Since a Financial Creditor had initiated action under section 7 of the Code against the Corporate Guarantor, the Application could not have been dismissed on the erroneous assumption that the Application should have been filed against the Personal Guarantor under Section 95 of the Code – Intec Capital Ltd. Vs. Eastern Embroidery Collections Pvt. Ltd. – NCLAT New Delhi

I. Case Reference

Case Citation	:	(2021) ibclaw.in 500 NCLAT
Case Name	:	Intec Capital Ltd. Vs. Eastern Embroidery Collections Pvt. Ltd.
Corporate Debtor	:	Eastern Embroidery Collections Pvt. Ltd.
Appeal No.	:	Company Appeal (AT) (Insolvency) No. 428 of 2021 [Arising out of Impugned Order dated 27 April 2021 passed by the Adjudicating Authority/NCLT, Bench-V, New Delhi in CP (IB) No. 161(ND)/2021)
Judgment Date	:	26-Oct-21
Court/Bench	:	NCLAT New Delhi
Act	:	Insolvency & Bankruptcy Code 2016
Present for Appellant(s)	:	Mr Sagar Bansal and Mr Aabhas Singh, Advocates.
Chairperson	:	Mr. Justice Venugopal M.
Member (Technical)	:	Mr. V. P. Singh
Member (Technical)	:	Dr. Ashok Kumar Mishra
Impugned Order	:	(2021) ibclaw.in 410 NCLT (set aside)
Original Judgment	:	Download

II. Brief about the decision

Grounds of Appeal

The Ld. Adjudicating Authority has erroneously held that the applicable Rules are ‘The Insolvency and Bankruptcy (Application to Adjudicating Authority for Bankruptcy Process for Personal Guarantors to Corporate Debtors) Rules, 2019 instead of “The Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016”.

The Ld. Adjudicating Authority has curtailed the remedies available to the Appellant of making an Application for Resolution of Insolvency of Corporate Debtor, who qualifies under the definition of “Corporate Person” and “Corporate Debtor” stated under Sub-section (7) & (8) of Section 3 of the IBC. Accordingly, the Corporate Guarantor is a Corporate Debtor in terms of Section Sub-section (7) and (8) of Section 3 of IBC and not a “Personal Guarantor” in terms of Sub-section (22) of Section 5 of the I&B Code. The questions that arise for our consideration is as under;

1. Is the Eastern Embroidery Collections Private Limited, for brevity ‘EECPL’, the Personal Guarantor of the Principal Borrower ‘Eastern Overseas’?

2. Whether the ‘EECPL’ is the Corporate Guarantor and therefore ‘Corporate Debtor’ of the ‘Eastern Overseas, in terms of Sub-section (7) and (8) of Sec 3 of I&B Code and the applicable Rules will be ‘Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016’?

Decision of the Appellate Tribunal

The Adjudicating Authority has held that the Insolvency and Bankruptcy (Application to Adjudicating Authorities for Bankruptcy Process for Personal Guarantors to Corporate Debtors” Rules, 2019 will be applicable instead of “the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules 2016. Under both the Rules, the conditions for the applicability of the Rules are provided. The Appellant contends that the Adjudicating Authority has curtailed the remedies available to the Appellant of making an Application for Resolution of Insolvency of the ‘Corporate Debtor’, who qualifies under the definition of ‘Corporate Person’ and ‘Corporate Debtor’ as stated under Section 3, Sub-section 7 and 8 of the IBC. Finding of the Adjudicating Authority that Section 5, Sub-section (22) of the IBC, which defines ‘Personal Guarantor’ comes into play, is against the law.
The Appellant further contends that Respondent is falling under the definition of ‘Corporate Person’ and ‘Corporate Debtor’ and is entirely outside the purview of the definition of ‘Personal Guarantor’ under Section 5 Sub-section 22 of the Code. Therefore, the Application against the Respondent Corporate Person is to be filed as per the Insolvency and Bankruptcy (Application to Adjudicating Authority Rules, 2016, not as per “the Insolvency and Bankruptcy (Application to Adjudicating Authority Rules for Bankruptcy Process for Personal Guarantors to Corporate Debtor) Rules, 2019 as Rule 2 and 3 are both Rules clearly define the applicability of the part of IBC.
It is further contended that the learned Adjudicating Authority under the wrong apprehension considered Respondent to be a Personal Guarantor while the Respondent is a Corporate Guarantor. It is pertinent to mention that the Appellant had not filed an Application against a Personal Guarantor under Section 95 of the Code; instead, the Application is filed against the Corporate Guarantor/Corporate Debtor.
The learned Adjudicating Authority had failed to notice that the Financial Creditor had taken Personal Guarantee of Mr Mahendra Singh Narang and Mrs Manjit Kaur in addition to the Corporate Guarantee given by the Corporate Debtor. Therefore, on the occurrence of default, it was the sole prerogative of the Financial Creditor to initiate action against the Principal Borrower or the Personal Guarantor of the Corporate Guarantor. Since the Appellant Financial Creditor had initiated action under the Insolvency and Bankruptcy Code against the Corporate Guarantor, the Application could not have been dismissed on the erroneous assumption that the Application should have been filed against the Personal Guarantor under Section 95 of the Code.
The law laid down by the Hon’ble Supreme Court in the Laxmi Pat Surana V Union Bank of India and Another (2021) ibclaw.in 53 SC case is fully applicable in the instant case. In the case mentioned above, Hon’ble Supreme Court has rejected the contention of the Appellant that since the loan was offered to the proprietary firm (not a corporate person), action under Section 7 of the Code cannot be initiated against the Corporate Person even though it had offered Guarantee in respect of the transaction. In this case, also Principal Borrower is a proprietary firm, and the Corporate Debtor had given the Corporate Guarantee for the said loan.(p7)

