Imp. rulings - Subsisting Guarantor's Liability After Approval of Resolution Plan.

Imp. rulings - Subsisting Guarantor's Liability After Approval of Resolution Plan.

Index;

1. NCLAT (2024.01.24) in UV Asset Reconstruction Company Ltd. Vs. UV Asset  Electrosteel Castings Ltd. [Company Appeal (AT) (Insolvency) No. 975 of 2022]

2. NCLAT (2023.11.24) in Puro Naturals JV Vs. Warana Sahakari Bank & Ors. (Company Appeal (AT) (Insolvency) Nos. 651, 661-663 and 1005 of 2023 ] 

3. NCLAT (2023.08.21) In SVA Family Welfare Trust & Anr. Vs. Ujaas Energy Ltd. & Ors. [Company Appeal (AT) (Insolvency) No. 266 of 2023. (2023) ibclaw.in 546 NCLAT]

4. Supreme Court of India (2021.05.21) in Lalit Kumar Jain Vs, Union of India & Ors. [Transferred Case  (CIVIL) NO. 245/2020]

5. Supreme Court of India (2018.08.14) in State Bank of India Vs. V. Ramakrishnan & Anr. [Civil Appeal No. 3595 of 2018 With Civil Appeal No. 4553 of 2018]

--------------------------------------------------------------

Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

# 37. Resolution plan.

A resolution plan shall provide for the measures, as may be necessary, for insolvency resolution of the corporate debtor for maximization of value of its assets, including but not limited to the following: -

XXXXXX

(d) satisfaction or modification of any security interest;

---------------------------------------------------------------

1. NCLAT (2024.01.24) in UV Asset Reconstruction Company Ltd. Vs. UV Asset  Electrosteel Castings Ltd. [Company Appeal (AT) (Insolvency) No. 975 of 2022] held that;

• The authority which floats the contract or tender, and has authored the tender documents is the best judge as to how the documents have to be interpreted. If two interpretations are possible then the interpretation of the author must be accepted.

• Whether any particular contractual promise is to be classified as a guarantee so as to attract all or any of the legal consequences to which I have referred depends upon the words in which the parties have expressed the promise.

• Where the contractual promise can be correctly classified as a guarantee it is open to the parties expressly to exclude or vary any of their mutual rights or obligations which would otherwise result from its being classifiable as a guarantee. 

• Every case must depend upon the true construction of the actual words in which the promise is expressed.

• From the above, it is clear that the contract of guarantee is a contract to perform the promise or discharge the liability of a third person in case of his default.

• From the above, it is clear that the question as to whether the deed in question is a deed of guarantee or not depends upon the terms under which the guarantor binds himself. Under law, he cannot be made liable for more than what he has undertaken.

• Reading the documents in their plain terms, the intent being clear, the same cannot be construed as letters of guarantee which necessarily requires, as per Section 126 of the Indian Contract Act, 1872, a promise to discharge the liability of a third person in case of his default.

• It is also held that approval of a resolution plan relating to a corporate debtor does not operate so as to discharge the liabilities of personal guarantors (to corporate debtors).

• The finding of the Adjudicating Authority that approval of Resolution Plan has led to extinguishment and effacement of the entire debt of ESL has to be held to be finding qua the Corporate Debtor only.

[ Link Synopsis ]

--------------------------------------------------------------

2. NCLAT (2023.11.24) in Puro Naturals JV Vs. Warana Sahakari Bank & Ors. (Company Appeal (AT) (Insolvency) Nos. 651, 661-663 and 1005 of 2023 ] held that.

• This Tribunal took the view that Resolution Plan providing for extinguishment of personal guarantee as approved by the CoC, did not contravene any provisions of Section 30(2)(e) of the Code.

• We, thus, answer Question No.(I) holding that Resolution Plan in question has consciously dealt with securities and personal guarantees given to the Financial Creditors including the dissenting Financial Creditors and the said clauses of the Resolution Plan do not contravene any provisions of Section 30, sub-section (2) as well as CIRP Regulations, 2016.

