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Guarantor Whose Guarantee Stands Invoked By Any Creditor Barred From Giving Resolution Plan, Though Insolvency Initiated By Another Creditor: SC On Sec 29A(h) IBC

LIVELAW NEWS NETWORK
18 Jan 2022 2:19 PM GMT
Guarantor Whose Guarantee Stands Invoked By Any Creditor Barred From Giving Resolution Plan, Though Insolvency Initiated By Another Creditor: SC On Sec 29A(h) IBC
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The Supreme Court has delivered an important judgment interpreting the scope of Section 29A(h) of the Insolvency and Bankruptcy Code. Section 29A IBC specifies the categories of persons who are not eligible to be resolution applicants.Sub-section (h) of Section 29A refers to persons whose guarantees stand invoked by the creditors of the corporate debtor. The exact wordings of the provision are...

The Supreme Court has delivered an important judgment interpreting the scope of Section 29A(h) of the Insolvency and Bankruptcy Code. Section 29A IBC specifies the categories of persons who are not eligible to be resolution applicants.

Sub-section (h) of Section 29A refers to persons whose guarantees stand invoked by the creditors of the corporate debtor. The exact wordings of the provision are as follows :

"has executed a guarantee in favour of a creditor in respect of a corporate debtor against which an application for insolvency resolution made by such creditor has been admitted under this Code and such guarantee has been invoked by the creditor and remains unpaid in full or part".

The Court was dealing with the issue whether the words "such creditor" in this provision will include all creditors of the corporate debtor or just the creditor who has invoked the insolvency process.

Adopting a "purposive interpretation" of the provision, a bench comprising Justice Sanjay Kishan Kaul and Justice MM Sundresh held that the disqualification under Section 29A(h) IBC will stand attracted on mere invocation of personal guarantee by a creditor, notwithstanding the fact that the insolvency process was initiated by another creditor.

The Court stated as follows (in paragraph 53 of the judgment) :

"The word "such creditor" in Section 29A(h) has to be interpreted to mean similarly placed creditors after the application for insolvency application is admitted by the adjudicating authority. As a result, what is required to earn a disqualification under the said provision is a mere existence of a personal guarantee that stands invoked by a single creditor, notwithstanding the application being filed by any other creditor seeking initiation of insolvency resolution process. This is subject to further compliance of invocation of the said personal guarantee by any other creditor".

The Court held that "any other interpretation would lead to an absurdity striking at the very objective of Section 29A".

"Ineligibility has to be seen from the point of view of the resolution process. It can never be said that there can be ineligibility qua one creditor as against others. Rather, the ineligibility is to the participation in the resolution process of the corporate debtor. Exclusion is meant to facilitate a fair and transparent process", added the judgment authored by Justice Sundresh. The Court also noted that word "person" under the Code is inclusive and illustrative in nature and is of wide import.

Insolvency proceedings in rem

The Court noted that the insolvency proceedings are in rem.

"Once a person executes a guarantee in favour of a creditor with respect to the credit facilities availed by a corporate debtor, and in a case where an application for insolvency resolution has been admitted, with the further fact of the said guarantee having been invoked, the bar qua eligibility would certainly come into play. What the provision requires is a guarantee in favour of 'a creditor'. Once an application for insolvency resolution is admitted on behalf of 'a creditor' then the process would be one of rem, and therefore, all creditors of the same class would have their respective rights at par with each other".

Manner of invocation of guarantee immaterial

"The provision after the amendment speaks of invocation by a creditor. The manner of invocation can never be a factor for the adjudicating authority to adjudge, as against its existence. Adequate importance will have to be given to the latter part of the provision which also disqualifies a person whose liability under the personal guarantee executed in favour of a creditor, remains unpaid in full or in part for the amount due from him, upon invocation".

The Court noted that Section 29A has a laudable object of protecting and balancing the interest of the committee of creditors and the corporate debtor, while shutting the doors to canvas the interests of others.

"That is the reason why it consciously excludes certain categories of persons. We may add that Section 29A(h) foresees the creditors who are otherwise either already under the insolvency resolution process or are entitled to go under it", the judgment stated.

Factual Background

The Respondent no. 1 company made defaults in its repayment to the Consortium of Banks, due to which personal guarantees of the owner of the Respondent no. 1 company, i.e. Respondent no. 3, were invoked.

Subsequently, proceedings under Section 13(2) of the SARFAESI Act, 2002 were initiated.

The Appellant- M/s. RBL Bank filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 in NCLT, Kolkata Bench to initiate CIRP against Respondent no. 1.

Two resolution plans were offered by the RP, of which one was proposed by Respondent no. 3. However, this was done prior to the introduction of Section 29A of the Code. Section 29A was introduced by the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017 on 23.11.2017, which came into effect on 18.01.2018.

Subsequent to this, the Committee of Creditors held a meeting to discuss the impact of the amendment on the eligibility of the Respondent no. 3 in submitting the resolution plan.

The Adjudicating Authority allowed Respondent no. 3 to submit the resolution plan.

Section 29A(h) was introduced by way of ordinance dated 06.06.2018, which excludes a person who has executed a guarantee in favour of a creditor, in respect of a corporate debtor against which an application for insolvency resolution made by such creditor has been admitted under this code and such guarantee has been invoked by the credit and remains unpaid if full or part from introducing a resolution plan.

An appeal against this was filed in the NCLAT. Meanwhile, the Resolution Plan of Respondent no. 3 was approved by 68.50% votes. With certain modifications to the plan, the plan came to be approved by 78.50% vote share.

The NCLAT directed Respondent no. 3 to submit a revised resolution plan and thereafter, confirmed the order passed by the Adjudicating Authority and dismissed the appeal.

The appeals, including that of the Appellant were dismissed on the ground that the resolution plan was approved with 78.50% voting share of the CoC.

The Appellants challenged the decision of the NCLAT which allowed Respondent no. 3 to propose the resolution plan, in the Supreme Court. The Supreme Court allowed the appeal.

Case Title : Bank of Baroda and another versus MBL Infrastructures Ltd and others

Citation : 2022 LiveLaw (SC) 62

Appearances : Solicitor General of India Tushar Mehta for appellant; Bishwajit Dubey for appellant; Senior Advocates Ranjit Kumar and Parag Tripathi for respondents

Click here to read/download the judgment



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