NCLAT held that based on the above discussion, it is clear that Respondent ‘Eastern Embroidery Collections Private Limited’ was the Corporate Guarantor of the Principal Borrower ‘Eastern Overseas’, and not a Personal Guarantor. Therefore, in terms of Sub-section (7) and (8) of Sec 3 of I&B Code, 2016 is a Corporate Debtor. Further, the applicable Rules would be ‘Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016’. Therefore, we are of the considered opinion that the Adjudicating Authority committed an error in holding that action should have been initiated against the Personal Guarantor of the Corporate Debtor under Section 95 of the Code instead of proceeding against the Corporate Debtor. In the circumstances stated above, Appeal deserves to be allowed, and the impugned order passed by the learned Adjudicating Authority is liable to be set aside.(p8)

III. Full text of the judgment

J U D G M E N T
(Virtual Mode)

[Per; V. P. Singh, Member (T)]

This Appeal emanates from the Impugned Order dated 27 April 2021 passed by the Adjudicating Authority/National Company Law Tribunal, Bench-V, New Delhi in Company Petition (IB) No. 161(ND)/2021, whereby the Adjudicating Authority has rejected the Application filed under Section 7 of the Insolvency and Bankruptcy Code, 2016 (in short ‘I&B Code’). The Parties are represented by their original status in the Company Petition for the sake of convenience.

2. Brief Facts

The brief facts of the case are as follows:

2.1 The Appellant ‘Intec Capital Ltd’ for brevity ‘Intec’ filed an Application under Section 7 of the Insolvency and Bankruptcy Code, 2016 for initiation of Corporate Insolvency Resolution Process (CIRP) against the Corporate Guarantor / Corporate Debtor ‘Eastern Embroidery Collections Private Limited’ (EECPL) for the sum borrowed by the partnership firm M/s Eastern Overseas.

2.2 The Appellant ‘Intec Capital Ltd’ is the Financial Creditor and is a non-banking Financial Company engaged inter-alia in the business of providing financial facilities. On the other hand, M/s ‘Eastern Overseas’ is a partnership firm engaged in embroidery and similar activities that approached ‘Intec’ for loan facilities and M/S’ Eastern Embroidery Collection Private Limited’ (Corporate Debtor) provided the Corporate Guarantee. As a result, the Corporate Guarantor ‘EECPL’ becomes the Corporate Debtor for the said loan facility provided by ‘Intec’.

2.3 M/s ‘Eastern Overseas’ (“Borrower”) on 07.10.2013 got sanctioned two loans Rs.82,20,000/- on 09.10.2013 i.e., LNN0I01413-140002997 and Rs.34,65,000/- on 18.02.2014 i.e, LNNHP00713-140003387 from M/s Intec Capital Limited. The Financial Creditor ‘Intec’ entered into a Loan Agreement with the Borrower and Guarantor /Corporate Debtor for Rs.82,20,000/- at 14% p.a reducing balance basis, to be repaid in sixty monthly instalments of Rs.1,89,059/each. Respondent/Corporate Guarantor signed and executed a deed of Guarantee and other relevant documents in favour of the Appellant for an amount of Rs.34,65,000/- with 14% per annum interest, reducing balance basis to be repaid by 60 EMI’s of Rs.79,695/-.

2.4 After that, on 01.04.2015, a notice was issued recalling the loan facility sanctioned to Borrower. The notice was also issued against the Corporate Guarantor invoking the Guarantee calling upon them to repay the financial debt.

2.5 Respondent ‘EECPL’, the Corporate Guarantor/Corporate Debtor, also provided security cheques for the financial facilities provided to the Principal Borrower ‘Eastern Overseas’ by Intec Capital. However, the payments were not made even after repeated requests as per the agreed repayment schedule. Moreover, the Borrower failed to regularise the loan account. Therefore, the Appellant ‘Intec’ was compelled to recall the loan facilities.

2.6 The Borrower failed to maintain an adequate amount in the Bank account, which dishonoured cheques/ECS/ACH. After that, the Arbitration proceeding was also initiated, resulting in an award in favour of the Financial Creditor ‘Intec’.

2.7 The Appellant claims Rs.2,10,57,036/- due as of 31.10.2020 against the Corporate Debtor, including the total loan amount payable, overdue instalments, principal outstanding, interest on delayed payments, and other charges as per the agreed terms and conditions.

2.8 The Adjudicating Authority rejected the prayer for initiation of CIRP against the Corporate Debtor mainly on two grounds. Firstly, the Appellant/Creditor had applied under Section 7 of the IBC and not under Section 95 of IBC. Secondly, the Appellant had filed the Application for Initiation of CIRP against the Personal Guarantor. But has not followed the applicable Rules, i.e. “The Insolvency and Bankruptcy (Application to Adjudicating Authority for Bankruptcy Process for Personal Guarantors to Corporate Debtors) Rules, 2019. Therefore, the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016” is not applicable in the instant case.