• According to the scheme of the IBC, the payment to which a Financial Creditor, who does not vote in favour of the Resolution Plan is entitled for payment in accordance with sub-section (1) of Section 53, in the event of liquidation of the Corporate Debtor

• And further dissenting Financial Creditor has to be paid in priority to the Financial Creditors who vote in favour of such Resolution Plan.

[ Link Synopsis ]

---------------------------------------------------------------

3. NCLAT (2023.08.21) In SVA Family Welfare Trust & Anr. Vs. Ujaas Energy Ltd. & Ors. [Company Appeal (AT) (Insolvency) No. 266 of 2023. (2023) ibclaw.in 546 NCLAT] held that

• 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.”

• Now, after portion of Part-III has been applied to Personal. Guarantors of Corporate Debtor, one would have to resort to those provisions under IBC if Personal Guarantors of Corporate Debtor are to be proceeded against. In Resolution Plan of Corporate Debtor provision relating to right of Financial Creditor to proceed against Personal Guarantor can be there, but enforcement of such right has to be as per provisions of law as discussed.”

• The decision of the CoC to accept the value for relinquishment of personal guarantee was a commercial decision of the CoC which cannot be allowed to be impugned at the instance of dissenting Financial Creditor.

• We are of the view that the Adjudicating Authority committed error in rejecting the Application for approval of the Resolution Plan on the ground that plan could not have contained a provision for extinguishment of personal guarantee of the personal guarantors. 

• Plan allocates a plan value for extinguishment of personal guarantee which has been accepted by the Financial Creditors by a vote share of 78.04%.

[ Link Synopsis ]

----------------------------------------------------------------------

4. Supreme Court of India (2021.05.21) in Lalit Kumar Jain Vs, Union of India & Ors. [Transferred Case  (CIVIL) NO. 245/2020] held that;

• # 111. 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. 

[ Link - Synopsis ]

---------------------------------------------------------------------

5. Supreme Court of India (2018.08.14) in State Bank of India Vs. V. Ramakrishnan & Anr. [Civil Appeal No. 3595 of 2018 With Civil Appeal No. 4553 of 2018] held that; 

• As per section 128 of the Indian Contract Act, 1872, the liability of the surety is co-extensive with that of the principal debtor and the creditor may go against either the principal debtor, or the surety, or both, in no particular sequence [Chokalinga Chettiar v. Dandayunthapani Chattiar, AIR 1928 Mad 1262]. 

• The liability of the principal debtor and the surety is co-extensive and is joint and several [Bank of Bihar v. Damodar Prasad, AIR 1969 SC 297].

• The Report of the said Committee makes it clear that the object of the amendment was to clarify and set at rest what the Committee thought was an overbroad interpretation of Section 14. That such clarificatory amendment is retrospective in nature

[ Link Synopsis ]

-------------------------------------------------

Imp. Rulings; Sharing of IM’s, Resolution Plan & Valuation Reports,

 Imp. Rulings; Sharing of IM’s, Resolution Plan & Valuation Reports, 

Index;

A. Sharing of IM’s (Information Memorandum)

1. NCLAT (10.10.2023) in Vinay Kumar Singhal RP Vs. Mahesh Bajaj [Comp. App. (AT) (Ins) No. 645 of 2023 & I.A. No. 2602, 2141 of 2023, (2023) ibclaw.in 705 NCLAT]

B.  Sharing of Resolution Plan with BOD.

2. NCLT Hyderabad (2024.02.06) in Prasada Raju M.R.V Vs. Sri. Vamsi Kambhammettu, RP. [I.A. No. 78 of 2023 in I.A. No. 1468 of 2022, in CP (IB) No.682/07/ HDB/ 2018 ]

3. SCI (2019.01.31) in Vijay Kumar Jain vs Standard Chartered Bank  [CIVIL APPEAL NO.8430 OF 2018]

C. Sharing of Valuation Reports with BOD.

4. NCLT Ahmedabad-2 (30.03.2022) in Hemant Shantilal Shah s Anr.  Vs. Care Office Ltd.  [LA No. 434 of 2020 IN CP (IB) 602 of 2018 ]

