Petition U/S Section 7 Of IBC Cannot Be Entertained Based On Guarantee Invoked During Prohibited Period U/S 10A Of IBC: NCLAT

The National Company Law Appellate Tribunal (NCLAT) New Delhi bench of Justice Ashok Bhushan (Judicial Member) and Mr. Barun Mitra (Technical Member) has held that the liability of the guarantor arises only when the guarantee executed by them in favor of the creditor is invoked. If such guarantee was invoked during the period prohibited under Section 10A of the Insolvency and Bankruptcy Code, 2016 (the Code), an application under Section 7 of the Code cannot be maintained. Brief Facts: IDBI Bank on request of Siti Networks Limited (borrower) sanctioned Working Capital – Cash Credit Facilities of upto ₹25 Crore in favour of the borrower vide sanction letter dated 24.11.2008. On 29.05.2012, IDBI enhanced the Working Capital Facility up to ₹150 Crore comprising of fund base limit of ₹50 Crore and non-fund base limit of ₹100 Crore in favour of the borrower against first pari passu charge on the assets of the company. Loan agreement was entered on 17.07.2012 with borrower and IDBI Bank. Pursuant to facilities granted to the borrower, a guarantee agreement was executed by ZEE Entertainment Enterprises Limited (corporate debtor) in favour of IDBI Bank, guaranteeing the obligation of borrower to maintain the Debt Service Reserve Account (DSRA). On 19.06.2021, IDBI Bank issued a notice under Section 13(2) of the SARFAESI Act. On 09.12.2022, the financial creditor called upon the corporate debtor to maintain the DSRA. An Application under section 7 of the Code was filed by IDBI Bank on 13.12.2023, claiming default under the Working Capital Facilities for ₹149,60,69,763/-, pleading default on 30.09.2019. The corporate debtor filed I.A. 581/2023 seeking rejection of the Section 7 application as barred by Section 10A of the Code. The financial creditor filed a reply, and a rejoinder was submitted. After hearing both parties, the Adjudicating Authority allowed I.A. 581/2023 and dismissed the application under section 7 of the Code as barred by Section 10A. Against the above order, the present appeal has been filed. Contentions: The Appellant submitted that Appellant had addressed a letter dated 02.03.2020 to the borrower, copy of which letter was also marked to the corporate debtor since DSRA amount was NIL since September 2019, no amount could be appropriated from the DSRA account to the loan account as a result of which borrower's account was declared NPA in December 2019. It was also argued that default on the part of the corporate debtor occurred prior to the 10A period i.e., prior to 25.03.2020. The default of corporate debtor continued even after the period specified under Section 10A, respondent never replenished the DSRA account and continuous to be in default. It was further submitted that in event the default continuous beyond the 10A period, Section 7 application cannot be held to be not maintainable. Per contra, the Respondent submitted that the various clauses of guarantee agreement dated 03.08.2012 indicate namely clauses 7, 9, 10, 11 & 27 that DSRA guarantee is on demand guarantee. The liability of the corporate debtor who has given limited guarantee is to arise only when guarantee is invoked and demand is made. Lastly, it was submitted that Application under Section 7 of the Code was not based on any default subsequent to 10A period. The appellant has made extraordinary claims against the corporate debtor against the guarantee dated 03.08.2012. Observations: The Tribunal after referring to the clauses of the Guarantee observed that the clauses of the guarantee by the corporate debtor clearly stipulate that the guarantor must maintain the DSRA amount as stated in recital 2, deposit any defaulted amount immediately upon the lender's request, and that lenders may invoke the guarantee from time to time. It further added that thus, it is clear that the lender must make a demand and invoke the guarantee requiring the guarantor to deposit the DSRA amount. The conclusion is inescapable that the guarantee must be invoked by the lender. The NCLAT in 'Pooja Ramesh Singh' Vs. 'State Bank of India & Anr. held that for default being committed within Section 3(12) of the Code, the amount should be payable and is not paid by the debtor or corporate debtor and date of default of the principal borrower as guarantor shall depend on the contract of guarantee. The default on the part of the guarantor shall accrue only when notice is issued to the guarantor. Similarly, the NCLAT in 'Mudhit Madanlal Gupta' Vs. 'Supreme Constructions & Developers Private Limited' held that Liability of corporate guarantor although is coextensive of the Principal Borrower but when the Guarantee requires invocation of the guarantee deed, default on the guarantor shall be the date when corporate guarantee has been invoked. The Tribunal held that the guarantor guaranteed the borrower would maintain the necessary...

Petition U/S Section 7 Of IBC Cannot Be Entertained Based On Guarantee Invoked During Prohibited Period U/S 10A Of IBC: NCLAT

Mohd Malik Chauhan

Tags