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TMI Blog2024 (7) TMI 1408X X X X Extracts X X X X X X X X Extracts X X X X ..... plan was approved. The claim lodged by the 1st respondent-financial creditor was of Rs.241.27 crores. However, as per the resolution plan, the 1st respondent-financial creditor had to accept a haircut as it was provided therein that the 1st respondent-financial creditor would get only a sum of Rs.38.87 crores from the resolution applicant. Liability of Guarantor/surety - HELD THAT:- The law is very well settled. The liability of the surety and the principal debtor is co-extensive. The creditor has remedies available to recover the amount payable by the principal borrower by proceeding against both or any of them. The creditor can proceed against the guarantor first without exhausting its remedies against the principal borrower. Chapter VIII of the Contract Act contains provisions regarding indemnity and guarantee. Section 137 lays down a settled principle that it is not necessary for the creditor to first sue the principal debtor or adopt a remedy against him. If the creditor omits to do that, unless there is a contract to the contrary, it will not amount to discharge of the surety. This means that without proceeding to recover the debt against the principal debtor, the creditor c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tor and the corporate guarantor. Whether the assets of the Corporate Debtor were part of CIRP in respect of ACIL, Corporate Guarantor - HELD THAT:- There is a mandate of clause (d) of sub-section (4) of Section 36 of the IBC that the assets of an Indian subsidiary of the corporate debtor shall not be included in the liquidation estate assets and shall not be used for the recovery in liquidation. Section 18 entrusts several duties to the IRPs concerning the corporate debtor's assets. Consistent with the provisions of Section 36(4)(d), the explanation (b) to Section 18(1) provides that the term assets used in Section 18 shall not include the assets of any Indian subsidiary of the corporate debtor. Perhaps the reason for including these two provisions is that it is well-settled that a shareholder has no interest in the company's assets. A holding company and its subsidiary are always distinct legal entities. The holding company would own shares of the subsidiary company. That does not make the holding company the owner of the subsidiary's assets - the assets of the subsidiary company of the corporate debtor cannot be part of the resolution plan of the corporate debtor. By ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1st respondent SREI Infrastructure Finance Limited (the financial creditor), for a grant of a loan. Under the agreement dated 5th January 2011, the financial creditor granted the corporate debtor a loan of Rs.100 crores for setting up a SEZ project. The corporate debtor is a subsidiary of M/s. Assam Company India Limited (ACIL). The loan granted by the financial creditor to the corporate debtor was secured by a mortgage made by the corporate debtor of its leasehold land and a pledge of shares of the corporate debtor and ACIL. The loan was also secured by the corporate guarantee dated 5th January 2011 furnished by ACIL. The financial creditor filed an Original Application before the Debt Recovery Tribunal-I, Kolkata (for short, the DRT ) to recover the outstanding loan amount. On 24th March 2015, a debt repayment and settlement agreement was executed to which the financial creditor, the corporate debtor and ACIL (the guarantor) were parties. On account of the default committed by the corporate debtor, the financial creditor invoked the corporate guarantee of ACIL. Thereafter, an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (for short, the IBC ) was filed c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of 15 months to the creditors of the 2nd respondent-corporate debtor. The COC of the 2nd respondent-corporate debtor approved the resolution plan of the applicant on 30th August 2021. As required by the approved resolution plan, the applicant has furnished a bank guarantee of Rs.2 crores on 3rd September 2021. SUBMISSIONS OF THE APPELLANT 4. Mr. Jaideep Gupta, the learned senior counsel appearing for the appellant, submitted that in the CIRP of ACIL, the appellant s resolution plan was duly approved. As per the resolution plan, a sum of Rs.38.87 crores was paid to the 1st respondent-financial creditor, which was in full and final settlement of the dues of the 1st respondent-financial creditor. He submitted that upon such payment being made by the appellant, Section 140 of the Indian Contract Act, 1872 (for short, the Contract Act ) would squarely apply as the rights of the 1st respondent-financial creditor shall stand subrogated in favour of the appellant. Therefore, through ACIL, the appellant would step into the shoes of the 1st respondentfinancial creditor. He would, thus, submit that the appellant has the right of subrogation over the right of the financial creditor over the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 1st respondent-financial creditor, has taken us through the impugned orders. He pointed out that the resolution plan of the 2nd respondent-corporate debtor has been approved by the adjudicating authority by the order dated 19th September 2023. He submitted that no payment was made against the claim raised by