D. Sharing of Valuation Reports with OC.

5. NCLAT (23.09.2022) in Rahul Khilnani Vs. Sh. Atul Kumar Jain Resolution Professional [Company Appeal (AT) (Insolvency) No. 586 of 2021]

E. Sharing of Valuation Reports with SCC - BOD

6. NCLT Chandigarh (08.07.2022) in Kulwinder Singh Makhni, Suspended Director of M/s Punjab Basmati Rice Ltd. Vs. Mr. Sanjay Kumar Aggarwal, Liquidator of M/s Punjab Basmati Rice Ltd.  [IA No.46/2022 in CP (IB) No.340/Chd/Pb/2018 ]

-------------------------------------------------

1. NCLAT (10.10.2023) in Vinay Kumar Singhal RP Vs. Mahesh Bajaj [Comp. App. (AT) (Ins) No. 645 of 2023 & I.A. No. 2602, 2141 of 2023, (2023) ibclaw.in 705 NCLAT] held that;

• From the aforesaid two provisions and the fact that the Code and Regulations are totally silent about the supply of the information memorandum to the participant, it has to be inferred that the legislature has made a provision for providing a copy of the information memorandum to the member of the CoC and the Resolution Applicant but not to the participant of the meeting of the CoC such like the present Respondent.

• Thus, in view of the aforesaid discussion, the question framed in the beginning is hereby answered to the effect that the Operational Creditor being a participant in the meeting of the CoC has no right to seek a copy of the information memorandum.

[ Link Synopsis ]

-----------------------------------------

2. NCLT Hyderabad (2024.02.06) in Prasada Raju M.R.V Vs. Sri. Vamsi Kambhammettu, RP. [I.A. No. 78 of 2023 in I.A. No. 1468 of 2022, in CP (IB) No.682/07/ HDB/ 2018 ] held that;

• It is contended that the CD being MSME, the Applicant, who was a promoter/director of the CD, was permitted to submit a Resolution Plan. Therefore, he was participating in CoC meeting in dual capacity as part of the suspended management and also as a Resolution Applicant.

• However, the role of the Applicant as ‘Resolution Applicant’ is circumscribed. Under section 30(5) of IBC, “the resolution applicant may attend the meeting of the committee of creditors in which resolution plan of the applicant is considered”. It clearly follows that a Resolution Applicant can attend CoC meeting only in respect of the plan that was submitted by him, and will have no access to the Resolution Plans submitted by others. 

• The cited case law of Vijay Kumar Jain Vs. Standard Chartered Bank also does not support the Applicant's argument. That case dealt with the eligibility of a former director who, being an unrelated financial creditor of the CD, sought access to CoC meetings and Resolution Plans submitted by Prospective Resolution Applicants. The Apex Court decision in that case affirmed the right of such individuals to attend CoC meetings and access Resolution Plans. However, that judgment will not apply to a suspended promoter/director who is also a Resolution Applicant. 

• In the present case, not only the Applicant is related to the CD, being a promoter/director, he is also a Resolution Applicant. The CD being the MSME, he was permitted to submit a Resolution Plan. However, he was rightly kept out by the CoC from the proceedings of examination and evaluation of the Resolution Plans submitted by other Resolution Applicants. 

• Clearly the ‘conflict of interest’ for the Applicant, who was part of the CoC in the dual capacity did not end with him being rejected as Resolution Applicant. His capacity to be an impartial observer of the CoC’s deliberations was compromised and his views on the Resolution Plan submitted by any other Resolution Applicant would necessarily have a potential of bias even after he was out of the race.

• Once the CoC has endorsed a Plan by requisite percentage of voting share, it is only for this Authority to adjudicate thereon and approve it under the provisions of IBC.

