India: Guarantor Barred From Being A Resolution Applicant Under Section 29A(h) Of IBC If Guarantee Invoked And Insolvency Proceedings Initiated By Similarly Situated Creditors: Supreme Court Of India

The Hon'ble Supreme Court in a recent decision in Bank of Baroda & Anr. v. MBL Infrastructures Ltd. & Ors.¹ rendered an important judgment pertaining to interpretation of Section 29A of the Insolvency and Bankruptcy Code, 2016 (IBC). The Apex Court was dealing with, amongst other things, the question as to whether the words 'such creditors' in Section 29A(h) would include all creditors or just one creditor who has invoked the insolvency process.

The Apex Court held that the words 'such creditor' in Section 29(A)(h) had to be interpreted to mean similarly placed creditors after the insolvency application is admitted by the adjudicating authority. As a result, the Apex Court observed that what is required to earn a disqualification under Section 29A(h) of the IBC was a mere existence of a personal guarantee that stood invoked by a single creditor, notwithstanding an application filed by another creditor for initiation of insolvency resolution process. In this article, we briefly navigate through the facts and findings of the above-mentioned case.

Brief Facts

MBL Infrastructures Limited (Respondent No.1) was set up by one, Mr. Anjanee Kumar Lakhotiya (Respondent No. 3) in the early 1990s. Loans/ credit facilities were obtained by the Respondent No.1 from the consortium of banks (with State Bank of Mysore now State Bank of India as lead bank). On the failure of the Respondent No.1 to act as per the terms of repayment, some of the respondents were forced to invoke the personal guarantees extended by the Respondent No.3 for the credit facilities availed by the Respondent No.1.

RBL Bank issued a notice under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), after duly invoking the personal guarantee of the Respondent No.3. This was followed by a similar action at the hands of Allahabad Bank and State Bank of Bikaner and Jaipur. At a later point in time, State Bank of Bikaner and Jaipur got merged with the State Bank of India. The aforesaid two proceedings invoking Section 13(2) of the SARFAESI Act were initiated in the month of February and March 2013, respectively.

Thereafter, RBL Bank filed an application under Section 7 of the IBC before the National Company Law Tribunal, Kolkata Bench (NCLT) to initiate the Corporate Insolvency Resolution Process (CIRP) against Respondent No.1. The Section 7 application was admitted vide an order dated 30 March 2017, appointing an Interim Resolution Professional, leading to imposition of moratorium in terms of Section 14 of the IBC. After the expiry of the initial period of CIRP, an application was filed by the Resolution Professional for extending the duration of CIRP by an additional 90 days, which was duly granted.

Two resolution plans were received by the Resolution Professional (Respondent No.2) as he then was, of which, one was authored by Respondent No.3 on 29 June 2017. This was done prior to the introduction of Section 29A of the IBC. A series of meetings took place with the active participation of the Committee of Creditors (CoC) on the resolution plan submitted by the Respondent No.3 between October 2017 and November 2017. A decision was made in the 9th meeting of the CoC held on 18 November 2017 seeking an appropriate resolution plan at the hands of Respondent No.3. In tune with the aforesaid directive, the Respondent No.3 submitted a modified resolution plan on 22 November 2017.

Thereafter, by way of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017, Section 29A was introduced to the IBC. The CoC held its meeting on 01 December 2017 to deliberate upon the impact of the amendment qua the eligibility of the Respondent No.3 in submitting a resolution plan in the CIRP proceedings. In view of the lingering doubt expressed, the Respondent No.3 filed an application before the NCLT praying for a declaration that he was not disqualified from submitting a resolution plan under sub-section (c) and (h) of Section 29A of the IBC.

The NCLT vide its order dated 18 December 2017 held that the Respondent No.3 was eligible to submit a resolution plan, notwithstanding the fact that he did extend his personal guarantees on behalf of the Respondent No.1 which were invoked by some of the creditors. This issue was never placed and raised before the NCLT. Though the NCLT took note of Section 29A(c) of the IBC, it did not give any specific findings on it.