2.9 Therefore, the Applicant/Appellant was required to submit the Application in ‘Form C’ under Section 95 (4) of the IBC, and that too after service of demand notice as required under Section 95 (4) (a) read with Rule 7 of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtor’s) Rules, 2019 and that too if the debt is not paid within 14 days from the date of service of demand notice.

2.10 The Adjudicating Authority has made the following observations;

“20. A bare perusal of the provision shows that an application by the creditor against the personal Guarantor shall be filed under section 95 (1) of the IBC, and according to section 95 (4) IBC 2016 (i) an application under sub-section (1) shall be accompanied with details and documents relating to the debts owed by the debtor to the creditor or creditors submitting the Application for insolvency resolution process as on the date of Application, (ii) it shall only be filed on failure by the debtor to pay the debt within a period of 14 days of the service of the notice of demand and (ii) supported with relevant evidence of such default or none repayment of debt.

21. On conjoint rating of section 95 of IBC with the Rule 7 of the insolvency and bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantor to Corporate Debtors) Rules, 2019, made it clear, an application under section 95 shall only be filed, on failure on debtor to pay the debt within the period of 14 days of service of the demand notice, served u/s 95 (4) IBC 2016. Which means an application u/s 95 (1) IBC 2016 can only be filed after the expiry of period of 14 days from the date of service of demand notice under section 95 (4) (b) of the IBC.

22. Applying the aforesaid provisions, when we consider the Application filed by the Applicant then we noticed that the applicant/creditor has filed under section 7 of the IBC not under section 95 of IBC. Secondly, Applicant has filed the Application for initiation of CIRP not against the corporate debtor rather against the personal Guarantor. Therefore, the Applicant is required to submit an application in Form C under section 95 (4) of the IBC and that too after service of demand notice as required under section 95 (4) (a) read with rule 7 of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtor’s) Rules, 2019 and if the debt is not paid within 14 days from the date of service of demand notice.

23. Here in the case in hand, the Applicant has not produced any document to show that the demand notice as required under section 95 (4) (b) of the IBC read with rule 7 of the’s Insolvency And Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 was ever served upon the personal Guarantor. Therefore, in our considered view, the present Application filed by the Applicant is not maintainable.

24. Accordingly, the present Application stands dismissed.

25. However, the Applicant is at liberty to file a fresh application in accordance with the provision of law.”

(verbatim copy)

Being aggrieved by the above order, this Appeal has been filed.

3. Grounds of Appeal

3.1 The Ld. Adjudicating Authority has erroneously held that the applicable Rules are ‘The Insolvency and Bankruptcy (Application to Adjudicating Authority for Bankruptcy Process for Personal Guarantors to Corporate Debtors) Rules, 2019 instead of “The Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016”.

3.2 The Ld. Adjudicating Authority has curtailed the remedies available to the Appellant of making an Application for Resolution of Insolvency of Corporate Debtor, who qualifies under the definition of “Corporate Person” and “Corporate Debtor” stated under Sub-section (7) & (8) of Section 3 of the IBC. Accordingly, the Corporate Guarantor is a Corporate Debtor in terms of Section Sub-section (7) and (8) of Section 3 of IBC and not a “Personal Guarantor” in terms of Sub-section (22) of Section 5 of the I&B Code.

4. Statutory Provisions

4.1 Companies Act, 2013

Sec 2(20) “company” means a company incorporated under this Act or under any previous company law;

4. Insolvency and Bankruptcy Code, 2016

Sec 3(7) “corporate person” means a company as defined in clause (20) of Section 2 of the Companies Act, 2013 (18 of 2013), a limited liability partnership, as defined in clause (n) of sub-section (1) of Section 2 of the Limited Liability Partnership Act, 2008 (6 of 2009), or any other person incorporated with limited liability under any law for the time being in force but shall not include any financial service provider;

(8) “corporate debtor” means a corporate person who owes a debt to any person;

(22) “personal guarantor” means an individual who is the surety in a contract of Guarantee to a corporate debtor;

6. Persons who may initiate corporate insolvency resolution process.—Where any corporate debtor commits a default, a financial creditor, an operational creditor or the corporate debtor itself may initiate corporate insolvency resolution process in respect of such corporate debtor in the manner as provided under this Chapter.

7. Initiation of corporate insolvency resolution process by financial creditor.—

(1) A financial creditor either by itself or jointly with [other financial creditors, or any other person on behalf of the financial creditor, as may be notified by the Central Government,] may file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred:

[Provided that for the financial creditors, referred to in clauses (a) and (b) of sub-section (6-A) of Section 21, an application for initiating corporate insolvency resolution process against the corporate debtor shall be filed jointly by not less than one hundred of such creditors in the same class or not less than ten per cent. of the total number of such creditors in the same class, whichever is less:

Provided further that for financial creditors who are allottees under a real estate project, an application for initiating corporate insolvency resolution process against the corporate debtor shall be filed jointly by not less than one hundred of such allottees under the same real estate project or not less than ten per cent of the total number of such allottees under the same real estate project, whichever is less:

Provided also that where an application for initiating the corporate insolvency resolution process against a corporate debtor has been filed by a financial creditor referred to in the first and second provisos and has not been admitted by the Adjudicating Authority before the commencement of the Insolvency and Bankruptcy Code (Amendment) Act, 2020, such Application shall be modified to comply with the requirements of the first or second proviso within thirty days of the commencement of the said Act, failing which the Application shall be deemed to be withdrawn before its admission.]

