Sec. 126 Of ICA, 1872 Can’t Be Interpreted To Mean That Co-Borrower And Guarantor Can’t Be The Same Person: NCLT Mumbai

The National Company Law Tribunal, Mumbai Bench, comprising Shri Kuldip Kumar Kareer (Judicial Member) and Smt. Anuradha Sanjay Bhatia (Technical Member), while adjudicating an application under Section 7 of Insolvency and Bankruptcy Code, 2016 (“IBC, 2016”) in Pegasus Assets Reconstruction Private Limited vs M/s. Whiz Enterprise Private Limited has held that Section 126 of the Indian Contract Act, 1872 cannot be interpreted to mean that co-borrower and the guarantor cannot be one and the same person Background Facts M/s Laxmi Business Center (“Borrower”) availed credit facilities sanctioned by Shamrao Vithal Co-operative Bank (“Lender”) vide Sanction Letters dated 01.02.2010 and 30.09.2016. M/s Whiz Enterprise Private Limited (“Corporate Debtor”) was co-borrower in the transaction. The Corporate Debtor executed a Deed of Guarantee dated 03.10.2016 to secure the loan. However, the Corporate Debtor failed to repay its dues and the loan account of the Corporate Debtor was declared as NPA on 02.12.2019. An Assignment of Debt Agreement dated 27.02.2020 was signed between the Lender and Pegasus Assets Reconstruction Private Limited (“Financial Creditor”) vide which the debts of the Corporate Debtor was assigned to the Financial Creditor. It was contended by the Corporate Debtor that it is not a co-borrower since it had not received any amount from the Lender. The Corporate Debtor was simply the Guarantor for the credit facilities availed by the Borrower. Even the financial statements of the Corporate Debtor did not reflect any outstanding loan payable to the Lender. It was further submitted that the Guarantee is void in view of Section 186 of the Companies Act, 2013 under which the Lender could not have obtained a Guarantee for an amount exceeding 60% of its paid up share capital, free reserves and securities premium account or 100% of its free reserve and security premium account, whichever was more. In the Rejoinder filed by the Financial Creditor, it was contended that an application dated 18.08.2016 for securing the term loan from the Lender mentioned the name of the Corporate Debtor as Co-borrower. Further the Sanction Letter dated 01.02.2010 and 30.09.2016 mentioned the sanction of the term loan to the Corporate Debtor. Findings of the Tribunal The Tribunal observed that the Lender had sanctioned a term loan of Rs. 12 crores to the Borrower vide a Sanction Letter dated 01.02.2010 and further a term loan of Rs. 23.17 crores vide a Sanction Letter dated 30.09.2016. Both the Sanction Letters were signed by both the Corporate Debtor and the Borrower. Further the Sanction Letter dated 30.09.2016 mentioned the name of the Corporate Debtor as “Co-Borrower”. Hence the contention that the Corporate Debtor is not a co-borrower is invalid. It was further observed that the Corporate Debtor cannot raise the defence of the Guarantee being void in view of Section 186 of the Companies Act, 2013 at such a belated stage of invocation of the guarantee. The Deed of Guarantee was duly signed by the Authorized Signatory of the Corporate Debtor and this showed that the Corporate Debtor was well aware that it was entering into the Deed of Corporate Guarantee. The Tribunal further observed that the contention that the Corporate Debtor cannot be a borrower and guarantor at the same time is not tenable. Section 126 of the Indian Contract Act, 1872 cannot be interpreted to mean that co-borrower and the guarantor cannot be one and the same person. Further, the Corporate Debtor voluntarily entered into the contract in the capacity of a Co-borrower as well as the Guarantor. Hence it cannot contend that the contract was hit by Section 126 of Indian Contract Act, 1872. With the aforesaid observations, the Tribunal admitted the petition. Case: Pegasus Assets Reconstruction Private Limited vs M/s. Whiz Enterprise Private LimitedCase No. ;CP No. 530/(IB)-MB-V/2021 Counsels for the Applicants; Adv. Khushboo Shah Rajani i/b AKR Advisors LLP Counsel for the Respondent ;Sr. Adv. Gaurav Joshi, Mrs. Khushboo Shah Rajani i/b AKR Advisors LLP, CP No. 530/(IB)-MB-V/2021 Click Here To Read/Download Order

Sec. 126 Of ICA, 1872 Can’t Be Interpreted To Mean That Co-Borrower And Guarantor Can’t Be The Same Person: NCLT Mumbai

Udai Yashvir Singh

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