Petition U/S 7 Of IBC Against Corporate Guarantor Cannot Be Admitted Unless Valid Delivery Of Guarantee Invocation Notice Is Established: NCLT Mumbai

The National Company Law Tribunal (NCLT) Mumbai bench of Hon'ble Reeta Kohli (Judicial Member) and Hon'ble Madhu Sinha (Technical Member) has held that an insolvency application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (the Code) against the corporate guarantor of the corporate debtor cannot be admitted unless the delivery of the demand-cum-guarantee invocation notice is properly established. Only when the delivery is proven can the default on the part of the corporate guarantor be said to have arisen. Brief Facts: The Corporate Debtor, Grevek Investments And Finance Private Limited is a Company incorporated under the Companies Act, 1956 and is a Corporate Guarantor for Starwort Engineers Pvt Ltd. ("Principal Borrower") under the Inter Corporate Deposit Agreement (ICD Agreement) entered into between the Financial Creditor and the Principal Borrower. The Financial Creditor extended the debt repayment deadline to 10 November 2022 through a letter dated 8 November 2021. However, the Principal Borrower failed to repay the debt. Thereafter, the Financial Creditor and the Principal Borrower eventually entered into a settlement agreement dated 15.02.2023 ("the Settlement Agreement") in order to amicably settle the said debt. The Principal Borrower once again failed to adhere to the repayment schedule as agreed between the parties in the Settlement Agreement. Despite receiving the Demand cum Invocation Notice, the Principal Borrower and Corporate Guarantor failed to discharge their obligations which amounted to default under the Code. This default is also recorded with NeSL which further confirmed the Corporate Debtor as a guarantor under the ICD Agreement. Section 7 application against the Principal Borrower was filed by the Financial Creditor before the National Company Law Tribunal, Mumbai Bench on 12 February, 2024 and the same has been admitted vide order dated 16.07.2024. In view of the above, the Financial Creditor has filed the present application against the Corporate Debtor being the Corporate Guarantor for the Principal Borrower. Contentions: The Applicant submitted that Clause 5.2 of the Settlement Agreement clearly indicates that the Borrower continued to remain liable under the ICD Agreement upon occurrence of Event of Default thereunder. The execution of the Settlement Agreement did not amount to discharging the CD from its obligations as a guarantor for the financial debt owned by the Borrower to the FC. Per contra, the Respondent submitted that the said ICD Agreement was extended from time to time and finally replaced/substituted/subsumed in Settlement Agreement dated 15th February 2023. A perusal of the Settlement Agreement and in particular, Recital G thereof, clearly indicates that the Settlement Agreement has been executed in full and final settlement of the ICD agreement. It was further argued that the Corporate Debtor is not bound to guarantee payment of any amounts due under the Settlement Agreement and as such, there is no question of the Petitioner filing the present Petition against the Corporate Debtor for a default under the Settlement Agreement. Lastly, it was submitted that the Invocation cum Demand Notice is not valid and as such, the Corporate Guarantee has not been invoked. Observations: The Tribunal after referring to the clauses of the Guarantee observed that the corporate guarantee of the corporate debtor remains effective until outstanding liability to the financial creditor is fully satisfied. Clause 6 permits modifications to the ICD Agreement without making the corporate guarantor the party to the same and the Settlement Agreement was a byproduct of this clause. Therefore the corporate debtor remains liable despite not being a party to the Settlement Agreement. The Tribunal further observed that since in the present case the guarantee is invoked on demand, the default date would be 1 January 2024 only if the notice of invocation is legally valid. Clause 23 of the Guarantee deals with the proof of delivery and it provides that the delivery shall be proved either by postal record or a certificate issued by any responsible officers of the lender. It further added that the Financial Creditor has failed to provide such evidence or contest this issue in its reply or submissions while addressing the contention of the corporate guarantor. Therefore, the invocation violates the terms of the corporate guarantee dated 10 November 2020. Based on the above, the Tribunal held that “Since the demand notice was never purportedly delivered to the Corporate Guarantor , the corporate guarantee never got invoked by the financial creditor in terms of the guarantee agreement which forms the basis of this petition, the default by corporate guarantor cannot be established.” Accordingly, the present petition was dismissed. Case Title: M/s, Q West...

Petition U/S 7 Of IBC Against Corporate Guarantor Cannot Be Admitted Unless Valid Delivery Of Guarantee Invocation Notice Is Established: NCLT Mumbai

Mohd Malik Chauhan

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