ACIL as it was an unsecured financial creditor primarily because the liquidation value of the 2nd respondentcorporate debtor is much lower than the total claim amount of the secured financial creditors. He pointed out that the main grievance of the appellant is that the institution of corporate insolvency has been upheld against the 2nd respondentcorporate debtor, for the assets allegedly part of the CIRP of ACIL, which is the holding company of the 2nd respondentcorporate debtor. He pointed out that under Section 36(4) of the IBC, the assets of the subsidiary of the corporate debtor cannot be included in the liquidation estate assets. He invited our attention to Section 18 of the IBC, which contains the duties of IRPs. He submitted that if there is a resolution of a corporate debtor, the assets of any of its subsidiaries will not be included in the scope of the resolution p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der the contract of guarantee. It was held that by involuntary process or due to liquidation or insolvency proceedings, corporate guarantors are not absolved of their liability, which arises out of an independent contract. In this case, the entire outstanding amount payable by the 2nd respondent-corporate debtor has not been recovered from ACIL. Therefore, there is no bar on the 1st respondent-financial creditor to proceed against the 2nd respondent-corporate debtor for the remaining amount. In this case, the 1st respondent-financial creditor first moved against the guarantor and, after exhausting the remedies against the guarantor, filed an application under Section 7 against the 2nd respondent-corporate debtor. Merely because the creditor has made a partial recovery from the guarantor, it does not absolve the corporate debtor of his financial obligations. Reliance was placed upon a decision of this Court in the case of Maitreya Doshi v. Anand Rathi Global Finance Ltd. Anr 2022 SCC Online SC 1276 . 9. Regarding the plea of subrogation, the learned counsel pointed out that the plea was never raised before the adjudicating authority and the NCLAT. The ground of subrogation was made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the guarantor pays all that he is liable for under the contract of guarantee. He submitted that if the guarantor makes only a part payment of the debt, Section 140 will not have any application. He relied upon a decision of the Allahabad High Court in the case of Darbari Lal Anr. v. Mahbub Ali Mian Ors (1927) SCC Online ALL 121 . He submitted that this proposition finds support even in the decision of the Allahabad High Court in the case of Shib Charan Das2 relied upon by the appellant. He pointed out that in the information memorandum of ACIL, the assets and liabilities of the 2nd respondent-corporate debtor were not included. The assets of the 2nd respondent-corporate debtor cannot be treated as a part of ACIL s assets. He submitted that the resolution plan of ACIL has been prepared based on the information memorandum. He submitted that the information memorandum and the resolution plan must be consistent with Section 36(4)(d) of the IBC. REPLY OF THE APPELLANT 11. Replying to the submissions made by the learned counsel appearing for the 1st respondent-financial creditor, the learned senior counsel appearing for the appellant reiterated his submissions on the applicability of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ANTOR / SURETY 14. As far as the guarantee is concerned, the law is very well settled. The liability of the surety and the principal debtor is co-extensive. The creditor has remedies available to recover the amount payable by the principal borrower by proceeding against both or any of them. The creditor can proceed against the guarantor first without exhausting its remedies against the principal borrower. Chapter VIII of the Contract Act contains provisions regarding indemnity and guarantee. Section 126 is relevant for our purposes, which reads thus: 126. Contract of guarantee , surety , principal debtor and creditor . A contract of guarantee is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the surety ; the person in respect of whose default the guarantee is given is called the principal debtor , and the person to whom the guarantee is given is called the creditor . A guarantee may be either oral or written. A surety is also known as a guarantor. Section 128 reads thus : 128. Surety s liability. The liability of the surety is co- extensive with that of the principal debtor, unles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made without surety s consent in the terms of the contract between the principal debtor and the creditor, it amounts to discharge of the surety as to the transactions subsequent to the variance. Under the provisions of Section 133, surety can be discharged only when there is a variance made in the terms of the contract between the principal debtor and the creditor. Section 134 contemplates a situation where the principal debtor is released by a contract between the creditor and the principal debtor. In such a case, the surety is discharged. If by any act or omission on the part of the creditor, the legal consequence of which is the discharge of the principal debtor, the surety stands discharged. Section 135 is based on the same principle on which Section 133 is based. If there is a contract between the creditor and the