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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 ..... ncial 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 concerning ACIL as the guarantee was not honoured. The adjudicating authority vide order dated 26th October 2017 admitted the said application. Thus, the Corporate Insolvency Resolution Process (for short, 'CIRP') of ACIL commenced. The 1st respondent-financial creditor filed a claim of Rs.648.81 crores, out of which the claim of Rs.357.29 crores was adm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 principal borrower (corporate debtor) in respect of its dues as well as the security provided to the financial creditor of the mortgage in respect of SEZ land. He submitted that upon payment of Rs.38.87 crores to the 1st respondent-financial creditor, as a full and final settlement of its total dues of Rs.241.27 crores, the appellant has now ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 process. He submitted that the holding company and its subsidiaries are distinct legal persons, and the holding company does not own the subsidiary's assets. The learned counsel relied upon a decision of this Court in the case of Vodafone International Holdings BV v. Union of India & Anr (2012) 6 SCC 613. He also relied u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 by way of an amendment to the memorandum of this appeal; therefore, the contention not raised earlier cannot be considered at this stage. He pointed out that the COC and the adjudicating authority have already approved the resolution plan for the 2nd respondent-corporate debtor. He submitted that this Court had settl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... & 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 Section 140 of the Contract Act. His submission is that the information memorandum indicates taking over the business of ACIL and the 2nd respondent-corporate debtor. He submitted that the business of the 2nd respondent-corporate debtor was included in the insolvency plan. He submitted that by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny 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, unless it is otherwise provided by the contract." It lays down the fundamental principle that the liability of the surety is co-extensive with that of the principal debtor unless otherwise provided by the contract. Sections 133 to 139 deal with the discharge of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 principal debtor is not a party to such a contract, the surety is not discharged. 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 agains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intiff 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 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 in this case that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gainst 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 amount to the discharge of the surety. The same principles will apply when the resolution plan is approved in CIRP of the surety. In such a case, the surety gets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d) 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. Such a transaction creates a right in favour of the creditor to proceed against the guarantor and borrower for recovery ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 pending before an adjudicating authority and if the CIRP against the corporate d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial 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 possession of the corporat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter; (g) any asset of the corporate debtor in 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ' used under Section 140 cannot be ignored. The principal borrower must continuously indemnify the surety. Section 140 of the Contract Act may be founded 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. I ..... X X X X Extracts X X X X X X X X Extracts X X X X
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