Explanation.—For the purposes of this sub-section, a default includes a default in respect of a financial debt owed not only to the applicant financial creditor but to any other financial creditor of the corporate debtor.

(2) The financial creditor shall make an application under sub-section (1) in such form and manner and accompanied with such fee as may be prescribed.

(3) The financial creditor shall, along with the application furnish—

(a) record of the default recorded with the information utility or such other record or evidence of default as may be specified;

(b) the name of the resolution professional proposed to act as an interim resolution professional; and

(c) any other information as may be specified by the Board.

(4) The Adjudicating Authority shall, within fourteen days of the receipt of the Application under sub-section (2), ascertain the existence of a default from the records of an information utility or on the basis of other evidence furnished by the financial creditor under sub-section (3):

[Provided that if the Adjudicating Authority has not ascertained the existence of default and passed an order under sub-section (5) within such time, it shall record its reasons in writing for the same.]

(5) Where the Adjudicating Authority is satisfied that—

(a) a default has occurred and the Application under sub-section (2) is complete, and there is no disciplinary proceedings pending against the proposed resolution professional, it may, by order, admit such Application; or

(b) default has not occurred or the Application under sub-section (2) is incomplete or any disciplinary proceeding is pending against the proposed resolution professional, it may, by order, reject such Application:

Provided that the Adjudicating Authority shall, before rejecting the Application under clause (b) of sub-section (5), give a notice to the Applicant to rectify the defect in his Application within seven days of receipt of such notice from the Adjudicating Authority.

(6) The corporate insolvency resolution process shall commence from the date of admission of the Application under sub-section (5).

(7) The Adjudicating Authority shall communicate—

(a) the order under clause (a) of sub-section (5) to the financial creditor and the corporate debtor;

(b) the order under clause (b) of sub-section (5) to the financial creditor, within seven days of admission or rejection of such Application, as the case may be.

PART II
INSOLVENCY RESOLUTION AND LIQUIDATION FOR CORPORATE PERSONS
CHAPTER I
PRELIMINARY

4. Application of this Part.—(1) This Part shall apply to matters relating to the insolvency and liquidation of corporate debtors where the minimum amount of the default is one lakh rupees:

Provided that the Central Government may, by notification, specify the minimum amount of default of higher value which shall not be more than one crore rupees:

[Provided further that the Central Government may, by notification, specify such minimum amount of default of higher value, which shall not be more than one crore rupees, for matters relating to the pre-packaged insolvency resolution process of corporate debtors under Chapter III-A.]

5. Definitions.—In this Part, unless the context otherwise requires,—

[(5-A) “corporate guarantor” means a corporate person who is the surety in a contract of Guarantee to a corporate debtor;]

(7) “financial creditor” means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to;

(8) “financial debt” means a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes—

(a) money borrowed against the payment of interest;

(b) any amount raised by acceptance under any acceptance credit facility or its de-materialised equivalent;

(c) any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument;

(d) the amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed;

(e) receivables sold or discounted other than any receivables sold on non-recourse basis;

(f) any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing;

[Explanation.—For the purposes of this sub-clause,—

(i) any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing; and

(ii) the expressions, “allottee” and “real estate project” shall have the meanings respectively assigned to them in clauses (d) and (zn) of Section 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2016);]

(g) any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account;

(h) any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution;

(i) the amount of any liability in respect of any of the Guarantee or indemnity for any of the items referred to in sub-clauses (a) to (h) of this clause;

CHAPTER III
INSOLVENCY RESOLUTION PROCESS

95. Application by creditor to initiate insolvency resolution process.—

(1) A creditor may apply either by himself, or jointly with other creditors, or through a resolution professional to the Adjudicating Authority for initiating an insolvency resolution process under this section by submitting an application.

(2) A creditor may apply under sub-section (1) in relation to any partnership debt owed to him for initiating an insolvency resolution process against—

(a) any one or more partners of the firm; or

(b) the firm.

(3) Where an application has been made against one partner in a firm, any other application against another partner in the same firm shall be presented in or transferred to the Adjudicating Authority in which the first mentioned Application is pending for adjudication and such Adjudicating Authority may give such directions for consolidating the proceedings under the applications as it thinks just.

(4) An application under sub-section (1) shall be accompanied with details and documents relating to—

(a) the debts owed by the debtor to the creditor or creditors submitting the Application for insolvency resolution process as on the date of Application;

(b) the failure by the debtor to pay the debt within a period of fourteen days of the service of the notice of demand; and

(c) relevant evidence of such default or non-repayment of debt.

(5) The creditor shall also provide a copy of the Application made under sub-section (1) to the debtor.

(6) The Application referred to in sub-section (1) shall be in such form and manner and accompanied by such fee as may be prescribed.

(7) The details and documents required to be submitted under sub-section (4) shall be such as may be specified.

4.3 Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016

[As amended up to GSR 583(E), dated 24-9-2020] [30 November, 2016]

In exercise of the powers conferred by clauses (c), (d), (e) and (f) of sub-section (1) of Section 239 read with Sections 7, 8, 9 and 10 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016), the Central Government hereby makes the following rules, namely—

1. Short title and commencement.—(1) These rules may be called the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016.

