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TMI Blog2025 (4) TMI 635X X X X Extracts X X X X X X X X Extracts X X X X ..... sary to be noticed for deciding the appeal are: i. IDBI Bank on request of Siti Networks Limited (borrower) sanctioned Working Capital - Cash Credit Facilities of upto Rs.25 Crore in favour of the borrower vide sanction letter dated 24.11.2008. ii. On 09.12.2009, IDBI sanctioned Working Capital Ltd. of Rs.50 Crore in favour of borrower. iii. On 29.05.2012, IDBI enhanced the Working Capital Facility up to Rs.150 Crore comprising of fund base limit of Rs.50 Crore and non-fund base limit of Rs.100 Crore in favour of the borrower against first pari passu charge on the assets of the company. iv. Loan agreement was entered on 17.07.2012 with borrower and IDBI Bank. v. Pursuant to facilities granted to the borrower, a guarantee agreement was executed by corporate debtor, ZEE Entertainment Enterprises Limited in favour of IDBI Bank, guaranteeing the obligation of borrower to maintain the Debt Service Reserve Account (DSRA). vi. Working Capital Facility was further enhanced in the year 2016. vii. On request of borrower, the Working Capital Facilities were renewed from time to time. viii. On 29.12.2019, account of borrower was declared as NPA by the IDBI Bank. ix. On 18.02. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as barred by Section 10A. xix. Aggrieved by the order 19.05.2023, this appeal has been filed. 3. We have heard learned Sr. counsel Mr. R. Venkataraman ASG with Ms. Pratiksha Mishra appearing for the appellant. Learned Sr. counsels Mr. Arun Kathpalia and Mr. Abhijit Sinha has appeared for the respondents. 4. Learned Sr. counsel Mr. N. Venkatraman submits that adjudicating authority committed error in rejecting Section 7 application as barred by 10A. It is submitted that there was default on the part of the corporate debtor since September 2019, the amount in the DSRA was NIL post September 2019. Appellant had addressed a letter dated 02.03.2020 to the borrower, copy of which letter was also marked to the corporate debtor since DSRA amount was NIL since September 2019, no amount could be appropriated from the DSRA account to the loan account as a result of which borrower's account was declared NPA in December 2019. It is submitted that default on the part of the corporate debtor occurred prior to the 10A period i.e., prior to 25.03.2020. It is further pleaded that the default of corporate debtor continued even after the period specified under Section 10A, respondent never replen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ejected by the adjudicating authority. It is submitted that the various clauses of guarantee agreement dated 03.08.2012 indicates namely clauses 7, 9, 10, 11 & 27 that DSRA guarantee is on demand guarantee. The liability of the corporate debtor who has given limited guarantee is to arise only when guarantee is invoked and demand is made. It is submitted that prior to 05.03.2021 guarantee was never invoked by the appellant so as to create any default on the part of the corporate debtor. Existence of debt is not sufficient for filing a Section 7 application unless default is also committed by the corporate debtor. The reliance of counsel for the appellant on Clause 25 is misplaced. The clauses of the guarantee i.e., Clauses 7, 9, 10 & 11 clearly contemplate invocation of guarantee and making a demand from the corporate debtor. The said clauses cannot be nullified relying on Clause 25 only. It is well settled that terms of an agreement have to be read in a manner to give effect to the relevant Clauses, and each Clauses should be interpreted in the manner that harmonised with the rest of the agreement ensuring the coherent and consistent construction. The application under Section 7 wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e account of the Borrower was classified as Non- Performing Asset (NPA) from on 29 December 2019: 19. The Borrower defaulted in its obligations under the Facilities and accordingly, the Financial Creditor recalled the entire Facility and demanded and called upon the Borrower to pay Rs 135,70,32.574.77 (out of which Rs 118,71,87,498.16 is towards the Working Capital Facility) within 15 days. The Financial Creditor did not receive any response from the Borrower to this. A copy of the recall letter dated 18 February 2021 is annexed hereto and marked as "Annexure-N"; 20. On 05 March 2021, the Financial Creditor invoked the guarantee provided by the Corporate debtor and called upon the Corporate debtor to pay Rs 61,97,33,612.80 together with further interest from 18 February 2021. A copy of the demand notice dated 5 March 2021 is annexed hereto and marked as "Annexure-O"." 10. Now we need to notice Part IV of the application. Entire Part IV of the Section 7 application filed by the IDBI is to the following effect: "PART - IV PARTICULARS OF FINANCIAL DEBT 1. TOTAL AMOUNT OF DEBT GRANTED DATE(S) OF DISBURSEMENT A. Details of Debt Working Capital Facilities of Rs. 150 Crores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... times till the repayment of the Loan shall be equal to two quarters' interest for Term Loan portion and Working Capital Portion (to be maintained from the date of 1" disbursement of the Loan) and a further amount equal to one quarter principal installment (to be maintained one quarter prior to commencement of servicing of principal installments). 3. After commencement of principal installment payments, the credit balance to be maintained would be the sum total of the interest component and principal component as aforesaid. 4. The Guarantor has agreed to guarantee that the Borrower shall maintain the credit balance in the DSRA as more fully specified in recital 2 above. 