Assignee Stepping Into Shoes Of Assignor, Borrower Or Guarantor Cannot Challenge Such Assignment: NCLAT New Delhi

Brief Facts

A working capital agreement and term loan agreement were executed between Sort india Enviro Solutions (corporate debtor) and RBL Bank Ltd. on November 28, 2015. Consequently, the debt was secured through personal guarantees given by Paresh Parekh and Manish Patel (personal guarantors/appellant). The corporate debtor failed to pay the debt amount in pursuance of which account of the corporate debtor was classified as Non-Performing Asset (NPA) on May 31, 2018. Subsequently, an agreement was executed between RBL Bank Ltd. and Asset Reconstruction Company Ltd. (financial creditor/respondent) on June 28, 2018 in which the debt was assigned to the financial creditor. Demand notices were issued to both the personal guarantors and corporate debtor but no payment was made with respect to outstanding liabilities.

A petition under section 95 of the IBC was filed by the financial creditor to start insolvency proceedings against the personal guarantors after the corporate debtor was admitted into insolvency on September 23, 2020. This petition was also admitted by the National Company Law Tribunal (NCLT).

Contentions of both parties

The appellant contended that the NCLT did not grant them equal and fair opportunity to present their case while hearing the petition under section 95 of the IBC therefore violated the principle of natural justice. It was further submitted that the appellant faced technical difficulties while presenting their argument orally despite this they were asked to file written submissions within a few hours. It was further argued that they complied with the order but their written submissions were not considered properly. The assignment agreement was also challenged. It was submitted that it was executed with malicious intent and violated the put option agreement. Lastly, it was contended that the respondent filed false and fabricated documents to prove debt and default.

Per Contra, the respondent argued that a proper procedure was followed by the NCLT and a comprehensive report under section 99 of the IBC was also filed by the Resolution Professional (RP). It was further submitted that invocation of deed of guarantee was valid as it contained absolute terms which were breached by the appellant. It was further submitted that assignee steps into the shoes of a lender once a debt is assigned to it therefore they were entitled to initiate insolvency proceedings against the appellant. It was further argued that put option agreement had no relation with the deed of guarantee.

NCLAT's Analysis

The NCLAT observed that the appellant were given fair opportunity to present their defences. There was no violation of principle of natural justice as time bound nature of the process under the IBC is pivotal. The tribunal further observed that remanding the matter back to the NCLT will be time consuming and on top of that the appellant were given sufficient opportunity to present case before this tribunal. It was observed as under:

“In view of such stringent timelines provided under the IBC for initiation of Insolvency Resolution Process under Chapter-III of the IBC, prima facie, the Adjudicating Authority cannot be faulted in the given circumstances for having proceeded with reserving the matter for orders after giving the Appellant due liberty to file further written submissions.

In view of the time-bound nature of IBC proceedings, we find no infirmity in the endeavour made by the Adjudicating Authority to expedite disposal of the present Section 95 application rather than prolong the matter”.

The NCLAT rejected the argument of the appellant that put option should have been exercised in a separate put option agreement by the RBL Bank Ltd before the personal guarantees could be invoked by the financial creditor. The tribunal held that the deed of guarantee is an independent and unequivocal contract which is not dependent on exercise of put option. The personal guarantors were liable to pay once the corporate debtor defaulted .It was held as under:

“the Deed of Guarantee entered between the original lender and PG is an independent, distinct and a special contract which has to be construed on its own terms. The terms of the Deed of Guarantee are therefore extremely material as the invocation of the guarantee had to be purely in accordance with the terms of guarantee. It is clear from the reading of the clauses contained in Deed of Guarantee that guarantee was given by the PG in unequivocal terms and the guarantee amount was to be paid by the guarantors without demur or objection once the guarantee was invoked”.

The NCLAT further observed that SARFAESI Act allows the debt to be assigned to the Assets Reconstruction Companies and once the debt is assigned, assignee steps into the shoes of an original lender. Additionally, the deed of guarantee contained a clause to assign the debt itself therefore the arguments of the appellant cannot be accepted. It was observed as under:

“Section 5(2) of the SARFAESI Act further contains a deeming clause which provides that an Asset Reconstruction Company on such acquisition of financial assets from the original lender will be deemed to be the lender and all the rights of such original lender shall vest in them. Once the deeming provision contained in Section 5(2) comes into play, the Asset Reconstruction Company shall be deemed to be Lender for all purposes.

"In the present case too, the legal fiction has come into play and the Respondent No.1 as the assignee in the Assignment Agreement clearly stepped into the shoes of her assignor and was therefore fully entitled to exercise its right to initiate proceeding under Section 95 of IBC against the PG”.

The NCLAT further observed that the liability of the guarantor is co-extensive with that of the primary borrower under section 128 of the Indian Contract Act. Once the corporate debtor defaults, the guarantor becomes equally and co-extensively responsible for the debt. The guarantors will have to honor the terms of guarantee mandatorily. It was held as under:

“In the letter invoking the guarantee, it was clearly stated that the Corporate Debtor had not performed its obligation of debt repayment. It is an admitted fact that the Corporate Debtor did not discharge the debt. It is a settled position in law that under Section 128 of the 'Indian Contract Act', the liability of the surety is coextensive with that of principal debtor unless it is otherwise provided by the contract. This legal precept has been laid down by the Hon'ble Supreme Court in the matter of Maharashtra State Electricity Board, Bombay Vs. Official Liquidator, High Court, Ernakulam and Anr. (1982) 3 SCC 358. In the present case, once the principal borrower failed to discharge the debt, the liability of the guarantor got triggered on the invocation of guarantee. By virtue of this Deed of Guarantee, the PG was therefore mandatorily obliged to honour its guarantee”.

Conclusion

The NCLAT concluded that the personal guarantors were liable to pay the debt once the corporate debtor defaulted in the repayment. The NCLT was right in admitting the petition under section 95 of the IBC against the personal guarantor. Accordingly, the present appeal was dismissed.

Case Title: Mr. Paresh Parekh v. Alchemist Asset Reconstruction Co. Ltd. and Anr.

Court: National Company Law Appellate Tribunal, New Delhi

Case Reference: Company Appeal (AT) (Insolvency) No. 1204 of 2024 with Company Appeal (AT) (Insolvency) No. 1205 of 2024

Judgment Date: 20/08/2024

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