[ Link Synopsis ]

-----------------------------------------

3. SCI (2019.01.31) in Vijay Kumar Jain vs Standard Chartered Bank  [CIVIL APPEAL NO.8430 OF 2018] held that;   

• This statutory scheme, therefore, makes it clear that though the erstwhile Board of Directors are not members of the committee of creditors, yet, they have a right to participate in each and every meeting held by the committee of creditors, and also have a right to discuss along with members of the committee of creditors all resolution plans that are presented at such meetings under Section 25(2)(i).

• It is also important to note that every participant is entitled to a notice of every meeting of the committee of creditors. Such notice of meeting must contain an agenda of the meeting, together with the copies of all documents relevant for matters to be discussed and the issues to be voted upon at the meeting vide Regulation 21(3)(iii).

• Obviously, resolution plans are “matters to be discussed” at such meetings, and the erstwhile Board of Directors are “participants” who will discuss these issues. The expression “documents” is a wide expression which would certainly include resolution plans.

• Therefore, a combined reading of the Code as well as the Regulations leads to the conclusion that members of the erstwhile Board of Directors, being vitally interested in resolution plans that may be discussed at meetings of the committee of creditors, must be given a copy of such plans as part of “documents” that have to be furnished along with the notice of such meetings.

• As a result of the aforesaid discussion, the arguments of the respondents that “committee” and “participant” are used differently, which would lead to the result that resolution plans need not be furnished to the erstwhile members of the Board of Directors, must be rejected.

• Therefore, the contention that a director simplicitor would have the right to get documents as against a director who is a financial creditor is not an argument that is based on the proviso to Section 21(2), correctly read, as it refers only to a financial creditor who is a related party of the corporate debtor. For this reason, this argument also must be rejected.

[ Link Synopsis ]

--------------------------------------------------

4. NCLT Ahmedabad-2 (30.03.2022) in Hemant Shantilal Shah s Anr.  Vs. Care Office Ltd.  [LA No. 434 of 2020 IN CP (IB) 602 of 2018 ] held that;

• Also, under Regulation 38(1)(a), a resolution plan shall include a statement as to how it has dealt with the interest of all stakeholders, and under sub clause 3(a), a resolution plan shall demonstrate that it addresses the cause of default. This Regulation also, therefore, recognizes the vital interest of the erstwhile Board of Directors in a resolution plan together with the cause of default. 

• It is here that the erstwhile directors can represent to the committee of creditors that the cause of default is not due to the erstwhile management, but due to other factors which may be beyond their control, which have led to nonpayment of the debt. 

• Therefore, a combined reading of the Code as well as the Regulations leads to the conclusion that members of the erstwhile Board of Directors, being vitally interested in resolution plans that may be discussed at meetings of the committee of creditors, must be given a copy of such plans as part of "documents" that have to be furnished along with the notice of such meetings.

• As a result of the aforesaid discussion, the arguments of the respondents that "committee" and "participant" are used differently, which would lead to the result that resolution plans need not be furnished to the erstwhile members of the Board of Directors, must be rejected.

• Resolution plan is a highly confidential document but when such document is required to be given to the most affected parties being erstwhile members of the Board of Directors of the corporate debtor, then the valuation report in our view which is an important document having bearing onto the fate of corporate debtor must be supplied to ex-management. 

• There is no specific provision to not to share copy of valuation report with ex-directors, we hold that in the interest of justice the copy of valuation report needs to be supplied to ex directors, as already directed by the Predecessor Bench.

• We are of the opinion that Resolution Professional shall provide a copy of the valuation report to the suspended management of the corporate debtor subject to an undertaking from members of the suspended management, to maintain confidentiality. 

• The source of this power is Regulation 7(2)(h) of the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016, read with paragraph 21 of the First Schedule thereto. 

[ Link Synopsis ]

---------------------------------

5. NCLAT (23.09.2022) in Rahul Khilnani Vs. Sh. Atul Kumar Jain Resolution Professional [Company Appeal (AT) (Insolvency) No. 586 of 2021] held that;

• In fact, the confidentiality is to be maintained regarding the Fair Value and Liquidation Value lest it should cause any undue claim to itself or any third party. This Tribunal is of the earnest view that as per the provisions of the Code, the Appellants (Operational Creditors) are not required to know the Liquidation Value.

