India: Case Note: Moratorium Prohibits Invocation Of Corporate Guarantee Against Corporate Debtor

The Hon'ble Adjudicating Authority (National Company Law Tribunal, Principal Bench, New Delhi) in the case of Axis Bank Limited and Another v. Edu Smart Services Private Limited (decided on 27.10.2017) held that invocation of corporate guarantee against the corporate debtor would result in enforcing of 'security interest' and it would amount to violation of the moratorium imposed under Section 14(1)(c) of the Insolvency and Bankruptcy Code, 2016.

Background Facts

Edu Smart Services Private Limited (hereinafter "Corporate Debtor") is the guarantor, by way of an irrevocable and unconditional corporate guarantee dated 03.06.2015, for Educom Solutions Ltd., which had entered into a Master Restructuring Agreement with Axis Bank Ltd. (hereinafter "Applicant") for restructuring and reconstitution of existing loans and working capital facilities granted by consortium of lenders.

Meanwhile, DBS Bank Limited filed an application for insolvency of the Corporate Debtor under Section 7 of the Insolvency and Bankruptcy Code, 2016 (hereinafter "the Code"). In the said proceedings, the corporate insolvency resolution process (hereinafter "CIRP") commenced on 27.06.2017 and moratorium was imposed under Section 14 of the Code. Thereafter, the Applicant made a claim based on the corporate guarantee, against the Corporate Debtor before the Insolvency Resolution Professional (hereinafter "IRP") on 11.07.2017 without invoking or making any demand on the Corporate Debtor- corporate guarantor. A communication was sent by the IRP to the Applicant on 20.07.2017 intimating that the claim cannot be verified as the corporate guarantee has not been invoked. The Applicant subsequently invoked the corporate guarantee against the Corporate Debtor on 21.07.2017, which was brought to notice of the IRP who responded by stating that the liability under the corporate guarantee was contingent as on the date of commencement of CIRP on 27.06.2017 and therefore the claim of the Applicant was not verifiable. The Applicant filed an application under Section 60(5) of the Code challenging the decision of the IRP dated 20.07.2017 whereby the claim of the Applicant was rejected.

Submissions by the Insolvency Resolution Professional

  • A preliminary objection was raised by IRP stating that the Applicant has already claimed the amount of debt in the CIRP of the principal borrower- Educomp Solutions Ltd. and the said fact was deliberately suppressed by the Applicant. Further, it was contended that if such claim is accepted under two different CIRPs, then the same would amount to unjust enrichment to such creditor and would lead to anomalous situation.
  • It was submitted that only a mature claim can be accepted by IRP at the time of the commencement of the insolvency process and that as per Section 3(11) of the Code, liability or obligation has to be due from any person in respect of a claim for it be accepted. Further, reliance was also placed on Regulation 13 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations 2016 (hereinafter "IBBI Regulations") to contend that the IRP has to verify only those claims which are existing as on the insolvency commencement date. Hence, it was argued that as the corporate guarantee was invoked after the commencement of CIRP, the same cannot be termed as a mature claim.
  • It was also contended that the invocation of corporate guarantee against the Corporate Debtor was in violation of moratorium imposed under Section 14 of the Code as the liability under the corporate guarantee was contingent on the date of commencement of CIRP on 27.06.2017, resultantly making the claim non verifiable. Further, the Applicant did not submit fresh claim form subsequent to the invocation of the corporate guarantee, and hence the claim could not be accepted and verified.
  • Moreover, it was submitted that the total claim of the secured creditors is about Rs. 112 crores, whereas the corporate guarantee furnished by the Corporate Debtor is of Rs. 2048 crores. Further, the liquidation valuation of the assets of the Corporate Debtor is about Rs. 25 crores only and therefore, it was submitted that the claim made by the Applicant on the basis of the corporate guarantee is a mala fide attempt to create hurdle in the CIRP of the Corporate Debtor.

Submissions by the Applicant

  • It was argued that the liability of the principal debtor and the corporate guarantor is co-extensive as provided under Section 128 of the Indian Contract Act, 1872; and therefore there is no bar in filing claims against the Corporate Debtor- corporate guarantor. Further, it was submitted that it was not necessary to make disclosure relating to claim made against the principal borrower i.e. Educomp Solutions Ltd.
  • Additionally, it was stated that the definition of "financial creditor" as provided under Section 5(7) of the Code includes "any person to whom financial debt is owed and also includes the person to whom the said debt has been legally assigned or transferred." Hence, it was submitted that the Applicant being a financial creditor has rightfully forwarded its claims before the IRP.

Issue

Whether the Applicant is entitled to make a claim by invoking the corporate guarantee after the date of commencement of the corporate insolvency resolution process of the Corporate Debtor- corporate guarantor?

Decision

In the present case, the CIRP commenced on 27.06.2017 and the corporate guarantee was invoked on 21.07.2017, which is much after the insolvency commencement date. In such situation, the IRP would not be in a position to verify the claim as it will not be reflected in the Books of Accounts which are supposed to be updated as on 27.06.2017. In absence of any record to verify the claim, it will be impossible for the IRP to accept any such claim which has become a debt after 27.06.2017.

The term 'debt' has been defined under Section 3(11) of the Code as "a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt". On the basis of this definition, the debt in this case has not become due from the Corporate Debtor on the insolvency commencement date and it became due only when the corporate guarantee was invoked by the Applicant which was later in time. Thus, it was held that in order to qualify as 'debt' firstly provisions of the corporate guarantee must be satisfied by raising a demand which is expressed by invoking the corporate guarantee and the date of its invocation has to be earlier than the insolvency commencement date

It was also observed that a careful consideration of Regulations 12 and 13 of IBBI Regulations show that the IRP has to verify every claim as on the insolvency commencement date and maintain a list of creditors containing names of all such creditors along with the amount claimed. Therefore the Applicant in the present case would not qualify for the consideration of its claim as it has become due and payable after the commencement date of CIRP.

Finally, the Hon'ble Adjudicating Authority held that a perusal of Section 14 of the Code makes it absolutely clear that the moratorium prohibits any action to foreclose, recover or enforce any security interest created by a corporate debtor in respect of its property; and that invocation of corporate guarantee against the Corporate Debtor would result in enforcing of security interest and it would amount to violation of moratorium under Section 14(1)(c) of the Code.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Sign Up
Gain free access to lawyers expertise from more than 250 countries.
 
Email Address
Company Name
Password
Confirm Password
Position
Industry
Mondaq Newsalert
Select Topics
Select Regions
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions