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TMI Blog2023 (8) TMI 998X X X X Extracts X X X X X X X X Extracts X X X X ..... by approval of the Resolution Plan, personal guarantors are not per se and ipso facto discharge from its obligation which may arise of the guarantee given to the Financial Creditor. The use of above expressions conversely indicates that there may be situations and circumstances, for example, relevant clauses in the Resolution Plan by which personal guarantors may be discharged. The judgment of the Hon ble Supreme Court in Lalit Kumar s case cannot be read to mean as laying down law that personal guarantee never can be discharged in a Resolution Plan. There can be no dispute that Moratorium under Section 14 is not applicable on the personal guarantors. Non-applicability of the Moratorium on personal guarantor is with different object and purpose. Personal guarantors are liable along with the principal borrower and can be proceeded with for recovery of dues by the Financial Creditor but the question as to whether personal guarantee given to the Financial Creditor can be extinguished in a Resolution Plan is a question which is a separate question and was not under consideration by the Hon ble Supreme Court in State Bank of India vs. V. Ramakrishnan and Anr [ 2005 (10) TMI 542 - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... publication of Form-G, Appellant submitted its Resolution Plan. There were multiple rounds of discussions and deliberations with regard to Final Resolution Plan dated 05.07.2021 read with addendum dated 03.08.2021 submitted by the Appellant which was placed before the Committee of Creditors (CoC) in its 18th CoC meeting. Resolution Plan of the Appellant was approved by the CoC by 78.04% vote shares on 30.08.2021. The Letter of Intent was issued to the Appellant on 31.08.2021 and thereafter on 16.09.2021, Resolution Professional filed an I.A No. 190 of 2021 before the Adjudicating Authority for approval of the Resolution Plan. Bank of Baroda, one of the members of the CoC holding 5.83% voting share, had filed an Affidavit objecting to the Resolution Plan on the basis that it provided for extinguishment of rights under personal guarantees. The Adjudicating Authority vide impugned order dated 06.01.2023 rejected I.A No.190 of 2021. Adjudicating Authority took the view that CoC cannot extinguish right of the particular secured creditor to proceed against the personal guarantor of the Corporate Debtor, hence, the plan contravenes the provision of Section 30(2)(e) of the Code. It was al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y and submits that the plan could not have contained any provision by which personal guarantees given in favour of the Bank of Baroda could have been extinguished. Bank of Baroda is fully entitled to proceed to realise its dues from the personal guarantors since the payment under the plan does not liquidate the dues of the Bank of Baroda. 7. We have considered the submissions of the parties and perused the record. 8. The Adjudicating Authority in the impugned order has also noticed the fact that out of the amount proposed in the Resolution Plan, Rs.45,00,00,000/- is towards the value of the Corporate Debtor and Rs.23,81,75,744/- is towards the release of personal guarantees. The Adjudicating Authority, however, accepted the objection of the Bank of Baroda that CoC cannot extinguish the right of the particular secured creditor to proceed against the personal guarantor of the Corporate Debtor. In paragraphs 11 12 of the impugned order, Adjudicating Authority has given following reasoning for rejecting the Application filed for the approval of the Resolution Plan: 11. In our considered opinion the CoC can take any commercial decision relating to insolvency of the corporat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lows:- 37. Resolution plan.- A resolution plan shall provide for the measures, as may be necessary, for insolvency resolution of the corporate debtor for maximization of value of its assets, including but not limited to the following: - (a) transfer of all or part of the assets of the corporate debtor to one or more persons; (b) sale of all or part of the assets whether subject to any security interest or not; [(ba) restructuring of the corporate debtor, by way of merger, amalgamation and demerger;] (c) the substantial acquisition of shares of the corporate debtor, or the merger or consolidation of the corporate debtor with one or more persons; [(ca)cancellation or delisting of any shares of the corporate debtor, if applicable;] (d) satisfaction or modification of any security interest; (e) curing or waiving of any breach of the terms of any debt due from the corporate debtor; (f) reduction in the amount payable to the creditors; (g) extension of a maturity date or a change in interest rate or other terms of a debt due from the corporate debtor; (h) amendment of the constitutional documents of the corporate debtor; (i) issuance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Code as follows: 3. Definitions.