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TMI Blog2024 (7) TMI 388X X X X Extracts X X X X X X X X Extracts X X X X ..... lution plan in relation to a Corporate Debtor does not discharge the guarantor of the Corporate Debtor. In recent judgment of Hon ble Supreme Court in Ajay Kumar Radheyshyam Goenka vs. Tourism Finance Corporation India Ltd [ 2023 (3) TMI 686 - SUPREME COURT] where question arose for consideration as to whether for approval of Resolution Plan by virtue of Section 31 process Section 138 of NI Act cannot be continued. From the facts brought on the record, it is clear that when Corporate Guarantee was invoked by the ICCI Bank on 16.10.2017 debt of more than Rs.218 Crore was due on the Principal Borrower. Initiation of proceeding against the Principal Borrower for admitted claim of Rs.294,51,35, 655/- itself proves that debt of the Principal Borrower was more than Rs.218 Crores. According to own case of the Appellant, upfront cash has been proposed of only Rs.2,06,00,000/- and rest amount of Rs.273,38,49,866/- was to be paid in preference shares - the submission of the Appellant that the guarantee dated 10.08.2016 stood terminated and unenforceable, cannot be accepted - there are no substance in this submission. The Adjudicating Authority after considering all relevant aspects of the ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nk had also filed a Clarification Application before the Adjudicating Authority which application was also rejected by the Adjudicating Authority by order dated 03.02.2022. (viii) Against the order dated 03.02.2022 passed by the Adjudicating Authority approving the Resolution Plan with respect of the Principal Borrower Ushdev International Ltd. Company Appeal (AT) (Ins.) No.172-173 of 2022 was filed by the CoC and Company Appeal (AT) (Ins.) No. 199-200 of 2022 was filed by ICICI Bank in this Tribunal. (ix) The above appeals challenging order dated 03.02.2022 was decided by this Tribunal by its judgment and order dated 11.03.2022. The Appeals were allowed by deleting a part of the direction of the Adjudicating Authority by which the Adjudicating Authority has directed that excluded securities are no longer enforceable. (x) Section 7 application filed by the ICICI Bank against the Corporate Debtor was heard and admitted by order dated 26.04.2023, aggrieved by which order this Appeal has been filed. (xi) The Adjudicating Authority after hearing the parties held that even after approval of the Resolution Plan with respect to the Principal Borrower, the security does not get discharged. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,866/- which means that residual debt of Rs.19,06,85,789/- which has been settled at NIL consideration. Thus, as per Clause 33, amount payable by the Principal Borrower falls below Rs.2,180 Million or Rs.218 Crore. Hence, the Corporate Guarantee given by the Corporate Debtor Ushdev Engitech Ltd. automatically stands terminated and unenforceable. 4. Shri Krishnendu Datta, learned senior counsel appearing for the ICICI Bank submits that the Corporate Guarantee given by the Corporate Guarantor has not extinguished by approval of the Resolution Plan in the CIRP of the Principal Borrower. It is submitted that the Adjudicating Authority while approving the Resolution Plan on 03.02.2022 has taken erroneous view that excluded securities are subsumed which view has already been set aside by this Tribunal vide its judgment and order dated 11.03.2022 in company appeal filed by the CoC as well as by the ICICI Bank. The judgment of this Tribunal dated 11.03.2022 clearly holds the field which has taken the view that excluded securities i.e. Corporate Guarantee dated 10.08.2016 still holds the ground and is enforceable. The submission of the Appellant that by approval of the Resolution Plan the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... observations were made by the Adjudicating Authority in Para 29 of the order dated 03.02.2022. Appeals against the order dated 03.02.2022 were filed by both the CoC and the ICICI Bank Ltd. which appeals have been allowed by the order of this Tribunal dated 11.03.2022. This Tribunal disapproved the view taken by the Adjudicating Authority that by approval of the plan excluded securities shall be subsumed. Noticing the provision of the plan, it was held by this Tribunal that clauses of the Resolution Plan itself indicated that excluded securities shall continue even after approval of the plan. This Tribunal also noticed the clauses of the Resolution Plan and the definition of the excluded securities. It is useful to notice Paras 11, 12, 13, 14, 15 and 16 of the judgment: 11. Before we proceed to consider the respective submissions, it is necessary to notice certain portion of the Resolution Plan which is approved by the Committee of Creditors. Schedule I of the Resolution Plan deals with Definitions and Clause 21 of the Schedule I deals with Excluded Securities in following words: Excluded