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TMI Blog2024 (3) TMI 1317X X X X Extracts X X X X X X X X Extracts X X X X ..... f subrogation is an absolute right of the guarantor, however, the issue becomes different, if it falls within the domain of the Code in the context of CIRP proceedings. We note that as per notification dated 15.11.2019, the Personal Guarantors became liable under the Code and therefore, the treatment of Personal Guarantors under the Code are to be treated differently vis- -vis under the contract of guarantees under the Indian Contract Act, 1872. The denial of right of subrogation is no more res-judicata and has been decided in catena of the judgments by the Hon ble Supreme Court of India. Hon ble Supreme Court of India in COMMITTEE OF CREDITORS OF ESSAR STEEL INDIA LIMITED THROUGH AUTHORISED SIGNATORY VERSUS SATISH KUMAR GUPTA OTHERS [ 2019 (11) TMI 731 - SUPREME COURT] noted that the Financial Creditors can pursue their claims against the Personal Guarantors to the Corporate Debtor and right of subrogation gets extinguished, although the apex Court decided not to express conclusive opinion which might have affected them pending litigations on account of invocation of such guarantees. It is now well settled law, in light of the Essar Case that rights of subrogation that may arise a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itors in pursuing their legal rights to recover their outstanding debts from the Personal Guarantors to the Corporate Debtor. After all, it cannot be anyone s case to write off public money by such circuitous route or hypothetical legal assumption. The Hon'ble Supreme Court, in SWISS RIBBONS PVT. LTD. AND ANR. VERSUS UNION OF INDIA AND ORS. [ 2019 (1) TMI 1508 - SUPREME COURT] , has categorically recognised the concept of preserving the corporate debtor as a going concern while ensuring maximum recovery for all creditors to be the intent of the Code. Thus, commercial wisdom of the CoC has been given supremacy and no grounds exist for the Adjudicating Authority or Appellate Tribunal to interfere. There are no error in the Impugned Order - appeal dismissed. - [ Justice Rakesh Kumar Jain ] Member ( Judicial ) And [ Mr. Naresh Salecha ] Member ( Technical ) For the Appellant : Mr. Krishnendu Dutta, Sr. Adv. with Mr. Ajay Kumar, Ms. Stuti Vatsa, Mr. Vaibhav Tiwari, Mr. Vijayant Goel, Advocates. For the Respondents : Mr. Savar Mahajan, Advocates for R4. Ms. Aishwarya Gupta, Adv. for R2. Mr. Ankur Mittal, Mr. Bhaskar, Adv. for R3. JUDGEMENT NARESH SALECHA, MEMBER (TECHNICAL) 1. Ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in in all four appeals and Mr. Kuldeep Kumar Bassi is the Respondent No. 4 herein an in all four appeals who was the Resolution Professional of the Corporate Debtor. 7. The Appellants brought out that the Resolution Plan submitted by the SRA/ Respondent No. 2 provided for assignment of debt of Financial Creditors to the Special Purpose Vehicle (in short SPV ) of SRA named as Hasaud Steels Limited. The Appellants further brought out that on the request of the Financial Creditors, the concept of Excluded Rights was incorporated as part of the final Resolution Plan dated 06.05.2019 r/w Addendum dated 17.06.2019. 8. The Appellants stated that the Resolution Plan was approved with a voting percentage of 79.3% by the CoC and thereafter the entire debt of the Corporate Debtor owed to the Financial Creditors were assigned to the SPV and the assignment deed dated 27.10.2020 was signed. 9. The Appellants further stated that the Financial Creditors also gave no due Certificate dated 23.11.2020 in favour of the Corporate Debtor. 10. It is the case of the Appellants that since the entire debt owed by the Corporate Debtor was assigned to the SPV, such debt stood transferred from the Financial Cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whichever provision that is inconsistent with Section 30(2)(e) of the Code shall be treated as not approved. 249. For this plan is spread in various schedules running into several pages, since all these aspects have not been brought to the notice of this Bench at the time of making submissions. we hereby hold that whichever provision that is inconsistent with Section 30(2)(e) of the Code, it shall be treated as not approved by this Bench (Emphasis Supplied) 16. The Appellants submitted that it is a settled law that once debt is assigned by the Financial Creditors in favour of any other third entity, he does not retain any independent right and subsequent rights to pursue any legal remedies arising of such debts. Elaborating further, the Appellants submitted that in the present Appeals, since the entire financial debt was transferred to the SPV by the Financial Creditors, the Financial Creditors did not have any right against the Personal Guarantors after the deed of assignment has been signed by the Financial Creditors in favour of the SPV. 17. The Appellants empathetically submitted that the rights arising out of the debt are integral rights and need to be transported to the thir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s per Clause 16 of the RBI circular RB/2018-19/203 dt. 7.6.2019, prima facie. there would be extinguishment of debt in the books of respondents No.3 to 11. This is because if such debt is not extinguished in the books of respondents No.3 to 11, the Resolution Plan itself cannot be deemed to be implemented. 