12. The terms and conditions of guarantee as witnessed by the deed are captured in Clauses 1 to 27. Clauses 2 to 4 of the guarantee deed are as follows: "2. The Borrower shall open and maintain the credit balance as per the terms more fully specified in recital 2 above or as modified from time to time by the Lender and shall perform and comply with all other terms, conditions and covenants contained in the Loan Agreement. 3. The Guarantor agree and confirm that interest / additional Interest shall b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l times. It is being understood and agreed by the parties that this guarantee can be invoked any number of times so as to conform to DSRA terms till the loan is repaid in full to the satisfaction of the Lender by the Borrower." 14. Clause 9 further provide that on default committed by borrower, the lender shall be at liberty to invoke the guarantee and require the amount as become due from the borrower from the guarantor. Clause 9 is as follows: "9. The Guarantor hereby confirms, agree and guarantee that in the event of the failure of the Borrower to maintain the DSRA or the terms specified from time to time, the Lender shall be at liberty to invoke this guarantee and recover the amount as become due from the Borrower from the guarantor along with all ancillary and incidental cost." 15. Clause 10 further provides that guarantor confirms and agree that immediately on receipt of notice/invocation letter from the lender, the guarantor shall credit deposit, repay such amount as maybe directed by the lender to meet the deficit in the DSRA. Clause 10 is as follows: "10. The Guarantor hereby confirms and agrees that immediately on receipt of a notice/invocation letter from the Len ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hould be payable and is not paid by the debtor or corporate debtor and date of default of the principal borrower as guarantor shall depend on the contract of guarantee. In paragraph 24 following was held : "24. The scheme of I&B Code clearly indicate that both the Principal Borrower and the Guarantor become liable to pay the amount when the default is committed. When default is committed by the Principal Borrower the amount becomes due not only against the Principal Borrower but also against the Corporate Guarantor, which is the scheme of the I&B Code. When we read with as is delineated by Section 3(11) of the Code, debt becomes due both on Principal Borrower and the Guarantor, as noted above. The definition of default under Section 3(12) in addition to expression 'due' occurring in Section 3(11) uses two additional expressions i.e "payable" and "is not paid by the debtor or corporate debtor". The expression 'is not paid by the debtor' has to be given some meaning. As laid down by the Hon'ble Supreme Court in "Syndicate Bank vs. Channaveerappa Beleri & Ors." (supra), a guarantor's liability depends on terms of his contract. There can be default by the Principal Borrower and the G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty arising out of nonfulfillment thereof by the Guarantors. 14. The Guarantors hereby agree that notwithstanding any variation made in the terms of the said Agreement of loan and / or any of the said security documents including reallocation/ interchange of the individual limits within the principal sum variation in the rate of interest, extension of the date for payment of the instalments, if any, or any composition made between the Bank and Borrower to give time to or not to sue the Borrower, or the Bank parting with any of the securities given by the Borrower, the Guarantors shall not be released or discharged of their obligation under this Guarantee provided that in the event of any such variation or composition or agreement the liability of the Guarantors shall not withstanding anything herein contained be deemed to have accrued and the Guarantors shall be deemed to have become liable on the date or dates on which the borrower shall become liable to pay the amount/amounts due under the said Agreement of Loan and/or any of the said security documents as a result of such variation or composition or agreement. 20. The Guarantors agree that amount due under or in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion, we arrive at following conclusions: (i) The Corporate Guarantee Deed dated 17.05.2019 is on demand guarantee deed and the default shall arise on the part of the Guarantor only when demand notice is issued as contemplated in the Deed of Guarantee. When the State Bank of India invoked the guarantee vide notice dated 01.10.2020, demand on the part of the Corporate Guarantee shall arise only subsequent to the notice dated 01.10.2020 i.e. non-payment of the amount within seven days i.e. default arise on 08.10.2020. (ii) Default on the part of the Guarantor having arisen on 08.10.2020 i.e. within the period which is covered as prohibited period under Section 10A, application under Section 7 was clearly barred by Section 10A. Issues No. II, III and IV are answered accordingly. (iii) The Adjudicating Authority in the impugned order has not adverted to the relevant clauses of the Deed of Guarantee as noted above. The date of default on part of the Guarantor being subsequent to 01.10.2020 when guarantee was invoked, the application was barred by Section 10A and the Adjudicating Authority committed error in admitting the Section 7 application." 