(2) They shall come into force from the 1st day of December, 2016.

2. Application.—These rules shall apply to matters relating to the corporate insolvency resolution process.

3. Definitions.—(1) In these Rules, unless the context otherwise requires,—

(a) “Code” means the Insolvency and Bankruptcy Code, 2016 (31 of 2016);

(b) “corporate insolvency resolution process” means the insolvency resolution process for corporate persons under Chapter II of Part II of the Code;

(c) “credit information company” shall have the meaning as assigned to it under the Credit Information Companies (Regulation) Act, 2005 (30 of 2005);

(d) “financial contract” means a contract between a corporate debtor and a financial creditor setting out the terms of the financial debt, including the tenure of the debt, interest payable and date of repayment;

(e) “Form” means a Form appended to these rules;

(f) “identification number” means the limited liability partnership identification number or the corporate identity number, as the case may be, of the corporate person;

(g) “Schedule” means the Schedule appended to these rules.

(2) All the words and expressions used herein and not defined shall have the meanings respectively assigned to them under the Code.

4. Application by financial creditor.—

(1) A financial creditor, either by itself or jointly, shall make an application for initiating the corporate insolvency resolution process against a corporate debtor under Section 7 of the Code in Form, 1, accompanied with documents and records required therein and as specified in the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

(2) Where the Applicant under sub-rule (1) is an assignee or transferee of a financial contract, the Application shall be accompanied with a copy of the assignment or transfer agreement and other relevant documentation to demonstrate the assignment or transfer.

2[(3) The Applicant shall serve a copy of the Application to the registered office of the corporate debtor and to the Board, by registered post or speed post or by hand or by electronic means, before filing with the Adjudicating Authority.]

(4) In case the Application is made jointly by financial creditors, they may nominate one amongst them to act on their behalf.

5. Demand notice by operational creditor.—(1) An operational creditor shall deliver to the corporate debtor, the following documents, namely—

(a) a demand notice in Form, 3; or

(b) a copy of an invoice attached with a notice in Form, 4.

(2) The demand notice or the copy of the invoice demanding payment referred to in sub-section (2) of Section 8 of the Code, may be delivered to the corporate debtor,

(a) at the registered office by hand, registered post or speed post with acknowledgement due; or

(b) by electronic mail service to a whole time director or designated partner or key managerial personnel, if any, of the corporate debtor.

(3) A copy of demand notice or invoice demanding payment served under this rule by an operational creditor shall also be filed with an information utility, if any.

4.4 Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019

[15 November, 2019]

1. Short title and commencement.—

(1) These rules may be called the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019.

(2) They shall come into force from the 1st day of December, 2019.

2. Application.— These rules shall apply to insolvency resolution process for personal guarantors to corporate debtors.

3. Definitions.— (1) In these rules, unless the context otherwise requires,—

(a) “Adjudicating Authority” means—

(i) for the purpose of section 60, the National Company Law Tribunal constituted under section 408 of the Companies Act, 2013 (18 of 2013); or

(ii) in cases other than sub-clause (i), the Debt Recovery Tribunal established under sub-section (1A) of section 3 of the Recovery of Debts and Bankruptcy Act, 1993 (51 of 1993);

(b) “Code” means the Insolvency and Bankruptcy Code, 2016 (31 of 2016);

(c) “electronic form” shall have the meaning assigned to it in clause (r) of section 2 of the Information Technology Act, 2000 (21 of 2000);

(d) “form” means a form appended to these rules;

(e) “guarantor” means a debtor who is a personal guarantor to a corporate debtor and in respect of whom Guarantee has been invoked by the creditor and remains unpaid in full or part;

(f) “section” means section of the Code;

(g) “serve” means sending any communication by any means, including registered post, speed post, courier or electronic form, which is capable of producing or generating an acknowledgement of receipt of such communication:

Provided that where a document cannot be served in any of the modes, it shall be affixed at the outer door or some other conspicuous part of the house or building in which the addressee ordinarily resides or carries on business or personally works for gain;

(2) Words and expressions used and not defined in these rules but defined in the Code shall have the meanings respectively assigned to them in the Code.

4. Relatives.— For the purposes of clause (ii) of Explanation to sub-section (2) of section 79, the manner of relationship shall mean the manner as provided in the Explanation to clause (24A) of section 5.

5. Excluded assets.— For the purposes of sub-section (14) of section 79,—

(a) the value of unencumbered personal ornaments under clause (c) of the said sub-section shall not exceed one lakh rupees;

(b) the value of unencumbered single dwelling unit owned by the debtor under clause (e) of the said sub-section shall not exceed,—

(i) in the case of dwelling unit in an urban area, twenty lakh rupees;

(ii) in the case of dwelling unit in rural area, ten lakh rupees. Explanation.— For the purposes of this rule,—

(a) “rural area” shall have the same meaning as assigned to it in clause (o) of section 2 of the National Rural Employment Guarantee Act, 2005 (42 of 2005);

(b) “urban area” means any area other than rural area.

6. Application by Guarantor.— (1) The Application under sub-section (1) of section 94 shall be submitted in Form A, along with an application fee of two thousand rupees.

