Co-Borrower Shares Similar And Equal Responsibility Under Loan Agreement: NCLAT New Delhi

The National Company Law Appellate Tribunal (NCLAT) Principal Bench, New Delhi comprising Mr. Justice Ashok Bhushan (Chairperson), Mr. Barun Mitra (Technical Member) and Mr. Arun Baroka (Technical Member) in an important judgment observed that initiation of Corporate Insolvency Resolution Process (CIRP) against a co-borrower is allowed under the Insolvency and Bankruptcy Code (IBC). In the present case, an appeal was filed by a suspended director of Narang Developers Pvt. Ltd. (NDPL) against decision of the National Company Law Tribunal (NCLT) Mumbai which admitted the NDPL into insolvency on an application filed by Aditya Birla Finance Ltd. (Financial Creditor) under section 7 of the IBC. Brief Facts The loan amount to the tune of Rs. 11.50 crores was advanced by financial creditor to corporate debtor with NDPL acting as a co-borrower. The terms and conditions of the loan were enumerated in the letters sanctioned on September 19, 2016, December 4, 2018. Subsequently, a facility agreement and a supplementary facility agreement were also executed on September 29, 2016 and December 7, 2018 respectively. An indenture of mortgage was executed on October 17, 2016 in which a security interest over its assets was created by the NDPL in favour of the financial creditor. Account of the corporate debtor was classified as Non-Performing Assets (NPA) on June 16, 2019 when it defaulted in paying the loan amount. Thereafter a demand notice under section 13(2) of the SARFAESI Act was sent on July 5, 2019. The financial creditor moved an application under section 7 of the IBC before the NCLT and CIRP was initiated against the corporate debtor on March 28, 2024. This decision of the NCLT was challenged by the suspended director of the NDPL before the NCLAT on the ground that the loan was provided directly to Csango Industries Pvt. Ltd and Pacific Link Pvt Ltd. and not to NDPL therefore the NDPL was not responsible for any default. Issue Before NCLAT Whether a Co-borrower is equally and severally liable under a loan agreement with that of the primary borrower. NCLAT's Analysis The NCLAT observed that co-borrower shares equal and same liability under a loan agreement with that of the primary borrower. It relied on the case of State Bank of India vs Athena Energy Venture Pvt. Ltd.in which it was held that CIRP can be initiated against both primary borrower and co-borrower as similar and equal responsibility is shared by them. The tribunal stated as under: “It is pertinent to point out that this Tribunal in the matter of State Bank of India Vs Athena Energy Venture Pvt Ltd. in CA(AT)(Ins) No. 633 of 2020 has held that with the coming into force of Act 26 of 2018, under the amended Section 60(2) and 60(3), CIRP can proceed against the Principal Borrower as well as Guarantor. The said judgment held that IBC has no aversion to simultaneously proceeding against the Corporate Debtor as Principal Debtor and Corporate Guarantor. Therefore, when the Principal Borrower and Guarantor have co-extensive liabilities, we see no reason as to why CIRP proceedings cannot be initiated against a Co-Borrower who has equal and similar liabilities with that of the Primary Borrower under a Facility Agreement which has been jointly signed and executed as in the present factual matrix”. The NCLAT further observed that: “The obligation of the Co-Borrower is co-extensive and coterminous with that of the Primary Borrower and hence a right or cause of action becomes available to the financial creditor to proceed against the primary borrower, as well as the Co-Borrower in equal measure in case they commit default in repayment of the amount of debt”. It was further contended by the appellant that the loan documents were not properly stamped which rendered them invalid. This plea was rejected by the NCLAT by observing that insufficiently stamped documents do not render an agreement invalid. It is merely a technical defect which can be rectified. The tribunal relied on the landmark judgment of NN Global Mercantile (P) Ltd. vs Indo Unique Flame Ltd delivered by the Supreme Court in which it was held that an instrument is not void just because it has not been properly stamped. However, it is not admissible until it is properly stamped. The tribunal stated as under: “Insufficient stamping is only a technical deficiency which is curable. It has been held by a 7 Judges Bench of the Hon'ble Supreme Court in Curative Petition (C) No. 44 of 2023 while dealing with a constitution bench decision of 5 Judges of the Hon'ble Supreme Court in NN Global Mercantile (P) Ltd. Vs Indo Unique Flame Ltd. (2024) 6 SCC 1 that non-stamping or improper stamping does not result in the instrument becoming invalid. The effect of not paying duty or paying an inadequate amount renders an instrument inadmissible and not void. Hence, we are of the firm view that admission of Section 7...

Co-Borrower Shares Similar And Equal Responsibility Under Loan Agreement: NCLAT New Delhi

Mohd Malik Chauhan

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