23. The Appellants reiterated that the approval of Resolution Plan vide Impugned Order dated 26.10.2020 in allowing the term loan and working capital lenders of the Corporate Debtor who were defined as Direct Financial Creditors (in short DFCs ) to have ability and right recourse against the guarantees given by the Personal Guarantors, despite the entire debt being assigned to the SPV as a result of which no debt whatsoever remained in the books of Corporate Debtor as well the Financial Creditors and therefore, no recourse to the guarantees could survive with the Financial Creditors after signing the assignment deed in favour of the SPV. 24. The Appellants further argued that in case the Financial Creditors retained some portion of the financial debt, perhaps the Financial Creditors could have pursued against the Personal Guarantors for remaining debts which is not the case here. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gainst the Personal Guarantors is bad in law. 31. The Appellants also assailed the Adjudicating Authority for lack of application of mind and dereliction of duty in examining the crucial aspect of Resolution Plan which was violative of the Code as reflected in para 249 of the Impugned Order. 32. The Appellants also assailed the Impugned Order with reference to Para 197 which entitled the Financial Creditors to initiate proceedings against the Personal Guarantors whereas the Financial Creditors have already made claims against the Corporate Debtor and received the payment through the Resolution Plan. 33. The Appellants reiterated that since no debt remains and survives both in the books of the Corporate Debtor and in the books of the Financial Creditors, the portion of the Resolution Plan which empowers the Financial Creditors to pursue legal remedies against the Personal Guarantors is against the law of the land as it is a settled law that liability towards the guarantee travels along with the debts and cannot be separated from debt assignment. 34. The Appellants assailed the Impugned Order whereby the Resolution Plan has extinguished its statutory rights of subrogation as guaranto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the guarantor. 41. The Respondent No. 2 further cited judgment of Hon ble Supreme Court of India in the matter of SBI Vs. Ramakrishnan [(2018) 17 SCC 394], where it was held that the Guarantors cannot escape payment obligation on the Resolution Plan taking effect under Section 133 of the Indian Contract Act, 1872 and therefore, the principle that any change made to the debt owed by the Corporate Debtor without the consent of the surety, discharge surety is, inapplicable in the present case as the Resolution Plan is binding on the Guarantors in terms of the Code. 42. The Respondent No. 2 gave an overall scheme of the Resolution Plan and submitted that the unpaid part of the debt of the Corporate Debtor was assigned to the SPV established by him as SRA whereas the personal guarantees furnished by the Appellants continued with the Financial Creditors. The Respondent No. 2 stated that this was very specific and clear part of the Resolution Plan and therefore cannot be challenged by the Appellants to avoid their financial obligations and further submitted that the Resolution Plan also extinguished the rights of the subrogation of the Appellants. The Respondent No. 2 submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n helping revival of the Corporate Debtor and therefore the intention of the Code is not to provide of free exit to such Personal Guarantors to the Corporate Debtor without fulfilling their stipulated financial liabilities based on which the Financial Creditors gave the loans and credit facilities to the Corporate Debtor. 50. The Respondent No. 3 stated that the Impugned Order in Para 197 clearly mentioned that resolution of debt cannot be mis-constitute as full satisfaction of debts payable to the Creditors as resolution of debt under the approved Resolution Plan is only to the extent of application against the insolvent corporate debtor which cannot take away rights of the Financial Creditors to proceed against the Personal Guarantors to the Corporate Debtor. 51. The Respondent No. 3 stated that CoC deliberated extensively before approving the Resolution Plan of the Respondent No. 2 and provided specific clause regarding the Excluded Rights of the Financial Creditors to proceed legally against the Personal Guarantors to the Corporate Debtor in order to recover their money not provided in the Resolution Plan. 52. The Respondent No. 3 submitted that the various clauses of the incor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Concluding their arguments, the Respondent No. 3 requested this Appellate Tribunal to dismiss the Appeals with heavy cost. 59. Mr. Kuldeep Kumar Bassi is the Respondent No. 4 in the present Appeal and Erstwhile Resolution Professional of the Corporate Debtor also denied all the averments made by the Appellants on similar grounds as brought out by the Respondent Nos. 2 3, discussed above. 60. The Respondent No. 4 brought out the relevant facts and the history of the case and particularly highlighted Para 197 of the Impugned Order dated 26.10.2020 which clearly recognised the facts regarding non availability of right of the subrogation to the Appellants herein. 