(2) The Guarantor shall serve forthwith a copy of the Application referred to in sub-rule (1) to every financial creditor and the corporate debtor for whom the Guarantor is a personal guarantor.

7. Application by creditor.— (1) A demand notice under clause (b) of sub-section (4) of section 95 shall be served on the Guarantor demanding payment of the amount of default, in Form B.

(2) The Application under sub-section (1) of section 95 shall be submitted in Form C, along with a fee of two thousand rupees.

(3) The creditor shall serve forthwith a copy of the Application referred to in sub-rule (2) to the Guarantor and the corporate debtor for whom the Guarantor is a personal guarantor.

(4) In case of a joint application, the creditors may nominate one amongst themselves to act on behalf of all the creditors.

8. Confirmation or nomination of insolvency professional.— (1) For the purposes of sub-section (2) of section 97 and sub-section (5) of section 98, the Board may share the database of the insolvency professionals, including information about disciplinary proceedings against them, with the Adjudicating Authority from time to time.

(2) For the purposes of sub-section (4) of section 97 and sub-section (3) of section 98, the Board may share a panel of insolvency professionals, who may be appointed as resolution professionals, with the Adjudicating Authority.

9. Copy of Application.— The Applicant shall provide a copy of the Application filed under sub-section (1) of section 94 or sub-section (1) of section 95, as the case may be, if not provided earlier, to the resolution professional within three days of his appointment under sub-section (5) of section 97, and to the Board for its record.

10. Filing of Application and documents.— (1) Till such time, rules of procedure for conduct of proceedings under the Code are notified, the applications under rules 6 and 7 shall be filed and dealt with by the Adjudicating Authority in accordance with—

(a) rules 20, 21, 22, 23, 24 and 26 of Part III of the National Company Law Tribunal Rules, 2016 made under section 469 of the Companies Act, 2013 (18 of 2013); or

(b) rule 3 of the Debt Recovery Tribunal (Procedure) Rules, 1993 made under section 36 of the Recovery of Debts and Bankruptcy Act, 1993 (51 of 1993) and regulations 3, 4, 5 and 11 of the Debt Recovery Tribunal Regulations, 2015 made under section 22 of the Recovery of Debts and Bankruptcy Act, 1993, as the case may be.

(2) The Application and accompanying documents shall be filed in electronic form, as and when such facility is made available and as directed by the Adjudicating Authority:

Provided that till such facility is made available, the Applicant may submit accompanying documents, and wherever they are bulky, in electronic form, in scanned, legible portable document format in a data storage device such as compact disc or a USB flash drive acceptable to the Adjudicating Authority.

5. Point in issue

The questions that arise for our consideration is as under;

1. Is the Eastern Embroidery Collections Private Limited, for brevity ‘EECPL’, the Personal Guarantor of the Principal Borrower ‘Eastern Overseas’?

6. We have heard the arguments of the learned Counsel for the Appellant and perused the record. There is no appearance from the Respondent side despite service of notice. The Adjudicating Authority has rejected the Application filed U/S 7 of the Code with the following observations;

“14. Ld. Counsel for the applicant submitted that since the Corporate Debtor has failed to repay the loan, therefore, the present Application is filed against the personal Guarantor to initiate the CIRP against the personal Guarantor. He further submitted that on the date of recall of loan the Guarantee was also invoked.

15. Before making any comment on the submissions made on behalf of the applicant, at this juncture, we would like to refer Rule 3 of Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 (w.e.f 01.12.2019) 9 herein after referred as Rules). Rule 3(1)(1) of the said Rules defines the word guarantors i.e. “guarantor” means a debtor who is a personal guarantor to a corporate debtor and in respect of whom Guarantee has been invoked by the creditor and remains unpaid in full or part.

16. A bare perusal of the definition shows to file an application against the personal guarantors, two things is required to establish, (i) a person is a personal guarantor to a corporate debtor and (ii) in respect of that the creditor has invoked the Guarantee and same is remain unpaid in full or part.

17. At this juncture, we would also like to refer to Rule 7 of Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 and the sane are quoted below:-

(1) A demand notice under clause (b) of sub-section (4) of section 95 shall be served on the Guarantor demanding payment of the amount of default, in Form B.

(2) The Application under sub-section (1) of section 95 shall be submitted in Form C, along with a fee of two thousand rupees.

(3) The creditor shall serve forthwith a copy of the Application referred to in sub-rule (2) to the Guarantor and the corporate debtor for whom the Guarantor is a personal guarantor.

(4) In case of a joint application, the creditors may nominate one amongst themselves to act on behalf of all the creditors.

18. A bare perusal of Rule 7 shows that before applying under Section 95 of the IBC, a demand notice under clause (b) under Sub-Section 4 of Section 95 of the IBC shall be served upon the Guarantor demanding the payment of amount of default in Form B and the Application under Sub-Section 1 of Section 95 of IBC shall be submitted in Form C.

19. At this juncture, we would also like to refer Section 95 of the IBC 2016 and the same is quoted below:-

Section 95-Application by creditor to initiate insolvency resolution process.

(2) A creditor may apply under sub-section (1) in relation to any partnership debt owed to him for Initiating an insolvency resolution process against-

(a) any one or more partners of the firm; or

(b) the firm.

