India: Orders Under Insolvency And Bankruptcy Code, 2016 WRT Corporate Persons

ORDERS UNDER INSOLVENCY AND BANKRUPTCY CODE, 2016

1. Initiation of Application under Section 7 of I&B Code would prevail against Guarantor which is a Corporate Person through Principal Borrower who is not a Corporate Person

Laxmi Pat Surana Vs. Union Bank of India & Anr. (Supreme Court) [Civil Appeal No. 2734 of 2020]

The Hon'ble Supreme Court ("SC") vide its judgment dated March 26, 2021, upheld the findings of the National Company Law Tribunal ("NCLT") dated December 12, 2019, and National Company Law Appellant Tribunal ("NCLAT") dated March 19, 2020, observing that the liability of the guarantor is co-extensible with the defaulting principal borrower even though such principal borrower is outside the purview of the corporate person defined under I&B Code. Further, the SC also affirmed the view of NCLT & NCLAT that a fresh period of limitation is required to be computed from the date of a written acknowledgment of the liability by the principal borrower and in particular the corporate guarantor.

In the present appeal, there were two important issues before the SC, to decide whether an action under Section 7 of the Code can be initiated by the Financial Creditor (Bank) against a Corporate Person (being a Corporate Debtor) concerning corporate 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? Also, whether an application under Section 7 of the I&B Code filed after three years from the date of declaration of the loan account as NPA, being the date of default, not barred by limitation?

Hon'ble Supreme Court negated the contentions of the appellant by asserting that a corporate person would be treated as Corporate Debtor when a corporate person assuming the status of the corporate debtor having offered guarantee, if and when the principal borrower/debtor (be it a corporate person or otherwise) commits default in payment of its debt. This would mean that a Financial Creditor can initiate action under Section 7 of I&B Code for commencing the Corporate Insolvency Resolution Process against a corporate person vis-à-vis guarantee offered by it in respect of a loan account of the principal borrower, who had committed default, even if the principal borrower is not a corporate person.

Additionally, the Hon'ble Apex Court while settling the other issue in hand i.e. whether an application under Section 7 of the Code was filed after three years from the date of declaration of the loan account as a Non-performing Asset, being the date of default, is not barred by limitation. In this context, the apex court affirmed that a fresh period of limitation (as prescribed in Section 18 of the Limitation Act) is required to be computed from the time when the acknowledgment is signed by the principal borrower or the corporate guarantor as the case may be, provided the acknowledgment is before the expiration of the prescribed period of limitation, even if such acknowledgment has been sent without prejudice.

2. Supreme Court explains how NCLT ought to proceed when Section 8, Arbitration Act application is filed

Indus Biotech Private Limited vs. Kotak India Venture Limited & Ors. (Supreme Court)

ARBITRATION PETITION (CIVIL) NO. 48/2019

In the above matter, the Hon'ble Supreme Court clarified that in any proceeding which is pending before the Adjudicating Authority under Section 7 of I&B Code, if such petition is admitted upon the Adjudicating Authority recording the satisfaction with regard to the default and the debt is due from the corporate debtor, any application under Section 8 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as Act, 1996) made thereafter will not be maintainable. In a situation where the petition under Section 7 of the I&B Code is yet to be admitted and, in such proceedings, if an application under Act, 1996 is filed, the Adjudicating Authority is duty-bound to first decide the application under Section 7 of the I&B Code by recording a satisfaction with regard to there being default or not, even if the application under Arbitration and Conciliation Act, 1996 is kept along for consideration. In such an event, the natural consequence of the consideration made therein on Section 7 of the I&B Code application would befall on the application under the Act, 1996.

The matter stated that the Petitioner Company and Respondent had a dispute during the negotiations which were held between them relating to the calculation and conversion formula that was to be applied in converting the preference shares of the Respondents into equity shares.

The Respondents demanded the amount from the Petitioner but the said amount was not paid. As a result, the Respondents filed the Application under Section 7 of IBC before the NCLT, Mumbai seeking the appointment of a Resolution Professional. Wherein, the Petitioner has also moved an application under Section 8 of the Act of 1996 seeking a direction to refer the Parties to Arbitration which was allowed by the NCLT, Mumbai vide its order dated 09.06.2020. As a result, the petition under Section 7 of the I&B Code filed by the Respondents was dismissed. The matter was referred for Arbitration.

The issue before the Supreme Court was whether the NCLT was justified in dismissing the insolvency proceedings and referring the matter for Arbitration.

The Supreme Court held that any proceeding which is admitted by the Adjudicating Authority under Section 7 of the IBC deciding the presence of default and the debt is due from the Corporate Debtor then an Application under Section 8 of the Act, 1996 will not be maintainable.

It is observed that in the event where the Application under Section 7 of the IBC is yet to be admitted and if meanwhile an Application under Section 8 of the Act of 1996 is filed then it is the duty of the Adjudicating Authority to first decide the Application under Section 7 of the IBC.

The Supreme Court reconsidered the observations recorded in the NCLT order dated 09.06.2020 and upheld the said order in view of the fact that by dismissing the Application under Section 7 of the I&B Code, the NCLT has decided that there is no default caused by the Petitioner.

In this view, the Supreme Court proceeded to constitute the Arbitral Tribunal for adjudication of the disputes between the parties.

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