--In this Code, unless the context otherwise requires,-- xxx xxx xxx (31) security interest means right, title or interest or a claim to property, created in favour of, or provided for a secured creditor by a transaction which secures payment or performance of an obligation and includes mortgage, charge, hypothecation, assignment and encumbrance or any other agreement or arrangement securing payment or performance of any obligation of any person: Provided that security interest shall not include a performance guarantee; 15. The Hon ble Supreme Court again in Lalit Kumar Jain v. Union of India- (2021) 9 SCC 321 had occasion to consider the provisions of the Code as well as the law pertaining to personal guarantor and the consequence of approval of the Resolution Plan on the rights of the personal guarantors. In the said judgment, the Hon ble Supreme Court held that sanction of a resolution plan does not per se operate as a discharge of the guarantor s liability. It was held that approval of a resolution plan does not ipso facto discharge a personal guarantor. The above observations have been made by the Hon ble Su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the principal debtor may secure by operation of law in bankruptcy (or in liquidation pro- ceedings in the case of a company) does not absolve the surety of his liability (see Jagannath Ganeshram Agarwala v. Shivnarayan Bhagirath [AIR 1940 Bom 247; see also In re Fitzgeorge Ex parte Robson [(1905) 1 KB 462] ). 109. This legal position was noticed and approved later in Industrial Finance Corpn. of India Ltd. v. Cannanore Spg. Wvg. Mills Ltd. 69An earlier decision of three judges, Punjab National Bank v. State of U.P pertains to the issues regarding a guarantor and the principal debtor. The court observed as follows: 1. The appellant had, after Respondent 4's management was taken over by U.P. State Textile Corporation Ltd. (Respondent 3) under the Industries (Development and Regulation) Act, advanced some money to the said Respondent 4. In respect of the advance so made, Respondents 1, 2 and 3 executed deeds of guarantee undertaking to 69(2002) 5 SCC 54 70(2002) 5 SCC 80 pay the amount due to the bank as guarantors in the event of the principal borrower being unable to pay the same. 2. Subsequently, Respondent 3 which had taken over the management of Resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of recovery which is referred to in the said Act. 124. In Kaupthing Singer and Friedlander Ltd. (supra) the UK Supreme Court re- viewed a large number of previous authorities on the concept of double proof, i.e. re- covery from guarantors in the context of insolvency proceedings. The court held that: 11. The function of the rule is not to prevent a double proof of the same debt against two separate estates (that is what insolvency practitioners call double dip ). The rule prevents a double proof of what is in substance the same debt being made against the same estate, leading to the payment of a double dividend out of one estate. It is for that reason sometimes called the rule against double dividend. In the simplest case of suretyship (where the surety has neither given nor been provided with security, and has an unlimited liability) there is a triangle of rights and liabilities between the principal debtor (PD), the surety (S) and the creditor (C). PD has the primary obligation to C and a secondary obligation to indemnify S if and so far as S discharges PD's liability, but if PD is insolvent S may not enforce that right in competition with C. S has an obligation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 31(1), in fact, makes it clear that the guarantor cannot escape payment as the Resolution Plan, which has been approved, may well include provisions as to payments to be made by such guarantor. This is perhaps the reason that Annexure VI(e) to Form 6 contained in the Rules and Regulation 36(2) referred to above, require information as to personal guarantees that have been given in relation to the debts of the corporate debtor. Far from supporting the stand of the Respondents, it is clear that in point of fact, Section 31 is one more factor in favour of a personal guarantor having to pay for debts due without any moratorium applying to save him. 26. We are also of the opinion that Sections 96 and 101, when contrasted with Section 14, would show that Section 14 cannot possibly apply to a personal guarantor. When an application is filed under Part III, an interim-moratorium or a moratorium is applicable in respect of any debt due. First and foremost, this is a separate moratorium, applicable separately in the case of personal guarantors against whom insolvency resolution processes may be initiated under Part III. Secondly, the protection of the moratorium under these Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court to say that in