Securities shall mean the Promoter Guarantee, corporate guarantee dated 10th August, 2016 give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mbrances provided by the Promoters or any third party, other than the Excluded Securities, in favour of the Financial Creditors for securing the Financial Debt of the Company (hereinafter referred as the Assigned Securities), which are valued by Resolution Applicant and included as part of Resolution Plan amount, shall not be extinguished or waived under this Resolution Plan and shall be assigned to Taguda India Prvaite Limited (which entity is the Identified Affiliate), along with the payment of INR 50 crore constituting the Assigned Debt by Taguda Indai Private Limited in the manner set out in Schedule XI. The Excluded Securities shall also not be extinguished or waived under this Resolution Plan and will continue be available with the Financial Creditors in accordance with their terms, which may be exercised by the Financial Creditors at their discretion for its for its debt. All other securities or other Encumbrances provided by the Company including on the fixed assets of the Company shall be extinguished as on the Final Settlement Date. The Financial Creditors reserve the right to take any action against the Promoters. 13. Sub-Clause 3.3(v) also makes it clear that excluded s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erational creditor, financial creditor etc., which are not part of the resolution plan and pertaining to the pre CIRP period, shall stand extinguished, post approval of the resolution plan. 1. The unpaid debt shall stand converted into non-convertible redeemable preference share. Hence, the excluded securities are no longer enforceable as defined under the resolution plan. 2. The approval of the Resolution Plan shall not be construed as waiver of any statutory obligations/liabilities of the Corporate Debtor and shall be dealt by the appropriate Authorizes in accordance with law. Any waiver sought in the Resolution Plan, shall be subject to approval by the Authorities concerned. 15. The Order passed by the Adjudicating Authority approving the Plan was subject to observations made in the Order i.e. subject to directions no. 1 under the heading Reliefs, Concessions and Dispensations . Further in clarification Order in Paragraph 29 following observations have been made : Heard the counsel for the applicant and the counsel for the Respondent/RP and perused the documents. This bench is of the prima facie view that though the excluded securities as defined under the resolution plan means ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... self states that excluded securities shall not be extinguished under the Resolution Plan which is the provisions in the plan made in 3.3.(iii)(h). Further as noted in 3.3.(v) there was again clear provision that excluded securities shall continue to survive. When the plan is ready as a whole it is clear that excluded securities were to continue and no contrary intention is reflected in the plan. It is due to the above contents of the plan that Learned Counsel for the Resolution Applicant also does not dispute that the Plan never contemplated for extinguishment of excluded securities. Both the parties had argued that plan never contemplated for extinguishment of the excluded securities. The Adjudicating Authority thus committed error in making observation in issuing direction no. 1 of the Impugned Order under the heading Reliefs, Concessions, and Dispensations. Hence the following part of the Direction no. 1 Hence, excluded securities are no longer enforceable as defined under the resolution plan are deleted from the Order. The deletion of the above Direction No. 1 shall in no manner affect the approval of the Resolution Plan vide Order dated 03.02.2022. The Order dated 03.02.2022 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 and 57: 50. Law on extinguishment of claim against personal guarantor and third party on approval of Resolution Plan has been settled by Hon ble Supreme Court in its judgment in Lalit Kumar Jain vs. Union of India and Ors. (2021) 9 SCC 321, where the Hon ble Supreme Court held that approval of resolution plan does not ipso facto discharge a personal guarantor (of a Corporate Debtor) of her or his liabilities under the contract of guarantee. In paragraph 126 the Hon ble Supreme Court held following: 126. 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). The writ petitions, transferred cases and transfer petitions are accordingly dismissed in the above terms, without order on costs. 