61. The Respondent No. 4 also submitted that it is the absolutely legally tenable provisions provided in the Resolution Plan for continuation of personal guarantees which can be independently pursued by the Financial Creditors for unpaid debts. 62. The Respondent No. 4 submitted that it was business decisions of the SRA as detailed out in Resolution Plan to revive the Corporate Debtor and has provided the legal rights and liabilities including the rights of the Financial Creditors to carve out the concept of Excluded Rights in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st the payment of unpaid CIRP Costs (in the manner set out on Section 1.1 of Part B) and payments to the Operational Creditors (in the manner set out in Section 1.3. Section 1.4 and Section 1.5 of Part B below), the Admitted Financial Debt owing to the Financial Creditors will be dealt with, in the following manner: (i) The Corporate Guarantee Debt Payment shall be paid to the Related Entity Creditors on a pro rata basis to the amount payable to such creditor, in the manner set out in Step 3 of Schedule 2 (Resolution Plan Steps) (ii) The Remaining Debt (and all rights of the Financial Creditors in respect of such debt), shall stand assigned/novated to the purchaser and the Loan Assignment Payment shall be paid in the manner set out in Step 4 of Schedule 2 (Resolution Plan Steps). on a pro rata basis to the amount payable to the Direct Financial Creditors. Upon such assignment, the Purchaser shall be entitled to exercise all rights as a creditor in respect of the Remaining Debt, including the right to enforce any security, guarantee or mortgage granted in respect of such debt. 2. Para 1.13 of the Addendum: Definition of Remaining Debt - Remaining Debt shall mean all rights, title, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tors in absence of any debt after extinguishment of such debts upon assignment in terms of the RBI Prudential Framework for Resolution of Stressed Assets dated 07.06.2019 and as stipulated in the approved Resolution Plan. Other issues which are required to be considered shall, inter-alia, includes: a. Whether, the right of subrogation shall stand extinguished after approval of the Resolution Plan under the Code or the same will continue to vest with Personal Guarantors in terms of the Indian Contract Act, 1872. b. Whether, mere right to sue in terms of Section 6(e) of the Transfer of Property Act, 1882 will come into play in the present Appeals. c. The implications on the rights and obligations of the Personal Guarantor to the Corporate Debtor in case the entire debt stand transferred or assigned and the Financial Creditors retained rights to peruse legal remedies against such Personal Guarantor by way of Excluded Rights .. All such issues are inter mingled, inter connected and to some extent depends upon each other, therefore, we shall take up and discuss al above issue in joint manner in subsequent paras. 68. We are of the opinion that the intent of the legislature behind the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial Creditors, such Personal Guarantors will become entitled to take over the rights or remedies which the Financial Creditors had against the Corporate Debtor. 71. We shall take into account the Section 140 and 141 of the Indian Contract Act, 1872 which reads as under :- 140. Rights of surety on payment or performance. Where a guaranteed debt has become due, or default of the principal debtor to perform a guaranteed duty has taken place, the surety upon payment or performance of all that he is liable for, is invested with all the rights which the creditor had against the principal debtor. 141. Surety s right to benefit of creditor s securities. A surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship is entered into, whether the surety knows of the existence of such security or not; and if the creditor loses, or, without the consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security. Illustrations (a) C, advances to B, his tenant, 2,000 rupees on the guarantee of A. C has also a further security for the 2,000 rupees by a mortgage of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Guarantors right of subrogation is clear departure from establish principles of contract guarantee which are covered under Section 140 and 141of the Indian Contract Act, 1872. 75. It may be alternative argument that if the Corporate Debtor is not required to pay the guarantors as a consequence of subrogation right, the Corporate Debtor may unjustly get enriched at the expense of the Guarantors, in case the financial conditions of the Corporate Debtor improve and the Corporate Debtor becomes capable to settle all the claims of the original lenders which have been paid or settled by the guarantors. On the other hand, if such contingencies and uncertainties on account of rights of subrogation is allowed to be continue, the Corporate Debtor even after resolution as a result of approved Resolution Plan, will always be subject to financial uncertainties and vagaries due to such claims by the Personal Guarantors in future. This clearly is not the intent of the code which has been consciously made for the revival of the Corporate Debtor and has adopted the concept of clean slate theory for the reborn corporate entity under new management. 