the Resolution Plan itself there can be provision to move against personal guarantor. We do not agree with these submissions. It appears Resolution Plan can have jurisdiction as to right of payment to be received from Personal Guarantor. To us, it does not appear that the Judgment lays down that in the Resolution Plan of the Corporate Debtor itself provision could be made to consume property of Personal Guarantor without recourse to appropriate proceedings which were, earlier as per Acts then applicable (and now without recourse to Part III of IBC). Before Part-III was enforced against personal guarantors of the Corporate Debtor, the provisions under which one could move against the personal guarantors are as mentioned by the Hon'ble Supreme Court in para 15 of the judgment in the matter of State Bank of India v. V. Ramakrishnan . After coming into force of Part-III, now one would have to proceed as per Chapter 111 of Part-III of IBC. If the arguments of the Respondents were to be accepted, there would have been no need of the earlier provision being maintained. After Part-III is enforced there would be no need of Part-III if properties of the Pers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y clear. If all the factors that need to be taken into account for determining whether or not the corporate debtor can be kept running as a going concern have been placed before the Committee of Creditors and CoC has taken a conscious decision to approve the resolution plan, then the adjudicating authority will have to switch over to the hands off mode. It is not the case of the corporate debtor or its promoter/Director or anyone else that some of the factors which are crucial for taking a decision regarding the viability and feasibility, were not placed before CoC or the resolution professional. The only basis for the corporate debtor to raise the issue of viability and feasibility is that the ownership and possession of the ethanol plant and machinery is the subject- matter of another dispute and that the resolution plan does not take care of the contingency where the said plant and machinery may not eventually be available to the successful resolution applicant. 22. Present is a case where it has been categorically pleaded that the issue of release of personal guarantees was deliberated by the CoC in 13th, 14th and 15th CoC meetings. In 13th CoC meeting held on 29.05.2021 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the interest of revival of the corporate debtor and maximization of value of its assets. This wisdom is not a matter of rhetoric but is denoting a well-considered decision by the protagonist of CIRP ie., CoC. As observed by this Court in K. Sashidhar (supra), the financial creditors forming CoC act on the basis of thorough examination of the proposed resolution plan and assessment made by their team of experts. The opinion on the subject-matter expressed by them after due deliberations in CoC meetings through voting, as per voting shares, is a collective business decision. This Court also observed in K. Sashidhar that there is an intrinsic assumption that financial creditors are fully informed about the viability of the corporate debtor and feasibility of the proposed resolution plan. These observations read with the observations in Essar Steel (supra) with reference to the reasons stated in the report of Bankruptcy Law Reforms Committee of November 2015, make it clear that commercial wisdom of CoC is assigned primacy in CIRP for it represents collective business decision, which is arrived at after thorough examination of the proposed resolution plan and assessment made with involv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that such security interest by the Corporate Debtor could have been very well dealt in the Resolution Plan. In paragraphs 29 to 32 of the judgment, following was held:- 29. From the facts of the present case, it is clearly noticeable that security interest of the Appellant was part of the CIRP process since the Appellant has filed its claim on 05.02.2020 in Form C and its claim although was rejected as Financial Creditor but was accepted as Other Creditor with notional value of Re.1. The Resolution Professional has communicated to the Appellant on 19.10.2020 that since no default has been committed by the Principal Borrower against its claim of Rs.133 Crore and odd, nominal value of Re.1 only is admitted. It is also noticeable that the Appellant at no point of time challenged the admission of its claim by Resolution Professional as Other Creditor . The main distinguishing feature of present case with that of Jaypee Kensington is that in Jaypee Kensington security interest of the Lender of that case was not part of the CIPR process but in the present case same was part of the CIRP process. 30. When any asset including security interest in the asset is part of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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