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TMI Blog2024 (8) TMI 477X X X X Extracts X X X X X X X X Extracts X X X X ..... lity for the debt is concerned, the same is retained by the financial creditors, including the respondent no.1-bank herein, to be exercised in respect of the guarantors only - The CD is absolved by operation of law in terms of the Resolution Plan and the assignee of the debt never gets any right to recover the debt from the guarantors, since the guarantors are excluded from the Resolution Plan as well as from the process of assignment itself. The debt survives only between the financial creditors/bank and the guarantors - the argument of the petitioner that its liabilities are transferred to the assignee is not borne out by the Resolution Plan and the corresponding provisions of the IBC. There is an element of continuity in the liability of the borrower to repay the debt. Seen from such perspective, a borrower may very well make good the loan taken by it even subsequent to the classification of its account as NPA, thereby regularizing the account - By a logical corollary, the converse is also true, that is, if the borrower, despite having the means, fails to repay the loan and continues the violations as envisaged in Clause 2.1.3 read with Clause 2.2 of the Master Circular, there i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ortion of the debt to one DRP Trading and Investment Private Limited, a Non-Banking Financial Company (NBFC) under the approved Resolution Plan of Laser Power and Infra Private Limited. 7. It is contended that as soon as a debt is assigned, the principal debtor ceases to be liable to the original creditor and becomes a borrower/debtor of the assignee. Thus, even if it is assumed that the corporate debtor/personal guarantor is still in debt due to borrowings of the corporate debtor, the liability would be towards the assignee, that is, DRP Trading and Investment Private Limited and not the respondent-Bank. 8. In support of such contention, learned counsel for the petitioner cites ICICI Bank Ltd. v. Officials Liquidator APS Star Industries Ltd. And others reported at (2010) 10 SCC 1. 9. It is next argued by the petitioner that from the approved Resolution Plan, it appears that the assignment has been made in respect of the debt owed against the corporate debtor, although the personal guarantees have been excluded from such assignment. Thus, upon assignment of debt to DRP Trading and Investment Private Limited, the assignee becomes a creditor for that portion of the debt which is assi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eported at (2021) 2 SCC 1 , It is argued that actions which determine the interest of parties themselves in the subject-matter of the case are actions in personam and actions in rem refer to those which determine the property and rights of the parties not merely amongst themselves but also against all the persons at any time claiming an interest in the property. Another point of difference highlighted was that ordinarily actions in rem are adjudicated by courts and other public fora. 17. Subsequently in Indus Biotech Private Limited. v. Kotak India Venture (Offshore) Fund, (Earlier known as Kotak India Venture Limited) and others reported at (2021) 6 SCC 436 , the Supreme Court, when faced with the question whether Section 7 proceedings under the IBC are actually in rem proceedings, held that merely filing of a proceeding under Section 7 of the IBC and its pendency could not be deemed to be a proceeding in rem and that it was only upon admission of an application under Section 7 of the IBC that proceedings can be construed as in rem. The ratio was that before admission of a Section 7 application, the NCLT was under the obligation to assess if there had been a default in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enable in the eye of law. It is further argued that for commission of wilful default in terms of Clause 2.1.3, there has to be a default in the first place. 23. It is contended by the petitioner that unutilized balance remained as on March 2016 and 2017 to repay the debt of the respondent Bank, for which the Review Committee declared the petitioner and others as Wilful Defaulter within the meaning of Clause 2.1.3 of the Master Circular. Strangely, it is argued, dispute the fact that the account of the corporate debtor maintained with the respondent Bank was declared as NPA on August 31, 2013, the Bank has considered events which occurred post declaration of NPA as well. 24. Thus, it is argued by learned counsel appearing for the petitioner that the declarations of the petitioner as Wilful Defaulter by the Identification Committee as well as the Review Committee are required to be set aside. 25. Learned counsel appearing for the respondent no.1-Bank (SBI), on the other hand, submits that the liability of the petitioner (personal guarantor) is not extinguished as per the approved Resolution Plan. The order dated April 7, 2021 passed by the NCLT, Kolkata approving said Plan has not be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f its dues by the assignment. 35. Since the Resolution Plan in the present case excludes personal guarantees from the purview of the assignment, the bank retains the right to invoke the personal guarantee and proceed against the personal guarantor notwithstanding that the entire portion of the remaining debt stood assigned to DRP Trading and Investment Private Limited. The liability of guarantor, it is argued, is co-extensive to that of the principle debtor. 36. Learned counsel for the petitioner refutes the argument that the assignee is not the lender, which proposition, it is contended, does not come to the aid of the writ petitioner. The SBI has also proceeded against the writ petitioner before the NCLT, where final judgment is yet to be pronounced. 37. It is also argued by the SBI that a proceeding under the Master Circular is a proceeding in rem. 38. It is next argued that the deed of guarantee was executed on March 28, 2014. Clause 2.6 only refers to the debt in respect of such personal guarantors being made applicable after September 9, 2014, which does not mean that the guarantees executed before such time cannot be proceeded against. 