[ Link Synopsis ]

---------------------------------------

6. NCLT Chandigarh (08.07.2022) in Kulwinder Singh Makhni, Suspended Director of M/s Punjab Basmati Rice Ltd. Vs. Mr. Sanjay Kumar Aggarwal, Liquidator of M/s Punjab Basmati Rice Ltd.  [IA No.46/2022 in CP (IB) No.340/Chd/Pb/2018 ] held that;

• This Bench holds that to enable a Member of Stakeholders’ Consultation Committee to meet the mandate under Regulations 31-A(1) and as laid down in 31-A(5), the copy of the valuation report needs to be shared with the applicant i.e. Member of Stakeholders’ Consultation Committee, as the same would be crucial in determining the reserve price of the asset of the corporate debtor. 

[ Link Synopsis ]

-------------------------------------------

Imp. Rulings; - Recall of orders obtained through fraud or misrepresentation.

Imp. Rulings; - Recall of orders obtained through fraud or misrepresentation.

Index; 

1. SCI (2024.02.12) in Greater Noida Industrial Development Authority Vs. Prabhjit Singh Soni and Anr. [Civil Appeal Nos. 7590-7591 of 2023]

2. SCI (31.10.2023) in Sanjay Kumar Agarwal Vs. State Tax Officer (1) & Anr. [Review Petition (Civil) No. 1620-1623 of 2023 in Civil Appeal No. 1661 of 2020 (Neutral Citation No. 2023 INSC 963)]

3. NCLAT (25.05.2023) In Union Bank of India Vs. Dinkar T. Venkatasubramanian & Ors.  [Reference made by Three Member Bench in I.A. No. 3961 of 2022 in Company Appeal (AT) (Ins.) No. 729 of 2020, (2023) ibclaw.in 85 SC]

4.  NCLT Hyderabad (15.11.2022) in Mr. H. Kishen  Vs. Feno Plast Limited & Anr. [ IA 1248 of 2022 in CP(IB) No. 10/7/HDB/2022 ] 

---------------------------------------------

1. SCI (2024.02.12) in Greater Noida Industrial Development Authority Vs. Prabhjit Singh Soni and Anr. [Civil Appeal Nos. 7590-7591 of 2023] held that;

• That the Form in which a claim is to be submitted under the CIRP Regulations 2016 is directory and not mandatory. What is important is, the claim must be supported by proof.

• That the RP is under a statutory obligation to collate the data obtained from (a) the claim(s) made before it and (b) information gathered from the records including those maintained by the CD.

• In consequence, even if a claim submitted by a creditor against the CD is in a Form not as specified in the CIRP Regulations, 2016, the same has to be given due consideration by the IRP or the RP,

• A fortiori, if a claim is submitted by an operational creditor claiming itself as a financial creditor, the claim would have to be accorded due consideration in the category to which it belongs provided it is verifiable.

•  in our view, though commercial wisdom of the COC in approving a resolution plan may not be justiciable in exercise of the power of judicial review, the Adjudicating Authority can always take notice of any shortcoming in the resolution plan in terms of the parameters specified in sub-section (2) of Section 30 of the IBC coupled with Regulations 37 and 38 of the CIRP Regulations 2016. If any such shortcoming appears in the resolution plan, it may send the resolution plan back to the COC for re-submission after satisfying the parameters so laid down.

• The inherent power has not been conferred upon the court; it is a power inherent in the Court by virtue of its duty to do justice between the parties before it.”

• That a Tribunal or a Court is invested with such ancillary or incidental powers as may be necessary to discharge its functions effectively for the purpose of doing justice between the parties and, in absence of a statutory prohibition, in an appropriate case, it can recall its order in exercise of such ancillary or incidental powers

• It was observed that there may be other grounds for recall of a judgment one of them being where fraud is played on the Court in obtaining a judgment.