The order of the NCLT dated 18 December 2017 was assailed by the Punjab National Bank before the National Company Law Appellate Tribunal (NCLAT). The NCLAT passed an order dated 21 December 2017 that the NCLT would not accept or reject any resolution plan without prior approval of the NCLAT.

After a series of litigation, on 23 March 2018, the NCLAT passed an order vacating the order passed on 18 December 2017 as the Punjab National Bank sought permission to withdraw its appeal without any liberty. However, a request made by the present appellant before the NCLAT seeking to be impleaded as a party to continue the lis was not considered favourably without any assigning of reasons. 

Eventually, the NCLT approved the resolution plan submitted by Respondent No. 3 by an order dated 18 April 2018. A direction was also given that the resolution plan shall come into force with immediate effect. The appellant challenged the order passed by the NCLT before the NCLAT. The NCLAT confirmed the order passed by the NCLT and refused to interfere with the same. Aggrieved by the decision of the NCLAT, the appellant challenged the same before the Hon'ble Supreme Court.

Submissions of the appellant

The appellant argued that Section 29A had to be given a holistic interpretation as its objective is to weed out undesirable persons with the intention of promoting primacy of debt by disqualifying guarantors who have not fulfilled their co-extensive liability with the insolvent corporate debtor.

It was submitted that Respondent No.3 (who is a promoter of the corporate debtor) was ineligible to submit a resolution plan under Section 29A(h) of the IBC, as several personal guarantees executed by Respondent No. 3 in favour of various creditors of Respondent No. 1 stood invoked prior to the commencement of CIRP. Therefore, the premise on which the NCLT held the Respondent No. 3 eligible to submit a resolution plan is ex facie false.

The appellant also stated that the law which was prevailing on the date of the application had to be taken into account. Therefore, the disqualification in the present case got attracted on the date of filing of the application and on the same analogy not only Section 29(A)(h) but also Section 30(4) has to be interpreted. As fraud vitiated all solemn acts, the appeal deserved to be allowed.

The appellant also pointed out that the approval of the resolution plan was made after the mandatory period of 270 days, i.e., after expiry of CIRP period. Since there is a clear infraction of Section 12, all orders passed were liable to be interfered with.

Submissions of the respondents

The respondents submitted that a decision made by the CoC in its commercial wisdom on being satisfied with the report of the expert on the viability and feasibility of the resolution plan, is not required to be interfered with by the Hon'ble Supreme Court.

The revised plan as accepted by NCLAT was an improvement to the earlier one submitted by Respondent No. 3 and, therefore, there could not be any grievance on that count. The object of the IBC had to be read with Section 29A(h) of IBC. The respondents submitted that as such, the appellant was estopped from questioning the eligibility of Respondent No. 3 to submit a resolution plan under Section 29A(h) of the IBC. The provision had to be literally interpreted to the extent that a personal guarantor is barred from submitting a resolution plan only when a creditor invoking the jurisdiction of the adjudicating authority had invoked a personal guarantee executed in favour of the said creditor.

The respondents submitted that no personal guarantee stood invoked by RBL Bank at the time of application to the adjudicating authority under Section 7 of the IBC. It was further submitted that the invocation of the consortium guarantee by other banks under Section 13(2) of the SARFAESI Act, 2002 was ex facie illegal in terms of the inter-se agreement executed between consortium members.

The respondents highlighted that the object of the IBC is to revive a corporate debtor and liquidation in such circumstances is the last resort. It was submitted that Respondent No. 3 had infused over INR 63 crores since the resolution plan was made operational and further received approval of shareholders to raise another INR 300 crores to revive Respondent No. 1.

