Imp. Rulings - Treatment of Guarantor’s property during Insolvency & Liquidation.
Index
(Part-A) Insolvency;
Vanguard Credit & Holdings Pvt. Ltd. Vs. Kshitiz Chhawchharia (RP) of Ramsarup Industries Ltd. & Anr. (Transfer of Guarantor’s property to SRA through Resolution Plan)
Nitin Chandrakant Naik Vs. Sanidhya Industries LLP (Inclusion of Guarantor’s property in Information Memorandum)
(Part-B) Liquidation;
Ayan Mallick Vs. Pratim Bayal, Liquidator & Ors. (Auction of Guarantor’s property by Liquidator)
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1. NCLAT (04.03.2021) in Vanguard Credit & Holdings Pvt. Ltd. Vs. Kshitiz Chhawchharia (RP) of Ramsarup Industries Ltd. & Anr. [Company Appeal (AT) (Ins.) No. 1125 of 2019 ] held that;
# 158. By implication of Section 13(4) of The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, a secured creditor can take possession of the secured assets, including the right to transfer by way of lease, assignment or sale for realising the secured asset. Accordingly, the mortgagees will have the right to enforce the mortgage over the land. The Resolution Plan provides the mechanism for the transfer of the land, which is as follows; ARCIL and Axis Bank would assign a portion of the debt to Narantak Dealcom limited (a nominee of the Resolution Applicant). Pursuant to such assignment, Vanguard will be required to take all actions is required to transfer the land to the Resolution Applicant. This obligation to transfer the land will be pursuant to discharging of Vanguard's Corporate Guarantee and mortgage obligations. In case of no consensual transfer of Vanguard, the creditors shall have the right to enforce the mortgage for the transfer of land. In pursuance to the obligations of the Applicant under the guarantee obligations and the mortgage provided, the Resolution Applicant's 1st seeking a direction to allow the transfer of the land from the Applicant to the Corporate Debtor. Failing this, the Resolution Plan suggests that the assignee of the loan and security should be allowed to enforce under SARFAESI Act and transfer the land to the Corporate Debtor.
[ Link - Synopsis ]
Blogger’s comments;
Mechanism proposed in the resolution plan for transfer of the property (land) of the guarantor, mortgaged with the financial creditor (bank) is as follows;
The guarantor / owner of the property transfers the mortgaged property to the successful resolution applicant.
In case the guarantor/ owner of the land does not agree to transfer the property to the successful resolution applicant, than;
Financial Creditor (Bank) will assign the loan & security interest to the nominee of the resolution applicant.
Assignee of the loan will enforce security interest under SARFAESI Act and transfer the secured asset (land) to the Corporate Debtor.
Now the questions arise;
Whether a non financial institution secured creditor (nominee of the successful resolution applicant in the present case) can enforce security interest under SARFAESI. Secured creditor in SARFAESI has been defined as under;
(zd) “secured creditor” means—
(i) any bank or financial institution or any consortium or group of banks or financial institutions holding any right, title or interest upon any tangible asset or intangible asset as specified in clause (l);
Whether a secured creditor while enforcing security interest can transfer the secured asset without competitive bidding or auction, to a predetermined successful resolution applicant, under the provisions of SARFAESI.
Apparently, the Hon’ble Adjudicating Authority (NCLT) granted waivers for the above provisions of the SARFAESI & the Hon’ble Appellate Authority (NCLAT) upheld the orders of NCLT.
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2. NCLAT (26.08.2021) in Nitin Chandrakant Naik Vs. Sanidhya Industries LLP [Company Appeal (AT) (Insolvency) No. 257 of 2020 & 239 of 2021] held that;
# 13. We have heard learned Counsel for the parties. When CIRP is initiated, in the first step, Interim Resolution Professional (IRP) is required under Section 18(1) to collect all information relating to the assets, finances and operations of the Corporate Debtor for determining the financial position of the Corporate Debtor. He has to make a list of assets and liabilities of Corporate Debtor. Regulation 36 of the CIRP Regulations provides as to what is required to be incorporated in the Information Memorandum which is to be issued by the Resolution Professional. Here also the Information Memorandum requires including details of the assets and liabilities of the Corporate Debtor as per Regulation 36(2) (a). Sub-clause (f) of Regulation 36(2) provides that the Information Memorandum should give details of guarantees that have been given in relation to the debts of the Corporate Debtor by other persons, specifying which of the guarantors is a related party. Thus reference to details of Guarantees given by Related Party has to be there. That reference does not make property of Guarantor a property of Corporate Debtor for which Section 36(2) (a) is there.
# 24. For the above reasons, we hold under Section 61(3) of the IBC that the Resolution Plan as approved by the Adjudicating Authority is in contravention of the provisions of law as discussed above and there have been material irregularities in exercise of powers by the Adjudicating Authority when it directed the Appellants (in para 26 of the impugned order (referred supra)), that the owners of the premises as mentioned in the judgment shall enter into Tripartite Agreements for transfer of the premises (as mentioned in para 18 of impugned order). In fact, if para 18 is seen, after describing the properties in the chart there is also portion added which says that the Financial Creditors shall be at liberty to proceed against the properties of the Promoters erstwhile Directors/ Guarantors “other than those mentioned above to recover their balance”. This, in the Resolution Plan would be blank cheque given to proceed even with regard to any other property also of the Personal Guarantors. In our view, without resorting to appropriate proceedings against the Personal Guarantors of Corporate Debtor this is irregular exercise of powers.
