTORSX X X X Extracts X X X X X X X X Extracts X X X X ..... CORPORATE INSOLVENCY RESOLUTION PROCESS MAY BE INITIATED AGAINST THE TWO BORROWERS IF THEY FALL WILTHIN THE AMBIT OF CORPORATE DEBTORS - By: - Mr. M. GOVINDARAJAN - Corporate Laws / IBC / SEBI - Dated:- 26-9-2022 - - In MAITREYA DOSHI VERSUS ANAND RATHI GLOBAL FINANCE LTD. AND ANR. - 2022 (9) TMI 1012 - SUPREME COURT , the respondent in the present appeal is Non Banking Financial Company. The respondent disbursed a loan of Rs.6 crores to Premier Limited under three separate loan-cum-pledge agreements. Doshi Holdings pledged shares held by it in Premier, in favor of the Financial Creditor, by way of security for the loan. Premier Limited failed to pay the loan amount. Therefore the respondent called upon Premier Limited to p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay the outstanding loan amount Rs.7,64,60,360/- on diverse dates between 28.06.2019 and 10.02.2020. On 14.02.2020 the respondent called upon Premier and Doshi Holdings, also described as the borrower under the Loan-cum-Pledge Agreements, to pay the entire outstanding loan amount. Premier Limited admitted and acknowledged its liability to pay its outstanding dues to the respondent under the Loan-cum-Pledge Agreements, but stated that it could not pay the same on account of genuine difficulty. On 21.09.2020, the respondent, as a financial creditor, filed an application before the Adjudicating Authority for initiation of corporate insolvency resolution process against Premier Limited for its default to repay the outstanding dues ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the tune of Rs. 8,35,25,398/-. On the same day, the respondent as a Financial Creditor also filed a petition against Doshi Holdings, under Section 7 of the Insolvency and Bankruptcy Code, 2016 ( Code for short), for initiation of corporate insolvency resolution process in respect of the same claim of Rs. 8,35,25,398/-, based on the same loan documents. The Adjudicating Authority admitted the application against Premier Limited on 29.01.2021. The Adjudicating Authority also admitted the application against Doshi holding on 19.02.2021. The appellant is the Director of both Premier Limited and Doshi holding. He filed an appeal before the National Company Law Appellate Tribunal against the order of Adjudicating Authority ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... admitting the application for corporation insolvency resolution process against Doshi holding. The National Company Law Appellate Tribunal dismissed the appeal filed by the appellant. Against the order of National Company Law Appellate Tribunal the appellant filed the present appeal before the Supreme Court. The appellant submitted the following before the Supreme Court- The financial creditor did not disburse any amount to Doshi Holding. The loan was granted to Premier Limited. Doshi holding did not get any amount under the loan-cum-pledge agreements and utilize the same. The Loan-cum-Pledge Agreements were standard form agreements in which Premier was the borrower and Doshi Holdings the pledgor. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... borrower and the pledgor have collectively been referred to as borrowers and individually referred to as borrower or pledgor for convenience. The appellant was authorized by Premier Limited and Doshi Holding to execute the loan-cum-pledge agreements on behalf of both separate entities. Since no disbursement has been made to Doshi Holdings against consideration for the time value of money, there was no obligation on the part of Doshi Holdings to make any repayment to the Financial Creditor. No financial debt is owed by Doshi Holdings to the Financial Creditor under Section 5(8) of the Code. As far as Doshi Holdings is concerned, the Loan-cum-Pledge Agreements only created a pledge of the shares of Doshi Holdi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngs in Premier in favor of the Financial Creditor. The Adjudicating Authority/Appellate Authority erred in arriving at the finding that Doshi Holdings was a borrower and hence liable to make repayment in respect of the loan disbursement to Premier. The Adjudicating Authority/Appellate Authority erred in arriving at the finding that Doshi Holdings was a borrower. The definition of financial debt in Section 5(8) of the IBC does not include a pledge. The Adjudicating Authority/Appellate Authority misconstrued the expression financial debt in Section 5(8) of the Code and/or failed to appreciate the scope and ambit of the said expression. The expressions Contract of Indemnity , Contract of Guarantee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Pledge are different from one and another in terms of their ramification and implication and they cannot be equated. The creation of pledge of shares of the Corporate Debtor did not and cannot amount to a guarantee and/or indemnity under Section 5(8) of the Code. Where Doshi Holding had only extended security by pledging shares, the respondent would at best be the secured debtor qua the security but, not a Financial Creditor within the meaning of Sections 5(7) and 5(8) of the Code. The Adjudicating Authority interchangeably referred to Doshi Holdings as a co-borrower/guarantor under the Loan-cum-Pledge Agreement, losing sight of the difference in the liability of a pledgor from that of a guarantor. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Appellate Authority failed to appreciate that the execution of a promissory note gives rise to a presumption that such promissory note is supported by consideration. The presumption is, however, rebuttable. The expressions borrower and pledgor had to be read in the context of the obligation of the parties under the Loan-cum-Pledge Agreement. the Adjudicating Authority had passed its order dated 19th February 2021, impugned in this appeal, ignoring its earlier finding pronounced in open Court on 29th January 2021 which held that under Section 7, if the claim against Premier Limited (Corporate debtor herein) is Admitted then for the same set of loans, arising under the same loan documents, the same debt/claim against Do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shi will not be permissible . Therefore the appellant contended that the petition under Section 7 of the Code against the Dohsi Holding was clearly not maintainable. The respondent submitted the following before the Supreme Court- Doshi Holdings was party to the Loan-cum-Pledge Agreements in its dual capacity as co-borrower and pledgor which had pledged its shares in Premier Limited in favor of the Financial Creditor. The Appellant had signed documents on behalf of Doshi Holdings in its capacity as co-borrower. Both Premier Limited and Doshi Holdings have been described as borrowers in the Loan-cum-Pledge Agreements. Doshi Holdings had acknowledged receipt of monies disbursed under three ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loan agreements by executing loan receipts. Doshi Holdings had also issued demand promissory note unconditionally promising repayment of loan to the Financial Creditor. The loan agreements, receipts and demand promissory notes have been signed by the Appellant in his capacity as the authorized signatory/Director of Doshi Holdings and Premier. After Premier Limited defaulted in payment of loan, demand notice was issued to Doshi Holdings to repay the loan in its capacity as co-borrower. An amount payable under a guarantee could never have been included inasmuch as amounts are never disbursed to a guarantor, but he is liable for debts of another. The definition of Corporate Debtor does not require as a pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -condition that monies should have been disbursed to the Corporate Debtor. The sine qua non for an entity to be considered as a Corporate Debtor is that such person/entity should owe a debt to any person and not that a disbursal has to be made to such a person/entity. The mere fact of it also being a pledgor is wholly irrelevant and does not in any manner disentitle the Respondent No.1 to initiate proceedings under Section 7 of the IBC against such a co-borrower. The Supreme Court considered the submissions made by the parties to the present appeal. The Supreme Court observed that- The Financial Creditor disbursed loan to the tune of Rs.6,00,00,000/- to Premier pursuant to the Loan-cum-Pledge Agreements r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eferred to above, executed both by Premier and by Doshi Holdings. Doshi Holdings was a party to the Loan-cum-Pledge Agreement in its dual capacity of borrower and pledgor of shares. The finding of the Appellate Authority that Doshi Holdings is a borrower, is based on its interpretation of the Loan-cum-Pledge Agreements and supporting documents. The interpretation given by the Appellate Authority is definitely a possible interpretation. The contract of indemnity, contract of guarantee and pledge are not one and the same- The contract of indemnity is a contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself or by the conduct of any other pers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on. In a contract of indemnity, a promisee acting within the scope of his authority is entitled to recover from the promisor all damages and all costs which he may incur. A contract of guarantee, on the other hand, is a promise whereby the promisor promises to discharge the liability of a third person in case of his default. The person who gives the guarantee is called the surety. The bailment of goods as security for payment of a debt or performance of a promise is a pledge. The Supreme Court held that if there are two borrowers or if two corporate bodies fall within the ambit of corporate debtors proceedings under Section 7 of the Code can be initiated against both the Corporate Debtors. The same amount cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be realized from both the Corporate Debtors. If the dues are realized in part from one Corporate Debtor, the balance may be realized from the other Corporate Debtor being the co-borrower. However, once the claim of the Financial Creditor is discharged, there can be no question of recovery of the claim twice over. The Supreme Court dismissed the appeal as it found no ground to interfere with the impugned judgment and order of the Appellate Authority. - - Scholarly articles for knowledge sharing authors experts professionals Tax Management India - taxmanagementindia - taxmanagement - taxmanagementindia.com - TMI - TaxTMI - TMITax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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