(4) An application under sub-section (1) shall be accompanied with details and documents relating to- (a) the debts owed by the debtor to the creditor or creditors submitting the Application for insolvency resolution process on the date of Application;

(b) the failure by the debtor to pay the debt within a period of fourteen days of the service of the notice of demand; and

(c) relevant evidence of such default or non-repayment of debt.

(5) The creditor shall also provide a copy of the Application made under sub-section (1) to the debtor.

(6) The Application referred to in sub-section (1) shall be in such form and manner and accompanied by such fee as may be prescribed.

(7) The details and documents required to be submitted under sub-section (4) shall be such as may be specified.

20. A bare perusal of the provision shows that an application by the creditor against the personal Guarantor shall be filed under Section 95 (1) of the IBC and according to Section 95(4) IBC 2016 (i), an application under sub-section (1) shall be accompanied with details and documents relating to the debts owed by the debtor to the creditor or creditors submitting the Application for insolvency resolution process as on the date of Application, (ii) it shall only be filed on failure by the debtor to pay the debt within a period of fourteen days of the service of the notice of demand and (iii) supported with relevant evidence of such default or non-repayment of debt.

21. On co-joint reading of Section 95 of IBC with Rule 7 of Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019, made it clear, an application under Section 95 shall only be filed, on failure of debtor to pay the debt within the period of 14 days of service of the demand notice, served u/s 95(4) IBC 2016 which means an application u/s 95(1) IBC 2016 can only be filed after the expiry of period 14 days from the date of service of demand notice under Section 95(4)(b) of the IBC.

22. Applying the aforesaid provisions, when we consider the Application filed by the applicant then we noticed that the applicant/creditor has filed under Section 7 of the IBC not under Section 95 of IBC. Secondly, the applicant has filed the Application for initiation of CIRP not against the Corporate Debtor rather against the personal Guarantor. Therefore, the applicant is required to submit an application in Form C under Section 95(1) of the IBC and that too after service of demand notice as required under Section 95(4)(b) read with Rule 7 of Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 and if the debt is not paid within 14 days from the date of service of demand notice.

23. Herein the case in hand, the Application has not produced any document to show that the demand notice as required under Section 95(4)(b) of the IBC read with Rule 7 of Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 was ever served upon the personal Guarantor. Therefore, in our considered view, the present Application is filed by the applicant is not maintainable.

24. Accordingly, the present Application stands dismissed.

25. However, the applicant is at liberty to file a fresh application in accordance with the provisions of law.”

(verbatim copy)

7. Analysis

7.1 The Adjudicating Authority has held that the Insolvency and Bankruptcy (Application to Adjudicating Authorities for Bankruptcy Process for Personal Guarantors to Corporate Debtors” Rules, 2019 will be applicable instead of “the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules 2016. Under both the Rules, the conditions for the applicability of the Rules are provided.

7.2 Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019¹

[15 November, 2019]

2. Application.—These rules shall apply to insolvency resolution process for personal guarantors to corporate debtors.

3. Definitions.— (1) In these rules, unless the context otherwise requires,—

(e) “guarantor” means a debtor who is a personal guarantor to a corporate debtor and in respect of whom Guarantee has been invoked by the creditor and remains unpaid in full or part; Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016

[As amended up to GSR 583(E), dated 24-9-2020] [30 November, 2016]

7.3 The Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016.

(2) They shall come into force from the 1st day of December, 2016.

2. Application.—These rules shall apply to matters relating to the corporate insolvency resolution process.

3. Definitions.—(1) In these Rules, unless the context otherwise requires,—

(a) “Code” means the Insolvency and Bankruptcy Code, 2016 (31 of 2016);

(b) “corporate insolvency resolution process” means the insolvency resolution process for corporate persons under Chapter II of Part II of the Code;

7.4 The Appellant contends that the Adjudicating Authority has curtailed the remedies available to the Appellant of making an Application for Resolution of Insolvency of the ‘Corporate Debtor’, who qualifies under the definition of ‘Corporate Person’ and ‘Corporate Debtor’ as stated under Section 3, Sub-section 7 and 8 of the IBC. Finding of the Adjudicating Authority that Section 5, Sub-section (22) of the IBC, which defines ‘Personal Guarantor’ comes into play, is against the law.

7.5 The definition of Corporate Person and Corporate Debtor as given under Section 3, Sub-section 7 and 8 of the Code is given below for ready reference;

7.6 Insolvency and Bankruptcy Code, 2016

Sec 3(7) “corporate person” means a company as defined in clause (20) of Section 2 of the Companies Act, 2013 (18 of 2013), a limited liability partnership, as defined in clause (n) of sub-section (1) of Section 2 of the Limited Liability Partnership Act, 2008 (6 of 2009), or any other person incorporated with limited liability under any law for the time being in force but shall not include any financial service provider;

(8) “corporate debtor” means a corporate person who owes a debt to any person;

(22) “personal guarantor” means an individual who is the surety in a contract of Guarantee to a corporate debtor;

7.7 The Appellant further contends that Respondent is falling under the definition of ‘Corporate Person’ and ‘Corporate Debtor’ and is entirely outside the purview of the definition of ‘Personal Guarantor’ under Section 5 Sub-section 22 of the Code.