51. There cannot be any dispute to the proposition that after the approval of the Resolution Plan, entire debt of the Corporate Debtor against the Financial Creditor stand discharged and after approval of Resolution Plan, Financial Creditor can have no further recourse against the Corpor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Existing Promoter) in relation to any portion of unsustainable debt secured or guaranteed by third parties. The finding of the Adjudicating Authority that approval of Resolution Plan has led to extinguishment and effacement of the entire debt of ESL has to be held to be finding qua the Corporate Debtor only. We hold that there is no finding recorded by the Adjudicating Authority in the impugned order that after approval of the Resolution Plan, it would lead to extinguishment and effacement of the entire debt of third party including the Corporate Debtor. 11. The above judgment does support the submission advanced by learned counsel for the Respondent No.1. 12. Now we come to submission of learned counsel for the Appellant based on Section 134 of the Contract Act. Section 134 of the Contract Act deals with discharge of surety by release or discharge of principal debtor. Sections 134 is as follows: 134. Discharge of surety by release or discharge of principal debtor : The surety is discharged by any contract between the creditor and the principal debtor, by which the principal debtor is released, or by any act or omission of the creditor, the legal consequence of which is the di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case noticing the facts of the case where Official Liquidator made payment to the Bank, the contention of the Bank that by payment received from the Official Liquidator surety was not discharged was rejected. In Para 14 and 15 of the judgment following was laid down: 14. This submission of Sri Kushal Kant, learned counsel for the bank cannot be accepted. The company had been wound up and the official liquidator had been ap- pointed. The official liquidator had filed Report No. 301 of 2002 before the company judge with a prayer that he may be allowed to disburse Rs. 78,16,428.42 to the bank towards full and final settlement of the claim of the bank submitted before the official liquidator. The bank had filed an application supported by an affidavit of the branch manager that the report of the official liquidator may be accepted and the official liquidator may be directed to disburse Rs. 78,16,428.42 to the bank towards full and final settlement of the claim of the bank before the official liquidator. The company judge accepted the report and passed an order that since the bank had agreed to accept the said amount towards full and final settlement of the claim, the official liquidat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be between creditors and/or members of the Company and the Company, as the case may be. It was always open to the Company to offer a compromise to any of the creditors or enter into arrangement with each of the members. The scheme in this case is essentially a compromise between the company and its unsecured creditors. The scheme when sanctioned does not merely operate as an agreement between the parties but has statutory force and is binding not only on the company but even dissenting creditors or members, as the case may be. The effect of the sanctioned scheme is to supply by recourse to the procedure thereby prescribed the absence of that individual agreement by every member of the class to be bound by the scheme which would otherwise be necessary to give it validity (see J. K. (Bombay) Pvt. Ltd., v. New Kaiser-I-Hind Spg. Wvg. Co. Ltd. Ors. etc.(1). Further section 391(1) itself by a specific and positive provision prescribes who can move an application under it. Only the creditor or member of that company or a liquidator in the case of a company being wound up is entitled to move an application proposing a compromise or arrangement. By necessary implication any one other than ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he creditor can realise the same from the guarantor in view of the language of Section 128 of the Contract Act, 1872 as there is no discharge under Section 134 of that Act. This Court observed as follows: (SCC pp. 362-63, para 7) 7. Under the bank guarantee in question the Bank has undertaken to pay the Electricity Board any sum up to Rs 50,000 and in order to realise it all that the Electricity Board has to do is to make a demand. Within forty-eight hours of such demand the Bank has to pay the amount to the Electricity Board which is not under any obligation to prove any default on the part of the Company in liquidation before the amount demanded is paid. The Bank cannot raise the plea that it is liable only to the extent of any loss that may have been sustained by the Electricity Board owing to any default on the part of the supplier of goods i.e. the Company in liquidation. The liability is absolute and unconditional. The fact that the Company in liquidation i.e. the principal debtor has gone into liquidation also would not have any effect on the liability of the Bank i.e. the guarantor. Under Section 128 of the Contract Act, 1872, the liability of the surety is coextensive with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Debtor does not discharge the guarantor of the Corporate Debtor. On a parity of reasoning, the approval of a resolution in respect of one borrower cannot certainly discharge a co-borrower. 