principal debtor by which the creditor makes a composition or promise with the principal debtor, or gives time to the principal debtor or agrees not to sue the principal debtor, it amounts to discharge of the surety provided the surety has not assented to such a contract. If the creditor contracts with a third party to give time to the principal debtor, and when the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its liability. In Maharashtra SEB [Maharashtra SEB v. Official Liquidator, (1982) 3 SCC 358] the liability of the guarantor (in a case where liability of the principal debtor was discharged under the Insolvency law or the Company law), was considered. It was held that in view of the unequivocal guarantee, such liability of the guarantor continues and the 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 suppl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... covery against the guarantors and the principal debtor of the amount claimed by it. 3. The following preliminary issue was, on the pleadings of the parties, framed: Whether the claim of the plaintiff is not maintainable in view of the provisions of Act 57 of 1974 as alleged in Para 25 of the written statement of Defendant 2? 4. The trial court as well as the High Court, both came to the conclusion that in view of the provisions of Section 29 of the Act, the suit of the appellant was not maintainable. 5. We have gone through the provisions of the said Act and in our opinion the decision of the courts below is not correct. Section 5 of the said Act provides for the owner to be liable for certain prior liabilities and Section 29 states that the said Act will have an overriding effect over all other enactments. This Act only deals with the liabilities of a company which is nationalised and there is no provision therein which in any way affects the liability of a guarantor who is bound by the deed of guarantee executed by it. The High Court has referred to a decision of this Court in Maharashtra SEB v. Official Liquidator [Maharashtra SEB v. Official Liquidator, (1982) 3 SCC 358] where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... right of obtaining an indemnity from PD. C can (after due notice) proceed against either or both of PD and S. If both PD and S are in insolvent liquidation, C can prove against each for 100p in the pound but may not recover more than 100p in the pound in all. 125. In view of the above discussion, it is held that approval of a resolution plan does not ipso facto discharge a personal guarantor (of a corporate debtor) of her or his liabilities under the contract of guarantee. As held by this Court, the release or discharge of a principal borrower from the debt owed by it to its creditor, by an involuntary process i.e. by operation of law, or due to liquidation or insolvency proceeding, does not absolve the surety/guarantor of his or her liability, which arises out of an independent contract. ( emphasis added ) This Court dealt with a situation where a resolution plan for the principal borrower was approved in CIRP, and the principal borrower was discharged from the debt by operation of law through an involuntary process. It was held that the contract between the creditor and the surety is independent; therefore, the approval of the resolution plan of the principal borrower will not am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mission of India under that Act prior to the approval of such resolution plan by the committee of creditors. (emphasis added) The resolution plan of the corporate debtor approved by the adjudicating authority binds the corporate debtor, its employees, members, creditors, guarantor and other stakeholders. Therefore, where a company furnishes a corporate guarantee for securing a loan taken by another company and if the CIRP of the corporate guarantor ends in a resolution plan, it will bind the creditor of the corporate guarantor. The corporate guarantor's liability may end in such a case by operation of law. However, such a resolution plan of the corporate guarantor will not affect the liability of the principal borrower to repay the loan amount to the creditor after deducting the amount recovered from the corporate guarantor or the amount paid by the resolution applicant on behalf of the corporate guarantor as per the resolution plan. 18. As observed earlier, in such a loan transaction secured by a guarantee, the guarantor has an obligation to repay the loan amount to the creditor, and there is a separate and distinct obligation on the borrower to pay the amount to the creditor. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any other law for the time being in force, the National Company Law Tribunal shall have jurisdiction to entertain or dispose of (a) any application or proceeding by or against the corporate debtor or corporate person; (b) any claim made by or against the corporate debtor or corporate person, including claims by or against any of its subsidiaries situated in India; and (c) any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor or corporate person under this Code. (6) Notwithstanding anything contained in the Limitation Act, 1963 or in any other law for the time being in force, in computing the period of limitation specified for any suit or application by or against a corporate debtor for which an order of moratorium has been made under this Part, the period