IBC-Corporate Debtor Cannot Take Advantage Of Its Own Default And Set Up A Plea Of Absence Of Permission Of RBI; NCLT Delhi

The National Company Law Tribunal, New Delhi Bench, comprising Shri P.S.N Prasad (Judicial Member) and Shri Rahul Bhatnagar (Technical Member), while adjudicating an application under Section 7 of Insolvency and Bankruptcy Code, 2016 (“IBC, 2016”) in Punjab National Bank (International) Limited vs M/s Superior Industries Limited has held that a Corporate Guarantee is not void only due to violation of The Foreign Exchange Management Act, 1999 (“FEMA, 1999”) and it is the duty of the Corporate Debtor to seek necessary permissions from the Reserve Bank of India (“RBI”) and other Regulators before issuing a guarantee. Background Facts PNB (International) Limited (“Financial Creditor”) is a wholly owned subsidiary of Punjab National Bank and is incorporated in London. The Financial Creditor provided a loan facility of 10,000,000 Euros to Vishal Cruise Private Limited (“Principal Borrower”) under the First Facility Agreement between the Parties. A Second Facility Agreement was entered subsequently for a 2,000,000 Euro overdraft facility. M/s Superior Industries Limited (“Corporate Debtor”) provided corporate guarantees dated 04.05.2012 and 28.01.2013 to secure the loan facility. The Principal Borrower failed to repay the loan amount and a Demand Notice dated 20.12.2016 was issued to the Corporate Debtor for repayment of the default amount in its capacity as corporate guarantor. It was argued by the Corporate Debtor in its reply that the Financial Creditor had been holding more amounts in FDR than amounts due under lien on the date of the default. Thus the guarantee stood discharged on the marking of lien. Further, payment in foreign currency cannot be made without prior permission of RBI as per FEMA, 1999 and the Regulations issued by RBI. Regulation 3 and 5 of The Foreign Exchange Management (Guarantees) Regulations, 2000 stipulate that the permission of RBI is needed for guaranteeing a debt owed by a resident of India to a person outside of India. Since no permission was taken from the RBI, the aforesaid guarantee was void. On the contrary, the Financial Creditor contended in its rejoinder that the Financial Creditor was incorporated in England and Wales and hence was governed under the provisions of Companies Act, 1985 (Act of the Parliament of the United Kingdom of Great Britain and Northern Ireland, enacted in 1985) and not by the provisions of FEMA, 1999 or RBI. Thus, there was no requirement of any prior approvals by the Financial Creditor from the RBI. Further, it was the Corporate Debtor which was required to ensure compliances of RBI and FEMA, 1999. It was further submitted that no FDR had been appropriated till date and that the FDR was less than the principal amount of the debt. Findings of the Tribunal The Tribunal firstly observed that the Corporate Debtor had already filed an application before the Delhi High Court for the release of FDRs. Thus the Corporate Debtor could not raise the plea that FDR was pending and can be setoff against the debt when it is had simultaneously filed an application for the release of the same. It was further observed that Punjab National Bank, which is incorporated in India, holds the FDR and not the Financial Creditor. Thus the debt cannot be setoff against the FDR. The Tribunal further observed that the Corporate Debtor had argued that the guarantee violated Regulation 5(d) of FEMA. The Tribunal however observed that the aforesaid regulation deals with external commercial borrowing, which are commercial loans raised by eligible Indian resident entities from a foreign entity. However, the Principal Borrower is a foreign entity incorporated in Mauritius. It was observed that although Regulation 5(d) was not violated, some other FEMA, 1999 regulation might have been violated which has not been brought to the notice of the Tribunal. Nevertheless, the Tribunal observed that a Corporate Guarantee is not void only due to violation of FEMA, 1999. Reliance was placed on the Delhi High Court judgment of SRM Exploration Pvt. Ltd vs. N and S and N Consultants S.R.O. (21.03.2012 - DELHC): MANU/DE/2056/2012 wherein it was held that FEMA, 1999 does not have any provisions which voids transactions in contravention of Section 3 of FEMA, 1999, which prohibits dealing in foreign exchange without permission of RBI. It was further observed that it was the Corporate Debtor which was required to take necessary permissions from RBI and other regulators and the Corporate Debtor cannot take advantage of its own default and set up a plea of absence of permission of RBI. Reliance was placed on the judgment of Eurometal Limited vs Aluminium Cables & Conductors, 1983 53 CompCas 744 Cal wherein it was held that it was the duty of the company issuing the guarantee to take necessary permission from RBI/FEMA and the company cannot take advantage of its own default. With the aforesaid observations, the Tribunal...

IBC-Corporate Debtor Cannot Take Advantage Of Its Own Default And Set Up A Plea Of Absence Of Permission Of RBI; NCLT Delhi

Udai Yashvir Singh

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