20. To the same effect, another ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le Supreme Court has occasion to consider general principle of construction of a contract. In paragraph 31 of the judgment, following was laid down: "31. It is also a well-recognised principle of construction of a contract that it must be read as a whole in order to ascertain the true meaning of its several clauses and the words of each clause should be interpreted so as to bring them into harmony with the other provisions if that interpretation does no violence to the meaning of which they are naturally susceptible. (North Eastern Railway Co. v. Lord Hastings [1900 AC 260 : (1900-03) All ER Rep 199 (HL)] )" 23. In event, we accept the interpretation put by learned counsel for the appellant with respect to Clause 25 to mean that no notice or invocation of guarantee is required to be done by lender with respect to the guarantee dated 03.08.2012, the said interpretation runs contrary to not one Clause of the agreement, but several Clauses i.e., 7, 9 & 11. From the guarantee deed, the recital has been noted above, clearly provides that financial creditor has granted facilities to the borrower on the condition when borrower shall maintain credit balance as per the terms more fully ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DBI's debt. Please reply on the proposal immediately, otherwise we will be forced to initiate action against the borrower and guarantor company The total overdues in the account as on 02.03.2020, are as under; Term Loan Principal: Rs.10,41,00,000/- Due on September 30, 2019 Rs.10,49,00,000/- Due on December 31, 2019 Interest: Rs.25,84,874/- Due on September 30, 2019 Rs.23,42,431/- Due on October 30, 2019 Rs.22,84,554/- due on November 30, 2019 Rs.23,41,734/- due on December 31, 2019 CC limit (Interest Servicing) Rs.1,03,37,249/- Due on October 1, 2019 Rs.1,10,71,191/- Due on November 1, 2019 Rs.1,07,91,205/- due on December 1, 2019 Rs.1.10 crore (approx.) due on January 1, 2020 Please note that interest for January and February 2020 on both the facilities are not included in the above statement. Regards Shilpa Chaporkar" 26. When we read the said email, the said email mentioned about the total overdue in the amount as on 02.03.2200 and on 01.01.2020, amount of Rs.1.10 Crore was towards interest in C.C. Limit. The said email cannot be read as invocation of guarantee deed dated 03.08.2012. It is true that said email was forwar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion that demand notice dated 05.03.2021 was a first notice demanding payment from the corporate debtor. In paragraphs 7.4 and 7.5 following has been held: "7.4. This Bench finds that the Financial Creditor has in its demand notice dated 05.03.2021 stated the following:- "3. The Borrower has failed and neglected to maintain the DSRA Account, as mentioned in the Corporate Guarantee executed by you on August 3, 2012..." "4. The Borrower has failed and neglect to pay the dues of IDBI Bank as per its above letter..." "6. In the premises, we hereby call upon you and demand from you to pay forthwith to IDBI Bank ...sums aggregating Rs. 61,97,33,612.80/- ..." 7.5. It follows from the language of said demand notice that it was the first notice demanding payment from the Corporate Debtor under the guarantee. Though, it is undisputed facts that the Corporate Debtor had the knowledge of default at the end of the principal borrower, this Bench feels that such knowledge implies existence of an obligation on the part of Corporate Debtor and such obligation is a debt under Section 3 (11) of the Code. This Bench further notes that Section 3(12) defines default to "means non-payment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rower defaulted on 30.09.2019, but the default on the part of the guarantor has been noticed in the very next sentence, when the financial creator has pleaded that "financial creditor invoked, the guarantee on 05.03.2021 and the corporate debtor is in continuous default thus 05.03.2021 was the first date on which default on the part of the guarantor was pleaded". Default on the part of the borrower and guarantor are different dates as per the terms of the contract between the guarantor and the lender. 30. Learned counsel for the appellant has placed reliance on the judgment of the Hon'ble Madras High Court in 'Dharamshi K. Patel & Anr.' (Supra). In the above case, NCLT has passed an order admitting a company petition filed against the corporate debtor Evershine Wood Packaging Private Limited, challenging the said order, writ petition was filed in the High Court. It was contended before the High Court that Section 7 application is not maintainable as default is committed between 25.03.2020 and 24.03.2021, hence, the petition was not maintainable. High Court after extracting Section 10A has also noticed the judgment of the Hon'ble Supreme Court in 'Ramesh Kymal' (Supra) and thereaft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n can be filed. If such interpretation is accepted, the whole purpose and object shall be defeated. The purpose and object of introduction of Section 10A was to give relief to Corporate Debtor who committed default during the period which is covered by Section 10A. The debt is not wiped out is only for the purpose that other proceedings are not prohibited but Sections 7, 9 and 10 applications are clearly barred. No application can be filed, even after the expiry of the period under Section 10A for the default which occurred during the 10A period." 32. Ultimately, the Hon'ble High Court took the view that there is no jurisdiction to entertain by passing an effective alternate remedy. In paragraphs 22 & 23, following was laid down: "(22) Since proviso to Section 10-A mandate that no application shall ever be filed for initiation of CIRP of the Corporate Debtor for the default occurring during the moratorium period, the above judgment relied upon by the learned Senior counsel is in tune with the statutory provision. However, the proviso cannot be extended to cases where the default is continued beyond the moratorium period. Therefore, there is no jurisdictional error to entertain ..... X X X X Extracts X X X X X X X X Extracts X X X X
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