during which such moratorium is in place shall be excluded. (emphasis added) Sub-section (2) of Section 60 contemplates separate or simultaneous insolvency proceedings against the corporate debtor and guarantor. Therefore, sub-section (3) of Section 60 provides that if CIRP in respect of the corporate guarantor is pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perations of the corporate debtor for determining the financial position of the corporate debtor, including information relating to- (i) business operations for the previous two years; (ii) financial and operational payments for the previous two years; (iii) list of assets and liabilities as on the initiation date; and (iv) such other matters as may be specified; (b) receive and collate all the claims submitted by creditors to him, pursuant to the public announcement made under sections 13 and 15; (c) constitute a committee of creditors; (d) monitor the assets of the corporate debtor and manage its operations until a resolution professional is appointed by the committee of creditors; (e) file information collected with the information utility, if necessary; and (f) take control and custody of any asset over which the corporate debtor has ownership rights as recorded in the balance sheet of the corporate debtor, or with information utility or the depository of securities or any other registry that records the ownership of assets including (i) assets over which the corporate debtor has ownership rights which may be located in a foreign country; (ii) assets that may or may not be in p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n respect of which a secured creditor has relinquished security interest; (h) any other property belonging to or vested in the corporate debtor at the insolvency commencement date; and (i) all proceeds of liquidation as and when they are realised. (4) The following shall not be included in the liquidation estate assets and shall not be used for recovery in the liquidation: - (a) assets owned by a third party which are in possession of the corporate debtor, including (i) assets held in trust for any third party; (ii) bailment contracts; (iii) all sums due to any workmen or employee from the provident fund, the pension fund and the gratuity fund; (iv) other contractual arrangements which do not stipulate transfer of title but only use of the assets; and (v) such other assets as may be notified by the Central Government in consultation with any financial sector regulator; (b) assets in security collateral held by financial services providers and are subject to netting and set-off in multilateral trading or clearing transactions; (c) personal assets of any shareholder or partner of a corporate debtor as the case may be provided such assets are not held on account of avoidance transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany. That does not make the holding company the owner of the subsidiary's assets. In the case of Vodafone International Holdings BV6, this Court took the view that if a subsidiary company is wound up, its assets do not belong to the holding company but to the liquidator. As mentioned in the decision, the reason is that a company is a separate legal persona and the fact that the parent company owns all its share has nothing to do with its separate legal existence. Therefore, the assets of the subsidiary company of the corporate debtor cannot be part of the resolution plan of the corporate debtor. 22. In the impugned judgment, the NCLAT has referred to various clauses in the revised resolution plan of ACIL, including clauses 12.3 and 13.3 and held that these clauses do not suggest that the 1st respondent-financial creditor accepted the amount as full and final settlement of all its dues. It was held that the effect of approval of the resolution plan is that the right to recover the loan amount from the corporate guarantor stands extinguished. Chapter VI, under the heading financial, value and projections in the approved resolution plan, records as follows: The projections have b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on the said obligation. The 1st respondent-financial creditor relied upon a decision of this Court in the case of Economic Transport Corporation, Delhi4, which holds that the doctrine of subrogation is a creature of equity. Therefore, the Section will have to be interpreted having regard to the equitable principles. If the surety pays the entirety of the amount payable under guarantee to the creditor, Section 140 provides a remedy to the surety to recover the entire amount paid by him in the discharge of his obligations. Therefore, the surety gets invested with the rights of the creditor to recover from the principal debtor the amount which was paid as per the guarantee. If the surety pays only a part of the amount payable to the creditor, the equitable right the surety gets under Section 140 will be confined to the debt he cleared. 25. Under the corporate guarantee, in the facts of this case, the liability of ACIL was to the extent of the entire amount repayable by the 2nd respondent-corporate debtor to the corporate creditor. In the CIRP of ACIL, the appellant paid a sum of Rs.38.87 crores only to the 1st respondent-financial creditor. The amount was paid by the appellant on b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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