76. Now we will also look into the aspect of Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the corporate debtor, pledge of shares of the corporate debtor (other than corporate guarantees and personal guarantees) related in any manner to the corporate debtor) to the resolution applicant and/or its connected persons, and/or banks or financial institutions designated by the resolution applicant in this regard, pursuant to the Acquisition Structure, with effect from the effective date: -Issue such letters and communications, and take such other actions, as may be required or deemed necessary for the release, assignment or novation of (1) the encumbrance over the assets of the corporate debtor, and (ii) the pledge over the shares of the corporate debtor: within 5 (five) business days from the effective date: and - Be deemed to have waived all claims and dues (including interest and penalty, if any) from the corporate debtor arising on and from the insolvency commencement date, until the effective date 103. Shri Rohatgi, learned Senior Advocate appearing on behalf of Shri Prashant Ruia, also pointed out Section XIII(1)(g) of the resolution plan dated 23-10-2018, in which it is stated as follows: Upon the approval of the resolution plan by the Adjudicating Authority in relati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the debt owed by the corporate debtor, without the surety's consent, would relieve the guarantor from payment. Section 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 us 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. (Emphasis Supplied) We note that the ratio emerges from above judgment is that in view of Section 31 of the Code, the Financial Creditors can pursue against the Personal Guarantors to the Corporate Debtor. 81. Lalit Kumar Jain vs. Union of India Ors. [(2021) 9 SCC 321] 130. The rationale for allowing directors to participate in meetings of the CoC is that the directors' liability as personal guarantors persists a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t absolve the surety/guarantor of his or her liability, which arises out of an independent contract. 137. For the foregoing reasons, it is held that the impugned notification is legal and valid. It is also held that approval of a resolution plan relating to a corporate debtor does not operate so as to discharge the liabilities of personal guarantors (to corporate debtors).... (Emphasis Supplied) This judgement paves clear way for the Financial Creditors to pursue their legal remedies against the Personal Guarantor to the Corporate Debtor. Having noted above judgment, it will not be worthwhile to repeat what flows clearly from above judgment. The above judgement of the Apex Court is binding and by a large applicable to the facts of these appeals. 82. It is now well settled law, in light of the Essar Case (Supra) that rights of subrogation that may arise against the Corporate Debtor can be extinguished under the Resolution Plan and therefore the arguments of the Appellant on issue of rights of subrogation s are not convincing. If the rights of subrogation are allowed to continue against the Corporate Debtor under the management of the new SRA, the same would have the effect of puttin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing, secured or determined, cannot be transferred.] (e) A mere right to sue 5 *** cannot be transferred. (f) A public office cannot be transferred, nor can the salary of a public officer, whether before or after it has become payable. (g) Stipends allowed to military, 6 [naval], 7 [air-force] and civil pensioners of 8 [the Government] Government] and political pensions cannot be transferred. (h) No transfer can be made (1) in so far as it opposed to the nature of the interest affected thereby, or (2) 9 [an unlawful object or consideration within the meaning of section 23 of the Indian Contract Act, 1872 (9 of 1872), or (3) to a person legally disqualified to be transferee]. [(i) Nothing in this section shall be deemed to authorise a tenant having an untransferable right of occupancy, the farmer of an estate in respect of which default has been made in paying revenue, or the lessee of an estate under the management of a court of Wards, to assign his interest as such tenant, farmer or lessee.] (Emphasis Supplied) It may be argued that the purpose of stipulating Section 6(e) i.e., non-transferable of mere right to sue or such actionable claims is to prohibit the practice of gambling o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to sue cannot be transferred. A bare right of action might be claims to damages for breach of contract or claims to damages for tort. An assignment of a mere right of litigation is bad... The reason behind the rule is that a bure right of action for damages is not assignable because the law will not recognise any transaction which may savour of maintenance of champerty. It is only when there is some interest in the subject matter that a transaction can be saved from the imputation of maintenance. That interest must exist apart from the assignment and to) that extent must be independent of it. 15 A bare right of action is not assignable. When however the right of action is one of the incidents attached to the property or contract assigned it will not be treated as a bare fight of action. It is submitted