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TMI Blog2022 (11) TMI 756X X X X Extracts X X X X X X X X Extracts X X X X ..... ortium banks had decided to provide loans to the borrower Doshion. In the Definition and Interpretation section of the Security Trustee Agreement, an Event of Default has been stated as having the meaning ascribed to in the financing documents - The action of declaring an Event of Default is also an action wherein this procedure was to be followed. Thus, it is clear that the Event of Default cannot be declared by an individual bank under the individual financing documents of the participating banks in the Bank of Baroda consortium and recourse must be taken to the Security Trustee Agreement and the Inter-se Agreement. Clause 7.2 of the Inter-se Agreement sets out a clear procedure by which an Event of Default can be declared by any an individual lender belonging to the Bank of Baroda consortium and this procedure is quite akin to the procedure set out in clause (4) of the Security Trustee Agreement regarding declaration of an Event of Default . Action taken by IDBI Bank regarding declaration of Event of Default and thereafter recall of the loan - HELD THAT:- Prior to the issue of this letter to FIPL, a letter dated 20.9.2016 was sent by IDBI Bank to the borrower Do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng it. The corporate debtor Fivebro International Private Limited is freed from the rigours of CIRP and moratorium and other related provisions of IBC - Application disposed off. - Company Appeal (AT) (Insolvency) No. 658 of 2022 - - - Dated:- 15-11-2022 - (Justice Ashok Bhushan) Chairperson , (Dr. Alok Srivastava) Member (Technical) And (Mr. Barun Mitra) Member (Technical) For the Applicant : Ms. Vaishnavi Viswanathan, Advocate For the Respondent : Mr. Akshat Khare Advocate JUDGMENT [Per. Dr. Alok Srivastava, Member (Technical)] The present appeal is filed under section 61 of the Insolvency and Bankruptcy Code, 2016 (in short IBC ) by the Appellant assailing the order dated 10.5.2022 (hereinafter called Impugned Order ) in CP (IB) No. 570/2018 passed by the Adjudicating Authority (National Company Law Tribunal, Ahmedabad). As a result of the Impugned Order, section 7 application under IBC filed by the Financial Creditor IDBI Bank Limited (in short IDBI Bank ) has been admitted leading to initiation of Corporate Insolvency Resolution Process (in short CIRP ) of the corporate debtor Fivebro International Private Limited (in short FIPL ). 2. The f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s for both the parties and perused the record. 6. The Learned Counsel for the Appellant has argued that the Adjudicating Authority has reproduced provisions of the Deed of Guarantee in the Impugned Order, and without discussing the arguments advanced by the corporate debtor and without providing any reason whatsoever for disregarding the contents of additional affidavit dated 18.10.2021 filed by FIPL, the Adjudicating Authority has mechanically endorsed the arguments of the Applicant IDBI Bank (Respondent No. 1 in the present appeal). She has further claimed that the Impugned Order does not refer to the relevant provisions in the Security Trustee Agreement and the Inter-se Agreement, though both were extremely relevant in adjudication of the section 7 application. She has further argued that Respondent No.1 IDBI Bank has no locus standi to invoke the guarantee given for the corporate loan, as the rights and liabilities of the borrower and lenders regarding invocation of guarantee are governed by the Deed of Guarantee and a perusal of the Deed of Guarantee would reveal that the guarantee was executed by FIPL in favour of the Security Trustee IL FS Trust Company Limited. She has c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ake enforcement action and an incomplete reading of clause 7.5, and that too incorrectly, cannot provide any right to Respondent No. 1 IDBI Bank to take enforcement related action for invocation of guarantee provided by FIPL. She has further argued that under clause 4 of the Inter-se Agreement, the rights and obligations of each lender is joint and several, but a plain reading of this clause makes it clear that for enforcement of security by the Security Trustee, the provisions contained in the agreement shall override any provisions contained in or implied by the financing documents/security documents. 10. She has also claimed that since the loan restructuring exercise failed on account of Standard Chartered Bank not disbursing the amount post restructuring, the guarantor stands completely discharged since Doshion could not be resuscitated after going through an incomplete loan restructuring process. 11. Elaborating further, the Learned Counsel for Appellant has submitted that when a guarantee is given in respect of a single debt or specific transactions, it comes to an end when the guaranteed debt that is paid or the promise is duly performed. In the instant case, the guara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Manoj Gaur [(IB-29) (PB) /2022 order dated 5.5.2022] wherein it is held that the lenders have to act in accordance with the provisions of Security Trustee Agreement, when such an agreement has been executed by the members of the banks consortium, and a single lender cannot act unilaterally to seek insolvency resolution under the IBC. 15. The Learned Counsel for Respondent IDBI Bank has argued that in the adjudication of an application under section 7 of IBC, NCLT is only required to only examine the existence of valid debt and valid default, and no further enquiry or examination of any objection or contractual clauses is permissible, as is held in the judgment of Hon ble Supreme Court in the case of Innoventive Industries Ltd. vs. ICICI Bank and Anr. (2018 1 SCC 407). Regarding the question of locus standi of IDBI Bank to file an application under section 7 of IBC, the Learned Counsel for Respondent No. 1 has submitted that the contractual clauses of the Deed of Guarantee stipulate that the Security Trustee is to act on behalf of all the banks and financial institutions as their agent pursuant to the Security Trustee agreement dated 26.11.2013 but that is not a bar to any indiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of IDBI Bank loan, since IDBI Bank had completed its commitment in the debt restructuring package. 18. The Learned Counsel for Respondent IDBI Bank has clarified that the concept of variation with reference to section 133 of the Indian Contract Act would only apply in case Standard Chartered Bank were to file claim for enhanced amount, but by no stretch of imagination the corporate debtor can be said to be discharged from its guarantee obligation as there has been no change of condition qua the sanctioned and disbursed amount by the IDBI Bank. He has added that under section 128 of the Indian Contract Act, the corporate debtor has co-extensive liability with that of principal borrower as such a guarantee is a continuing guarantee in terms of the section 129 of the Indian Contract Act. 19. The Learned Counsel for Respondent IDBI Bank has distinguished the facts in the matter of Keshavlal Harilal Setalvad (supra) from the present case, by stating that the former is a case of private mortgage between the two private parties and not consortium lending under financial system, as is the case in the present matter. He has also referred to the admission order passed by NCLT, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... EREAS XX XX XX XX E. The Consortium of Lenders have agreed to enter into this Inter-se Agreement for the purpose of co-ordinating the exercise of their rights, powers and ranking and sharing of securities crated in favour of the Security Trustee and remedies and fulfilment of their obligations under the transaction documents. Xx xx xx xx 5. Coordinated approach Xx xx xx xx 5.1 All the Lenders shall act in the spirit of the Consortium and as far as possible in the best interests of the consortium having due regard to the interest of each of the Lenders. 5.2. It is the objective of the Lenders to have a coordinated approach to taking of all action under the Financing Documents, the other Transaction Documents and this Agreement, unless otherwise specifically provided in this Agreement including the taking of an Enforcement Action. Xx xx xx xx 7. Actions under the Transaction Documents 7.1 Any decision/action (whether in the nature of authorisation, direction, approval, waiver or consent or otherwise) in relation to the matters set out below shall be taken by the Lenders or the Lead Bank or consultation with the Lenders in the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities proposed to be reduced. II. Deed of Guarantee THIS DEED OF GUARANTEE made on the 27th day of June, 2014 by M/S FIVEBRO INTERNATIONAL PRIVATE LIMITED .in favour of IL FS TRUST COMPANY LIMITED .. Xx xx xx xx AND WHEREAS one of the conditions specified and contained in the said Agreements of Loan is that the Borrower shall procure and furnish to the Security Trustee a guarantee guaranteeing due payment by the Borrower of the said principal sum (not exceeding Rs. 408.64 crores) more particularly described in the Annexure attached hereto together with interest costs charges expenses and/or other money due to the BOB consortium in respect of or under the above-mentioned credit facilities or any of them on demand by the BOB consortium. AND WHEREAS the guarantor has at the request of the Borrower and in consideration of the BOB Consortium having agreed to grant /granted at the request of guarantor the abovementioned credit facilities in the Borrower have agreed to execute the guarantee in favour of the Security Trustee on the terms an in the manner hereinafter appearing. Xx xx xx xx 1. If at any time default shall be made by the Borrower in p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Financing