23. In recent judgment of Hon ble Supreme Court in Ajay Kumar Radheyshyam Goenka vs. Tourism Finance Corporation India Ltd, (2023) 10 SCC 545, 2023 SCC OnLine SC 266 where question arose for consideration as to whether for approval of Resolution Plan by virtue of Section 31 process Section 138 of NI Act cannot be continued. The Court in the above case relied on judgment of Hon ble Supreme Court in Lalit Kumar Jain vs. Union of India (supra) to held that approval of Resolution Plan per se does not per se operate as a discharge of the guarantor's liability. In Para 80, 81 and 82 following was held : Argument that as the debt stood extinguished by virtue of Section 31 of the Code, the criminal proceedings under Section 138 of the NI Act cannot continue as regards the Director/ signatory 80. The argument that as the debt stood extinguished by virtue of Section 31 IBC, the proceedings under Section 138 of the NI Act cannot continue as regards the Director/signatory, would run contrary to the lin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lays down that by approval of Resolution Plan the Guarantor is not absolved from its liability to the Financial Creditors. We have also noticed above that the Resolution Plan of the Principal Borrower clearly contemplated that the guarantee in favour of the Financial Creditor shall continue and shall not be discharged. The judgment of this Tribunal dated 11.03.2022 arising out of approval of Resolution Plan of the Principal Borrower has been noticed in the preceding paragraphs of this judgment where this Tribunal has clearly held that guarantee continues even after approval of the Resolution Plan. Thus, the issue of continuance of guarantee by guarantor of the Corporate Debtor after approval of Resolution Plan is no more open to be contested, it having been firmly settled by this Tribunal by judgment dated 11.3.2022, as noticed above. We, thus, do not find any substance in submission of learned counsel for the Appellant that after approval of Resolution Plan of the Principal Borrower, the liability of the Guarantor shall come to an end. 26. The Adjudicating Authority dealt with the submission of the Appellant on Section 134 and repelled the same in Para 42 of the judgment, which o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsideration amounting to Rs. 19,06,85,789. On adding all three part, the amount Rs. 294,51,35,655/- determines the Admitted Claim of the Respondent Bank. (iii) I say that as per the Resolution Plan for the Principal Borrower i.e. Ushdev International Limited the Respondent Bank is being paid upfront cash payment of Rs. 2,06,00,000/- and Preference Shares of a sum of Rs. 273,38,49,866/-. (iv) I say that an amount of Rs. 19,06,85,789/- is Residual Debt out of the Admitted Debt which is being settled at NIL consideration. (v) I say that Clause 33 of the Corporate Guarantee provides that the liability of the Corporate Guarantor shall automatically fall off if the amount payable by the Principal Borrower falls below Rs. 2,180 Million or Rs. 218 Crores. Since the amount of Rs. 19.06 Crores is the only amount which is not being paid, it becomes the only outstanding of the Principal Borrower. Since the sum of Rs. 19.06 Crores is less than the threshold limit of Rs. 218 Crores under the Corporate Guarantee, the Corporate Guarantee given by Ushdev Engitech Ltd. automatically stands terminated and unenforceable. 30. The above submission of the Appellant has been refuted by ICICI Bank by filin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the preference shares are nothing but another form of debt. It is notable that the preference shares are non-convertible into equity and have no shareholder rights such as dividend or voting rights. Hence, it is clear that such preference shares are nothing but a mechanism and/or a distinct nomenclature used for financial liability/debt and cannot be themselves construed as payment of the unpaid debt of UIL. Without prejudice, no payments have been received under the UIL Plan and tile debt still remains over INR 218 Crores. 32. It is further submitted by the Respondent that ICICI Bank has not received any payment under Resolution Plan and total amount due and payable has not fallen below Rs.218 Crore. 33. We have perused the pleadings made by the Appellant as well as ICICI Bank on the question as raised above. From the facts brought on the record, it is clear that when Corporate Guarantee was invoked by the ICCI Bank on 16.10.2017 debt of more than Rs.218 Crore was due on the Principal Borrower. Initiation of proceeding against the Principal Borrower for admitted claim of Rs.294,51,35, 655/- itself proves that debt of the Principal Borrower was more than Rs.218 Crores. According t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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