[ Link Synopsis ]

-------------------------------------------

2. SCI (31.10.2023) in Sanjay Kumar Agarwal Vs. State Tax Officer (1) & Anr. [Review Petition (Civil) No. 1620-1623 of 2023 in Civil Appeal No. 1661 of 2020 (Neutral Citation No. 2023 INSC 963)]  ex-parte proceedings, AA observed as under;

• We are of the opinion that the well-considered judgment sought to be reviewed does not fall within the scope and ambit of Review. The learned Counsels for the Review Petitioners have failed to make out any mistake or error apparent on the face of record in the impugned judgment, and have failed to bring the case within the parameters laid down by this Court in various decision for reviewing the impugned judgment.

[ Link Synopsis ]

-----------------------------------------------------

3. NCLAT (25.05.2023) In Union Bank of India Vs. Dinkar T. Venkatasubramanian & Ors.  [Reference made by Three Member Bench in I.A. No. 3961 of 2022 in Company Appeal (AT) (Ins.) No. 729 of 2020, (2023) ibclaw.in 85 SC] held that;

• The inherent power has not been conferred upon the Court; it is a power inherent in the Court by virtue of its duty to do justice between the parties before it.

• The Hon’ble Supreme Court in the above judgment has clearly held that where a party has had no notice and decree is made against him, he can approach the court for setting-aside the decision.

• There is a distinction between a petition under Article 32, a review petition and a recall petition. While in a review petition the Court considers on merits where there is an error apparent on the face of the record, in a recall petition the Court does not go into the merits but simply recalls an order which was passed without giving an opportunity of hearing to an affected party.”

• In our opinion a tribunal or a court may recall an order earlier made by it if

- (i) the proceedings culminating into an order suffer from the inherent lack of jurisdiction and such lack of jurisdiction is patent,

- (ii) there exists fraud or collusion in obtaining the judgment,

- (iii) there has been a mistake of the court prejudicing a party, or

- (iv) a judgment was rendered in ignorance of the fact that a necessary party had not been served at all or had died and the estate was not represented.

• The order passed is liable to be recalled and reviewed not because it is found to be erroneous, but because it was passed in a proceeding which was itself vitiated by an error of procedure or mistake which went to the root of the matter and invalidated the entire proceeding.

• That no review lies on merits unless a statute specifically provides for it. Obviously when a review is sought due to a procedural defect, the inadvertent error committed by the Tribunal must be corrected ex debito justitiae to prevent the abuse of its process, and such power inheres in every court or Tribunal.

• This Tribunal is not vested with any power to review the judgment, however, in exercise of its inherent jurisdiction this Tribunal can entertain an application for recall of judgment on sufficient grounds.

Further Developments;

Hon'ble Supreme Court (31.07.2023) in Union Bank of India v. Financial Creditors of Amtek and ors,[Civil Appeal No. 4620/2023]  observed as under;

"We are in agreement with the view taken by the Five Judges Bench of the NCLAT and thus find no reason to interfere with the impugned judgment."

[ Link Synopsis ]

---------------------------------------------

4. NCLT Hyderabad (15.11.2022) in Mr. H. Kishen  Vs. Feno Plast Limited & Anr. [ IA 1248 of 2022 in CP(IB) No. 10/7/HDB/2022 ]  held that;

• 'The principle that a person who does not come to the Court with clean hands is not entitled to be heard on the merits of his grievance and, in any case, such person is not entitled to any relief is applicable not only to the petitions filed under Articles 32, 226 and 136 of the Constitution but also to the cases instituted in others courts and judicial forums”

• Therefore, we have no doubt that the remedy to move for recalling the order on the basis of the newly discovered facts amounting to fraud of high degree, cannot be foreclosed in such a situation. 

• "No court or tribunal can be regarded as powerless, to recall its own order. If it is convinced that the order was wangled through fraud or misrepresentation of such a dimension as would affect the very basis of the claim".

[ Link Synopsis ]

---------------------------------------------