[ Link - Synopsis ]
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3. NCLAT (13.05.2022) in Ayan Mallick Vs. Pratim Bayal, Liquidator & Ors. [Company Appeal (AT) (Insolvency) No. 456 of 2022] held that;
13.05.2022: Heard learned counsel for the Appellant, Shri Ashish Makhija, learned counsel for the Liquidator and learned counsel appearing for the Bank. This Appeal has been field against the order dated 01.02.2022 by which the Adjudicating Authority (National Company Law Tribunal), Kolkata Bench, Kolkata has dismissed the I.A. No. 32/KB/2022 filed by the Applicant/Appellant. In the I.A. the prayer made by the Appellant who is Suspended Director of the Corporate Debtor was that e-auction sale notice dated 16.12.2021 for sale of the assets of the Corporate Debtor under liquidation and assets of the guarantor under SARFAESI Act be stayed until the disposal of the I.A.
# 2. The e-auction notice was issued for sale of factory and land. Apart from the assets of the Corporate Debtor, the land was owned by the Promoter/ Guarantor, hence, e-auction notice was for a joint sale of the assets. It was submitted before the Adjudicating Authority that joint sale will maximize the value of assets of the Corporate Debtor, hence the Court should permit the same. After hearing the learned counsel for the parties, the Adjudicating Authority rejected the application and observed that if there is maximization of the assets, selling it as a combined should not prejudice the applicant in any manner as it is going to get a better value for the corporate guarantor.
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# 5. We have considered submissions of learned counsel for the parties and perused the record. When the Adjudicating Authority is satisfied that joint sale shall bring maximization of assets of the Corporate Debtor and the possession of the properties of the Guarantors have already been taken under SARFAESI and both land and factory need to be sold together to maximize the value of the assets, we fail to see that how the Appellant shall be prejudiced in any manner. We do not find any error in the order of the Adjudicating Authority rejecting the I.A. We dismiss the Appeal. We, however, observe that it shall be open to the Appellant to take such remedy under SARFAESI with regard to auction in accordance with law.
[ Link - Synopsis ]
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Blogger’s comments; The following questions needs to be answered;
Whether Liquidator can include the property of guarantor in the Liquidation Estate.
Whether Liquidator can deal/auction any property outside the Liquidation Estate.
Whether Liquidator has powers to take into possession any property under the provisions of SARFAESI.
Whether a bank/financial institution can appoint Liquidator as its authorised officer to deal with the property (secured asset) under the provisions of SARFAESI.
Whether a Liquidator can work as representative of a stakeholder during the liquidation process.
In joint reserve price /joint auction notice how the money will be distributed of the realisation post auction.
Following are the provisions of the Code & regulations’
Quote.
# Section 36. Liquidation estate. -
(1) For the purposes of liquidation, the liquidator shall form an estate of the assets mentioned in sub-section (3), which will be called the liquidation estate in relation to the corporate debtor.
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(3) Subject to sub-section (4), the liquidation estate shall comprise all liquidation estate assets which shall include the following: -
(a) any assets over which the corporate debtor has ownership rights, including all rights and interests therein as evidenced in the balance sheet of the corporate debtor or an information utility or records in the registry or any depository recording securities of the corporate debtor or by any other means as may be specified by the Board, including shares held in any subsidiary of the corporate debtor;
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(4) The following shall not be included in the liquidation estate assets and shall not be used for recovery in the liquidation: -
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(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 transactions that may b avoided under this Chapter;
Unquote,
As per the provisions of the Code, personal assets of any shareholder can not be the part of the “Liquidation Estate” and can not be used for recovery in the liquidation process under the Code. However, a bank (SFC) can deal/realise mortgaged properties, other than those owned by CD , held by the bank as collateral security, outside the liquidation process as per existent laws.
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Although, Liquidator, in his personal capacity, can accept assignment for disposal of properties mortgaged (owned by shareholders) to the bank,, as authorised agent/representative of the bank, but the moment Liquidator, agrees to act as agent/representative of a stakeholder (bank), he renders himself ineligible to work as Liquidator & has to voluntarily vacate the office of Liquidator.
Quote;
Liquidation Regulations
# Regulation 3. Eligibility for appointment as liquidator.
(1) An insolvency professional shall be eligible to be appointed as a liquidator if he, and every partner or director of the insolvency professional entity of which he is a partner or director, is independent of the corporate debtor.
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(3) An insolvency professional shall not continue as a liquidator if the insolvency professional entity of which he is a director or partner, or any other partner or director of such insolvency professional entity represents any other stakeholder in the same liquidation process.
Unquote,
In my opinion, the best way forward for the bank, in the present situation, is to enforce its security interest for the property of CD (Factory plant & machinery) under section 52(1)(b) and realise the same, as permitted under section 52(4) read with Liquidation Regulation 37(7) in SARFAESI, along with the guarantor’s property (Land) mortgaged with the bank, under section 13(8) of SARFAESI. This way SFC will be able to maximise the value of assets (Land, building, plant & machinery), without violating the provisions of either the Code (IBC.2016) or SARFAESI.
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