that the same has been reiterated by Supreme Court as well as high courts in various judgments, for instance in Agri Marketing Co. vs. Imperial Exports Limited, 2001 SCC OnLine Bom 841, by the Hon'ble Bombay High Court. Thus, the survival of guarantees is clearly in contravention of Section 6(e) of the Transfer of Property Act, 1882 and as such in violation of Section 30(2)(e) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the CoC in its commercial wisdom has approved such provisos for continued rights of the Financial Creditors against the Personal Guarantors and that there has been no assignment of such rights to proceed against the Personal Guarantors to the SPV of the Successful Resolution Applicant/ Respondent No. 2. This was in fact proposed by the SRA in finally approved Resolution Plan and seems to be have done after due deliberations with the CoC. In such eventuality there is no applicability of transfer of mere rights to sue , as the said rights were never assigned and have been retained by the Financial Creditors all along. The Appellants cannot seek undue benefits on account of the Resolution Plan and avoid their huge financial liabilities accrued based on the Personal Guarantees given by the Personal Guarantors to the Corporate Debtor. 92. We are of clear opinion that the financial creditors have reserved the rights to proceed against the personal guarantors like the Appellant herein in terms of the Excluded Rights in approved Resolution Plan. There is no question of transfer of a mere right to sue and in such circumstances, we feel that it is a structured financial deal in form of Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... garding the judgment of Hon ble High Court in the matte of Vikas Aggarwal Vs. Reserve Bank of India (Supra) regarding extinguishment of debts. We have already recorded the relevant para of the said judgment while discussing the averments made by the Appellants in our earlier discussion. On this judgement, during the hearing, one specific query was put by the bench as whether any final decision has been taken by the Hon ble High Court on these observations, however, it was stated that the Hon ble High Court only noted but did not give any ruling and left to the DRT to look into. Thus, the averments of the Appellants in citing the Vikas Aggarwal (Supra) cannot give any rescue to the Appellants. 98. Now we will take issue regarding alleged non existing of debts in the books of the Financial Creditors and regarding treatment in the books of the financial creditors with respect to such continuing rights of the financial creditors against the personal guarantors of the Corporate Debtor after the approval of the Resolution Plan. We feel that it the prerogative and within the purview of such Financial Creditors (within the applicable regulatory framework as applicable ) and it does not com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o enquire into the justness of the rejection of the resolution plan by the dissenting financial creditors. From the legislative history and the background in which the I B Code has been enacted, it is noticed that a completely new approach has been adopted for speeding up the recovery of the debt due from the defaulting companies. In the new approach, there is a calm period followed by a swift resolution process to be completed within 270 days (outer limit) failing which, initiation of liquidation process has been made inevitable and mandatory. In the earlier regime, the corporate debtor could indefinitely continue to enjoy the protection given under Section 22 of the Sick Industrial Companies Act, 1985 or under other such enactments which has now been forsaken. Besides, the commercial wisdom of CoC has been given paramount status without any judicial intervention, for ensuring completion of the stated processes within the timelines prescribed by the I B Code. 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. They act on the basis of thorough examination of the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty of guarantee being connected to the debt, it cannot be separated from assignment, it goes along with assignment, therefore he promoter director cannot take out this argument against the plan. Right of subrogation is not a primary right, it is not conditional that creditor shall hot proceed against the guarantor unless right of subrogation is available to the guarantor against the principal debtor. This right of subrogation is not a right emanated out of any contractual rights; indeed this right will be available to the guarantor only after it has paid the dues of the principal debtor to the creditor. The creditor is under no obligation as to this subrogation right. It is the guarantor who comes forward to take the liability of surety upon itself notwithstanding whether it could realise its monies in the event creditor realised principal debtor dues from the guarantor. Since IBC has categorically envisaged that no liability will remain in force against the corporate debtor after plan approval, right of subrogation will not be available to the guarantors. It makes no difference to the right to proceed against the surety. The right to proceed against guarantor will remain in force ..... X X X X Extracts X X X X X X X X Extracts X X X X
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