7.8 Therefore, the Application against the Respondent Corporate Person is to be filed as per the Insolvency and Bankruptcy (Application to Adjudicating Authority Rules, 2016, not as per “the Insolvency and Bankruptcy (Application to Adjudicating Authority Rules for Bankruptcy Process for Personal Guarantors to Corporate Debtor) Rules, 2019 as Rule 2 and 3 are both Rules clearly define the applicability of the part of IBC.

7.9 It is further contended that the learned Adjudicating Authority under the wrong apprehension considered Respondent to be a Personal Guarantor while the Respondent is a Corporate Guarantor.

7.10 It is pertinent to mention that the Appellant had not filed an Application against a Personal Guarantor under Section 95 of the Code; instead, the Application is filed against the Corporate Guarantor/Corporate Debtor.

7.11 It is also important to point out that the Appellant has annexed the Guarantee Agreement (Annexure 4) with the Appeal paper book. In Column 11 of the Guarantee Agreement, details of documents is stated, which is given below for ready reference;

a) Loan Agreement/DPN/irrevocable power of attorney/declaration, indemnity.

b) ECS through Punjab and Sindh Bank Account No. 00751300068765.

c) Creation of exclusive charge in ROC in favour of Intake Capital Limited on the prime security offered-NA.

d) Personal Guarantee and Deeds of Guarantee of Mohinder Singh Narang and Mrs Manjit Kaur in favour of ‘Intake Capital Limited’.

e) Corporate Guarantee and Deeds of Guarantee with 12 months back to back and for Rest 4 Yrs quarterly SPDC in favour of Intake Capital Limited-Eastern Embroidery Collections Private Limited & Excel Computerised Embroidery Private Limited providing only Corporate Guarantee and Deed of Guarantee without SPDC.

7.12 The learned Adjudicating Authority had failed to notice that the Financial Creditor had taken Personal Guarantee of Mr Mahendra Singh Narang and Mrs Manjit Kaur in addition to the Corporate Guarantee given by the Corporate Debtor.

7.13 Therefore, on the occurrence of default, it was the sole prerogative of the Financial Creditor to initiate action against the Principal Borrower or the Personal Guarantor of the Corporate Guarantor.

7.14 Since the Appellant Financial Creditor had initiated action under the Insolvency and Bankruptcy Code against the Corporate Guarantor, the Application could not have been dismissed on the erroneous assumption that the Application should have been filed against the Personal Guarantor under Section 95 of the Code.

7.15 In Laxmi Pat Surana V Union Bank of India and Another 2021 SCC OnLine SC 267 Hon’ble Supreme Court has held that;

“1. Two central issues arise for our determination in this Appeal, as follows:—

(i) Whether an action under Section 7 of the Insolvency and Bankruptcy Code, 20161 can be initiated by the financial creditor (Bank) against a corporate person (being a corporate debtor) concerning Guarantee offered by it in respect of a loan account of the principal Borrower, who had committed default and is not a “corporate person” within the meaning of the Code?

(ii) Whether an application under Section 7 of the Code filed after three years from the date of declaration of the loan account as Non-performing Asset2, being the date of default, is not barred by limitation?

31. A priori, we find no substance in the argument advanced before us that since the loan was offered to a proprietary firm (not a corporate person), action under Section 7 of the Code cannot be initiated against the corporate person even though it had offered Guarantee in respect of that transaction. Whereas, upon default committed by the principal Borrower, the liability of the company (corporate person), being the Guarantor, instantly triggers the right of the financial creditor to proceed against the corporate person (being a corporate debtor). Hence, the first question stands answered against the Appellant.”

(Verbatim copy with emphasis supplied)

7.16 The law laid down by the Hon’ble Supreme Court in the above-mentioned case is fully applicable in the instant case. In the case mentioned above, Hon’ble Supreme Court has rejected the contention of the Appellant that since the loan was offered to the proprietary firm (not a corporate person), action under Section 7 of the Code cannot be initiated against the Corporate Person even though it had offered Guarantee in respect of the transaction. In this case, also Principal Borrower is a proprietary firm, and the Corporate Debtor had given the Corporate Guarantee for the said loan.

8. Conclusion

8.1 Based on the above discussion, it is clear that Respondent ‘Eastern Embroidery Collections Private Limited’ was the Corporate Guarantor of the Principal Borrower ‘Eastern Overseas’, and not a Personal Guarantor. Therefore, in terms of Sub-section (7) and (8) of Sec 3 of I&B Code, 2016 is a Corporate Debtor. Further, the applicable Rules would be ‘Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016’.

8.2 Therefore, we are of the considered opinion that the Adjudicating Authority committed an error in holding that action should have been initiated against the Personal Guarantor of the Corporate Debtor under Section 95 of the Code instead of proceeding against the Corporate Debtor.

8.3 In the circumstances stated above, Appeal deserves to be allowed, and the impugned order passed by the learned Adjudicating Authority is liable to be set aside.

ORDER

Company Appeal (AT) (Insolvency) No 428 of 2021 is allowed. No order as to costs. The impugned order dated 27 April 2021 is set aside. The case is remanded back to the learned Adjudicating Authority for deciding afresh in the light of the directions given above, preferably within two months from the date of receipt of the order.

[Justice M. Venugopal]
Acting Chairperson

[V. P. Singh]
Member (Technical)

[Dr. Ashok Kumar Mishra]
Member (Technical)

NEW DELHI
26TH OCTOBER, 2021

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