Held

The Hon'ble Supreme Court observed that Section 29A was one of many facets of the IBC and therefore, the provision had to be read with the main objective enshrined thereunder. The objective behind Section 29A of the IBC was to avoid unwarranted and unscrupulous elements to get into the resolution process and preventing their personal interests to step in. Secondly, Section 29A consciously seeks to prevent certain categories of persons who may not be in a position to lend credence to the resolution process by virtue of their disqualification. The Apex Court then emphasised on the need for adopting a purposive interpretation with the primary aim to revive and restart the corporate debtor, with liquidation being the last resort.²

The Apex Court then turned to the scope of Section 29A(h). It was observed that once a person executed a guarantee in favour of a creditor for credit facilities availed by the corporate debtor, and in case where the application for insolvency was admitted and the guarantee was invoked, the Apex Court opined that the bar qua ineligibility would certainly come into play. The Hon'ble Supreme Court noted that the provision requires a guarantee in favour of a creditor. Once an application for insolvency resolution was admitted on behalf of 'a creditor' then the process would be one of rem, and therefore, all creditors of the same class would have their respective rights at par with each other.

The words 'such creditor' in Section 29A(h) has to be interpreted to mean similarly placed creditors after the application for insolvency is admitted by the adjudicating authority. As a result, the Apex Court observed that what is required to earn a disqualification under the said provision is a mere existence of a personal guarantee that stands invoked by a single creditor, notwithstanding the application being filed by any other creditor seeking initiation of insolvency resolution process. This is subject to further compliance of invocation of the said personal guarantee by the other creditor.

On factual background, the Apex Court noted that Respondent No. 3 had executed personal guarantees which were invoked by three of the financial creditors even prior to the date when the application filed. Accordingly, the Apex Court opined that the rigor of Section 29A(h) of the IBC obviously stood attracted. Thus, on the touchstone of the interpretation of Apex Court of Section 29A(h), it was held that the plan submitted by Respondent No. 3 ought not to have been entertained in the first place.

The Hon'ble Supreme Court clarified that the NCLT and NCLAT were not right in rejecting the contentions of the appellants on the ground that the earlier appeals were withdrawn without liberty. The Apex Court noted that admittedly, the appellant was not a party to the decision of NCLT on the first occasion, in the appeal the appellant merely filed an application for impleadment. The NCLT did not decide the matter on merit. In fact, the question of law was left open. The Apex Court held that the principle governing res judicata and issue estoppel would never get attracted in such a scenario. Thus, the reasoning rendered by the NCLAT to that extent could not be sustained in law.

The Hon'ble Supreme Court stated that the interest of over 23,000 shareholders and thousands of employees of Respondent No.1 also needed to be looked into. About INR 300 crores was raised with the approval of the shareholders by Respondent No. 1. Further, about INR 63 crores was infused into the Respondent No. 1 to make it functional. The Apex Court noted that there were many ongoing projects of public importance undertaken by Respondent No. 1 in nature of construction activities at different stages.

The Apex Court reminded itself of the ultimate object of the IBC, which is to put a corporate debtor back on its feet. It was also noted that no prejudice would be caused to the dissenting creditors as their interest would otherwise be secured by the resolution plan itself, which permits them to get back the liquidation value of their respective credit limits. Thus, on the peculiar facts of the instant case, the Hon'ble Supreme Court held that it did not wish to disturb the resolution plan leading to the on-going operation of Respondent No. 1.

Comments

The instant decision has played a fine balance between the goal of setting the law on Section 29(A)(h) of IBC straight while also ensuring that the corporate debtor is brought back on its feet. The Hon'ble Supreme Court by harmoniously interpreting the object of Section 29A and IBC at large, in the peculiar facts of this case, has ensured that an otherwise going concern is not brought back into the clutches of insolvency.

Footnotes

1. Bank of Baroda & Anr. v. MBL Infrastructures Ltd. & Ors.

2. Chitra Sharma & Ors. v. Union of India, (2018) 18 SCC 575; Arcelor Mittal (India) (P) Ltd. v. Union of India, 2019 4 SCC 17.

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