39. The loan, it is submitted, was rest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether the dictum of Hutchens (supra) is constrained by the peculiar facts of the case or is a general pronouncement on the rights of the surety. 47. In paragraph no. 154 of Vineet Saraf, the Delhi High Court observed preliminarily that the principles in Hutchens operate in different fields. While a reservation of rights clause is a private agreement between the parties, Hutchens (supra) on the other hand seems to be concerned with the legal compliance to the form and substance of a contract of guarantee. In fact, ultimately, the Delhi High Court refused to issue a writ of prohibition. 48. In agreement which the said judgment, this Court also finds that in Hutchens, the Australian High Court was generally dealing with the principles of assignment of debt. It was held therein that it would be simply impossible as a matter of basic principle to assign the benefit of a guarantee or security for it (as distinct from the property secured), while retaining the benefit of the guaranteed debt and thereby to convert the one debt owing to both principal debtor and guarantor to the one creditor into two debts, one owing by the principal debtor to the creditor and the other owing by the guara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion Plan by the NCLT shall be deemed to have all the approval for procedural requirements in terms of relevant Section of the CA 2013 and Rules and RA will comply with all the procedural requirements, if required. 51. A salient feature of the assignment is that the financial creditors shall assign the entire admitted debt of the Corporate Debtor (CD) to the Non-Banking Financial Institution. Thus, the argument of the respondent no. 1 bank that only a portion of the debt was assigned and that the respondent no. 1 bank still retains the right to recover the other portion is baseless. The assignment covers the entire admitted debt of the corporate debtor, thus leaving no scope of partial satisfaction of the debt. 52. However, such assignment of debt, although covering the entire admitted debt, was only with regard to the CD and not the guarantors. In the fourth paragraph of Step 4, it is clearly mentioned that as a part of the assignment, all the securities interest held by the Financial Creditors including but not limited to any security provided for the loan not accounted in the books of account of the company and/or any third party security provided shall be assigned to the NBFC co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not retain the right per se to realize the assigned debt from the corporate debtor but is compensated for the consideration paid by it for such assignment by issuance in its favour preference shares of the rejuvenated corporate debtor of an amount equivalent to the assigned debt. Such conversion, thus, takes away the apprehension that the assignee shall be entitled to recover the self-same debt from the corporate debtor, which right has also been retained by the financial creditors vis- -vis the personal guarantors. 59. Hence, from the standpoint of the NBFC/assignee, it invested an amount for having the entire admitted debt of the CD assigned to it and was compensated for the same by consideration in the form of preference shares of the revived CD being issued in its favour. 60. Thus, insofar as the right to recover the original debt is concerned, the same is foregone by the NBFC by conversion of such debt into equivalent preference shares of the CD. 61. The question which now arises is whether the NBFC, simultaneously with the original financial creditor/bank, can recover the debt from the guarantors. The answer is a resounding No , since the Resolution Plan itself contemplates t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loan comes within the purview of lender as contemplated in the Master Circular. 70. Insofar as the Wilful Defaulter proceeding not being in rem is concerned, such argument of the petitioner is also specious. The declared purpose of the Master Circular is to put in place a system to disseminate credit information pertaining to Wilful Defaulters for cautioning banks and financial institutions so as to ensure that further bank finance is not made available to them. The decision to declare an entity as a Wilful Defaulter, although not a judicial adjudication, has the plenary effect of cautioning all banks and financial institutions to ensure that further bank finance is not made available to such defaulters. Hence, by its very nature, the effect of such a declaration is not confined to the lender and the defaulter but operates in rem, true against the whole world. 71. Accordingly, such argument of the petitioner cannot be accepted. 72. The proposition in Indus Biotech (supra) to the effect that a proceeding under Section 7 of the IBC partakes of the character of in rem after admission of the application has no bearing in the present context at all. The said proceeding in the present ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om September 9, 2014, even if the guarantee was given prior to the said date. However, the clear language of Clause 2.6 of the Master Circular dated July 1, 2015 militates against such an interpretation. 79. The said clause provides, in no uncertain terms, that this treatment , of non-group corporate and individual guarantors was made applicable with effect from September 9, 2014, and not to cases where guarantees were taken prior to this date. 80. The expression, this treatment , is preceded by the statement that in case the guarantor refuses to comply with the demand made by the creditor/banker, despite having sufficient means to make payment of the dues, such guarantor would also be treated as Wilful Defaulter. The use of the term treated in the preceding sentence, read with the expression treatment , makes it very clear that treatment as a Wilful Defaulter can only take place in respect of guarantors when the guarantee was taken on or after September 9, 2014. Since, in the present case, March 28, 2014 was the date when the petitioner executed the deed of guarantee, which is an admitted position, Clause 2.6 does not apply to the petitioner at all and as such, the declaration of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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