Financial Creditor Can Initiate Simultaneous Or Independent Proceedings Against Principle Borrower And Personal Guarantor: NCLT Mumbai
The National Company Law Tribunal, Mumbai Bench-VI bench of K. R. Saji Kumar(Judicial Member) and Sanjiv Dutt (Technical Member) has held that the principal debtor and the surety are jointly and severally liable to the creditor which has the right to recover its dues from either or both of them simultaneously. The bench noted that there is no embargo under the Insolvency and...
The National Company Law Tribunal, Mumbai Bench-VI bench of K. R. Saji Kumar(Judicial Member) and Sanjiv Dutt (Technical Member) has held that the principal debtor and the surety are jointly and severally liable to the creditor which has the right to recover its dues from either or both of them simultaneously.
The bench noted that there is no embargo under the Insolvency and Bankruptcy Code on the financial creditor initiating simultaneous or independent proceedings against the principal borrower and the personal guarantor.
Brief Facts:
The matter pertained to a term loan of Rs.50,00,00,000/- sanctioned by Dewan Housing Finance Corporation Ltd. (DHFL) to the Corporate Debtor for a real estate project. Despite disbursement, the Corporate Debtor defaulted on payments which led to classification as a Non-Performing Asset (NPA). Piramal Capital and Housing Finance Limited (PCHFL) initiated the Corporate Insolvency Resolution Process (CIRP) against Corporate Debtor under Section 7 of the Insolvency and Bankruptcy Code, 2016.
The Financial Creditor, PCHFL, contended that the Corporate Debtor violated the terms of the loan agreement by failing to pay interest and principal amounts. The Financial Creditor claimed a total amount of Rs.1,05,96,31,988/- including interest as of 05.09.2022.
However, the Corporate Debtor contested the application's maintainability and merits. Firstly, it argued that proceedings should be held in abeyance due to a pending application against a personal guarantor under Section 95 of IBC. Secondly, it disputed the existence of a default and referred to repayment terms outlined in the Sanction Letter and Loan Agreement. The Corporate Debtor asserts that repayment obligations only begin after 36 months from the first disbursement, thus claiming a moratorium period until 29.09.2020.
The Corporate Debtor questioned the reliability of the Information Utility Report and argued that there were inconsistencies between the default date and the Loan Recall Notice issuance date.
Observations by the NCLT:
The NCLT considered the objection raised by the Corporate Debtor regarding the maintainability of the Application against it while insolvency proceedings against Mrs Durgaben Patel, the Personal Guarantor, were ongoing. The NCLT referred to Section 128 of the Indian Contract Act, 1872 and held that the liability of the surety is co-extensive with that of the principal debtor unless otherwise provided by the contract. Considering Clause 6 of the Deed of Personal Guarantee, which established joint and several liabilities, the NCLT held that the Financial Creditor could pursue proceedings against both the principal borrower and the personal guarantor simultaneously.
The NCLT held that IBC permits the initiation of insolvency resolution proceedings against personal guarantors before, during, or after the completion of CIRP against the corporate debtor. Moreover, Section 14(3)(b) of IBC excludes sureties from the moratorium under Section 14(1).
Moving to the interpretation of clauses within the Sanction Letter and Loan Agreement, the NCLT referred to clauses noting that interest/ Pre-Equated Monthly Installments (PEMI) were due monthly from the date of the first disbursement until the commencement of repayment through Equated Monthly Instalments (EMIs). It referred to provisions allowing the Financial Creditor to recall the loan upon default in payment for two consecutive months. The NCLT dismissed the Corporate Debtor's contention that it was not obligated to pay PEMIs until 29.09.2020.
The NCLT noted that once the Adjudicating Authority is satisfied with the occurrence of default, the Section 7 application must be admitted (referred to M/s Innoventive Industries Ltd. Vs. ICICI Bank Ltd.) It noted that the Financial Creditor provided necessary evidence demonstrating the existence of a debt exceeding the minimum threshold prescribed under Section 4 of the IBC, along with the default in repayment by the Corporate Debtor. The Application was filed in the prescribed form and was complete.
Therefore, the NCLT admitted the application initiated by the Financial Creditor for the commencement of the Corporate Insolvency Resolution Process (CIRP) concerning Gigeo Construction Company Private Limited, the Corporate Debtor.
Case Title: Omkara Assets Reconstruction Private Limited vs Gigeo Construction Company Private Limited
Case Number: CP (IB) No.1180/MB/2022
Advocate for the Applicant: Adv. Nausher Kohli a/w Adv. Astha Ojha & Adv. Jashshah i/b DSK Legal
Advocate for the Respondent: Adv. Shadab Jan a/w Adv Atharva Khadse.
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