documents. Xx xx xx xx 2. Appointment and Rights of the Security Trustee 2.1 Appointment of Security Trustee Xx xx xx 2.1.2 The Borrower shall, in accordance with the Agreements, create or cause to be created in favour of the Security Trustee the security, who shall hold the same for the benefit of the Secured Parties entitled to such Security. Xx xx xx xx 2.2.5 As to matters not expressly provided for in this Security Trustee Agreement or in any other Financing documents to which the Lenders are party, the Security trustee may refrain from exercising any right, owner or discretion, unless and until specifically instructed in writing by the Lenders, and the Security Trustee shall not be responsible for any consequences arising as a result of the Security Trustee not acting or taking any action pursuant to such instructions, which shall be binding on the Lenders, if they had been in receipt of written intimation from the security Trustee of its inability to take such action. Xx xx xx xx 4. Enforcement of Security and Actions under the Financing Documents Any Lender/s proposing to take any decision / action in connec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which is regarding enforcement of security and actions under the financing documents, any Lender proposing to take any decision/action in connect with the matters contained in clause (3) of the Security Trustee Agreement has to intimate the Security Trustee about such action by a written notice and the Security Trustee should then inform the same to other Lenders within a day on receipt of such notice of such proposed decisions/actions by the Lender. The action of declaring an Event of Default is also an action wherein this procedure was to be followed. Thus, it is clear that the Event of Default cannot be declared by an individual bank under the individual financing documents of the participating banks in the Bank of Baroda consortium and recourse must be taken to the Security Trustee Agreement and the Inter-se Agreement. 25. We also note that a similar procedure has been established in the Inter-se Agreement regarding actions under the transaction documents, which can be seen in clause 7 of this agreement. Clause 7.1 (b) states that in relation to declaration of an event of default under the financing documents/recall of the facilities, action shall be taken by the Lender or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n individual bank wanted to declare an Event of Default , it had to follow the procedure set out in clause 7.2 of the Inter-se Agreement (as well as Clause 4 of the Security Trustee Agreement) and intimates the Security Trustee of its intention to declare default, it has clearly not been done by Respondent IDBI Bank. The Respondent IDBI Bank has not made any averments that it had communicated its intention of declaring an Event of Default to the Security Trustee or the Lead Bank Bank of Baroda. Thus we find that the Event of Default declared by the Respondent IDBI Bank has not been declared in accordance with the Inter-se Agreement entered into between participating banks of the Bank of Baroda consortium and the Security Trustee Agreement, and therefore cannot be called a valid Event of Default . 28. We note that in the Impugned Order the Adjudicating Authority has relied on clause 7.5 of the Inter-se Agreement to hold that any lender is at liberty to take any decision or action on any other matter and is not required to take any approval from any other lender. We find that clauses 7.1 and 7.2 of the Inter-se Agreement clearly lay down that an Event of Default is covered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lication and would like to leave this issue at this stage only. We also feel that the arguments of the Learned Counsel for Appellant regarding the applicability of sections 129 and 133 of the Indian Contract Act in the present case would not be relevant in so far as adjudication of application 7 is concerned. 31. We note the order of NCLT in the matter of IDBI Bank vs. Manoj Gaur (supra) wherein it is held that if the Security Agreement lays down that the lenders shall act collectively then IDBI Bank could not have acted on behalf of all the lenders, without obtaining their formal consent and substituting itself in place of the Security Trustee. We also take note of the judgment of Hon ble Supreme Court in the matter of State Bank of India vs. V. Ramakrishnan (supra) wherein the Hon ble Apex Court has held that the continuing liability under IBC for corporate guarantees is not res-integra and shall be operative for individual guarantors. Both these judgments are, in our opinion, applicable in the present case. 32. On the basis of detailed discussion in the aforementioned paragraphs, we are of the clear opinion that, in view of the stipulations and provisions in the Inter-se A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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