Creditors Are Not Barred From Enforcing Personal Guarantee Signed On Their Behalf By Trust: NCLAT

The NCLAT New Delhi bench of Justice Rakesh Kumar Jain (Judicial Member) and Mr. Naresh Salecha (Technical Member) has held that creditors are not barred from enforcing a personal guarantee even if they were not party to the trusteeship deed signed on their behalf between a trust and the personal guarantors. Brief Facts: The present appeal has been filed against an order passed by the Adjudicating Authority by which an application under section 95 was admitted. Contentions: The appellant submitted that since the Personal Guarantee issued by the Appellant was based on the assumption of compliance with the MRA by the consortium banks, which was intentionally not fulfilled by lenders including Respondent No. 1 /SBI, the Appellant argues that this Personal Guarantee is rendered vitiated. It was also submitted that the Respondent No. 1 /SBI, despite lacking locus standi, filed an application under Section 95 of the Code based on the Personal Guarantee executed in favor of SBICAP. It was also argued that this application is barred by limitation, as ESL's account was declared a Non-Performing Asset (NPA) on 31.03.2013, implying that the limitation period expired on 30.03.2016. It was further argued that the limitation period even counting from the Revival Letter dated 30.11.2016, concluded on 30.11.2019. Following this, a Demand Notice under the Code was issued on 05.11.2020, and the application under Section 95 of the Code was filed on 01.04.2021 by the Respondent No. 1 / SBI and thus both the Demand Notice and the application under Section 95 of the Code are time-barred. It was also contended that the Respondent No. 1 /SBI is not a signatory to the Personal Guarantee dated 03.06.2015, and therefore, could not have invoked this guarantee against the Appellant. It was further contended that Clause 17 of the Personal Guarantee has been overlooked, as it requires the issuance of a certificate by the Security Trustee or lenders detailing the amount due from the guarantors, which Respondent No. 1 /SBI failed to provide. Per contra, the respondent submitted that there is no provision in the Code that prohibits a lender from filing a petition, even in cases where a security trustee has been appointed to hold the security interest. Therefore, the assertion that Respondent No. 1 cannot proceed based on the lack of direct contractual relationship with the Appellant is unfounded. It was further contended that it is well-established law that beneficiaries under a contract are entitled to enforce its covenants. This principle is supported by the case of M.C. Chacko v. State Bank of Travancore, Trivandrum (1969), which affirms that a party can indeed enforce a contract made for its benefit. Therefore, the Lender's ability to act upon the security documents is valid and enforceable, irrespective of their direct involvement in the trusteeship agreement. It was also argued that for the present application against the appellant, the limitation period commenced on August 22, 2018, and expired on 23.08.2021. Since the application was filed on 31.03.2021, it is well within the limitation period following the Section 95 Demand Notice issued on 05.04.2020. It was also argued that the issues pertain to the terms of the MRA, which govern the relationship between the CDR Lenders and the Corporate Debtor, and do not impact the enforceability of the Personal Guarantee, which remains valid until the underlying debt is fully discharged. Observations: The tribunal noted that it is admitted fact that the account of the corporate debtor was declared as NPA on March 31, 2013 but the loans amount predated this declaration. The MRA was restructured on March 25, 2014 with the consent of all the parties including the appellant therefore the date of declaration of the NPA became irrelevant. It further added that in the present case, the respondent issued a demand notice on June 22, 2018 requiring payment to be made within 60 days. The period of limitation started from August 22, 2018 and ended on August 21, 2021. Since the application was filed on March 31, 2021, it cannot be said that it was filed after the expiry of limitation period. The tribunal further observed that normally trusteeship deeds are signed between a trust on behalf of lenders and the personal or corporate guarantor of the principal borrower in which beneficiaries remain the lenders or creditors. It further noted that under the terms of the MRA and STA, security trustees hold security not for themselves but for the benefit of the lender or claimant. Therefore, lenders can enforce the documents even if they are not parties to the trusteeship agreement. After examining the relevant clauses of the deed of guarantee, the tribunal observed that just because a trustee acted on behalf of the creditors, it does not preclude the creditors from enforcing the personal...

Creditors Are Not Barred From Enforcing Personal Guarantee Signed On Their Behalf By Trust: NCLAT

Mohd Malik Chauhan

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Creditors Are Not Barred From Enforcing Personal Guarantee Signed On Their Behalf By Trust: NCLAT

Mohd Malik Chauhan

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INR 1099+GST

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