Beneficiaries Of Personal Guarantee Can File Application U/S 95 Of IBC: NCLAT

Brief Facts:

Piramal Finance Limited ("PFL") granted Loan Facility to Hema Engineering Industries Limited ("HEIL") ('Corporate Debtor') under the Facility Agreement dated 20.07.2017.

Under the Assignment Agreement dated 22.03.2019, the Facility Agreement dated 20.07.2017, originally entered into between PFL and HEIL, was assigned to PHL Fininvest Private Limited (now Piramal Enterprises Ltd.), the Respondent No.1 herein.

As per the Facility Agreement dated 20.07.2017, the Respondent No.1 extended a term loan facility of Rs.400 cr to HEIL. HEIL's obligation to repay the loan, along with all other amounts due under the said Facility Agreement, was secured by a Personal Guarantee dated 20.07.2017, which was executed by Krishan Kumar Jajoo (Appellant) in favour of Piramal Trusteeship Services Private Ltd. ("PTSPL"), the appointed Security Trustee.

The Respondent No.1 filed an application under Section 95(1) of the Code on 21.06.2021, seeking initiation of personal insolvency proceedings against the Appellant which was admitted against which the present appeal has been filed.

Contentions:

The appellant submitted that there was no privity of contract between the parties, as the Deed of Guarantee dated 20.07.2017 ("Guarantee Deed") was executed by the Appellant in favour of PTSPL (the Security Trustee), and not with Respondent No. 1. An application under Section 95 of the Code cannot be maintained without proper invocation of the Guarantee.

It was also argued that since the original Board Resolution does not grant Respondent No. 1 the authority to take action against the Appellant, the application filed by Respondent No. 1 under Section 95 of the Code is liable to be dismissed on this ground.

Per contra, the respondent submitted that the debt is due and payable from HEIL ("Corporate Debtor"), and the Appellant, as the Personal Guarantor of the Corporate Debtor, has committed defaults in repaying the same.

The Supreme Court in in Laxmi Pat Surana v. Union Bank of India (2021) held that a default is deemed to have been committed by the guarantor if the principal borrower fails to discharge its obligations, and as a consequence, the status of the guarantor transforms into that of a corporate debtor under the Code.

It was also argued that the Facility Agreement explicitly provided that the 'Lender' was entitled, inter alia, to assign any rights under the agreement without the consent of the Corporate Debtor. The new lender would acquire the same rights as the original party to the Facility Agreement.

It was further submitted that the assignment of the Facility Agreement to PHL Fininvest was duly authorized, and the Appellant's objections regarding the assignment and privity of contract are without merit.

It was also contended that the Resolution Professional was appointed by an order dated 08.04.2022, which was not challenged by the Appellant. As such, the order has attained finality, and the Appellant is deemed to have acquiesced to this appointment.

Lastly, it was submitted that the terms of the Personal Guarantee clearly establish that both the 'Lender' and the 'Trustee' are entitled to initiate action against the Appellant.

Observations:

The Tribunal observed that trusteeship deeds are signed to act on behalf of the creditors/lenders. Such deeds are generally signed by the trust on behalf of the lenders and the personal or corporate guarantor of the principal borrower. However, by their true nature and intent, the true beneficiaries of such deeds are the lenders or financial creditors.

Based on the above, it observed that the security trustees are holding 'Security' not for themselves, but on behalf of, and for the benefit of Financial Creditor/Lender. The Lenders, can therefore, enforce the security documents even if he is not a party to the trusteeship agreement.

The Tribunal after referring to the relevant clauses of the Agreement, observed that the Assignment Agreement and the transfer of rights and obligations under the Facility Agreement were binding on the Corporate Debtor and accordingly, the Appellant could not seek to escape his obligations thereunder.

It also said that the Respondent No. 1 / Lender, being the ultimate beneficiary under the Personal Guarantee, could institute and maintain the proceedings initiated against the Appellant under the Code.

It further observed that a bare perusal of the clauses of the agreement establish the independent rights of creditors in addition to Trust. By no way of imagination it can be argued by the Appellant (as guarantor) that creditor (including its assignee) can not pursue his rights against the Appellant.

The Tribunal while rejecting the submission with respect to appointment of the Resolution Professional by the Adjudicating Authority, observed that it is a discretion of the Adjudicating Authority and provisions of the Codes are directives in nature as held by the NCLAT in L. Ramalakshmamma and Ors. Vs. State Bank of India (2021).

The Tribunal while rejecting the contention of the Appellant with respect to principle of Natural Justice observed that the parties were given ample opportunities to raise objections which were duly considered by the Adjudicating Authority. Since, objections were sufficiently addressed by the Adjudicating Authority and the report filed by the Resolution Professional satisfies the requirements of the code, it cannot be said that the order passed by the Adjudicating Authority was invalid or principles of natural justice were violated.

It rejected the submission that the Respondent was not authorised to file the application under section 95 of the code and relied on the Supreme Court judgment in United Bank of India v Naresh and Ors.(1996) where it was held a corporation could ratify the action, expressed or implied, of pleadings being signed by one of its officers.

Based on the above, it noted that in the present case, the Respondent No. 1 executed and placed on record a fresh board resolution dated 05.01.2022, thereby ratifying all acts undertaken under the previous board resolution dated April 12, 2021.

The Supreme Court in Laxmi Pat Surana vs Union of India (2021), held that this is the prerogative of the creditor to initiate the insolvency process against the principal borrower or the personal guarantor or both.

Accordingly, the present appeal was dismissed.

Case Title: Krishan Kumar Jajoo Versus Piramal Enterprises Ltd. and Anr.

Case Number: Company Appeal (AT) (Ins) No. 1601 of 2024 & I.A. No. 5835 of 2024

Judgment Date:21/02/2025

For Appellants: Mr. Vikas Dutta, Mr. Siddharth Silwal, Ms. Shivani Sharma, Advocates.

For Respondents: Mr. Prashant Kumar, Mr. Angad, Mr. Kevin Chadha & Ms. Nikita Menon, Advocates for R-1.

Mr. Adhish Srivastava, Advocate for R-2.

Mr. Jayant Prakash, RP.

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