Insolvency Process Against Guarantor under IBC
Insolvency Process Against
Guarantor under IBC
Renish Petrochem FZE v.
Ardor Global (P.) Ltd.
Short
Summary:
In this flash tabloid, the writer initiates by speak of
the provisions of Insolvency & Bankruptcy Code, 2016 (hereafter referred as
“IBC”) in relation to power of NCLT to accept the application in against
Guarantor in case of default by Corporate Debtor.
As IBC code has prescribed the
Corporate Debtor. The main shove of the article, is upon the question “Whether Insolvency
resolution process against guarantor could be initiated on default in repayment
to creditor”.
In
this editorial author discuss the provisions relating to insolvency process
against Guarantor in the landmark judgement delivered by NCLT, Ahmedabad Bench in
case of Renish Petrochem FZE (Here after referred as “OC”) v. Ardor Global (P.) Ltd. (Here
after referred as “respondent”)
Introduction:
Corporate
Debtor: means a corporate person who owes a debt to any
person;
“Corporate Person”
means a company as defined in clause (20) of section 2 of the Companies Act,
2013, a limited liability partnership, as defined in clause (n) of sub-section
(1) of section 2 of the Limited Liability Partnership Act, 2008, or any other
person incorporated with limited liability under any law for the time being in
force but shall not include any financial service provider;
This is article no. 264 of the series of editorials written by the author
on corporate laws {Including Companies Act, 2013, SEBI, RBI Regulations, IBC, LLP Act, 2008 etc.}.
Case
element:
Case Name
|
Renish Petrochem FZE v. Ardor
Global (P.) Ltd.
|
Bench Name
|
The National Company Law Tribunal (NCLT), Ahmedabad Bench
|
Link:
|
|
NCLT Order No.
|
C.P.(IB) NO. 33/9/NCLT/AHM/2017
|
Heard &
Pronounced on Order
|
31st July, 2017
|
Order Passed by
|
Justice S.J. Mukhopadhaya, Chairperson
|
A. Factual Background:
i.
Applicant that it had supplied various materials from time to
time to Ardor International Limited and the outstanding amount from Ardor
International Limited is Rs. 15,35,40,909.49 ps.
ii.
Applicant that Applicant agreed to supply goods to Ardor
International Limited on a condition that the payment of all and any sums of
monies due and payable by Ardor International Limited shall at all times be
guaranteed by Ardor Global Private Limited, its Associate Entity.
iii.
Pursuant to said understanding, a Deed of Guarantee between the OC
and the respondent company was entered whereby the respondent company
unconditionally and irrevocably guaranteed as principal obligator to make
entire payment to the applicant.
iv.
Applicant issued notice dated 15th November, 2016 to the
Respondent. In response to the said notice, Authorised Signatory of Respondent
Company issued a Reply dated 4.12.2016 acknowledging the claim made by the
applicant in respect of supply of goods to Ardor International Limited on the
basis of Deed of Guarantee dated 1st September, 2014. In the said Reply,
Respondent Company requested time to clear the dues
v.
Applicant issued notice as required by Rule 5 of the
Adjudicating Rules to the Respondent Company on the same day by hand and
endorsement of the same was made by the Respondent on the notice. Thereafter on
31st May, 2017, this Petition is filed by the Applicant.
vi.
The
Hon'ble High Court of Gujarat in Company Petition No. 297 of 2016 vide its
orders dated 28.11.2016 and 6.12.2016 ordered for liquidation proceedings and
appointed Official Liquidator to take over charge and possession of assets of
Ardor International Ltd.
vii.
The
winding up order is passed not in respect of the Respondent Company and it is
in respect of Ardor International Limited.
viii.
The
Registry brought to the notice of this Authority on 18.7.2017, on which date
the matter was posted for pronouncement of the Order that a Caveat Application
No. 10 of 2017 filed by Central Bank of India, Ahmedabad relating to this
matter is pending. Therefore, this Authority directed the Applicant to serve
notice on the Central Bank of India and file proof of service.
ix.
Coming
to the right of audience to the Central Bank of India, which is said to be a
'Financial Creditor' of the Corporate Debtor, there is no provision in the Code
or in the Adjudication Rules that on an application filed by the Operational
Creditor under Section 9 of the Code there is a need to give notice to the
Financial Creditor. However, in view of the Caveat filed by the Financial Creditor,
notice has been ordered. The argument put forward by the learned Counsel for
the Central Bank of India is that the Corporate Debtor is a Principal Borrower
from the Central Bank of India and therefore the Operational Creditor cannot
trigger Insolvency Resolution Process against the Corporate Debtor herein on
the ground that it is a guarantor to Ardor International Limited. Learned
Counsel appearing for the Central Bank of India further contended that the
amount due under a contract of guarantee from Ardor Global Private Limited is
not an 'operational debt'.
x.
Learned
Counsel appearing for the Operational Creditor contended that 'operational
debt' is defined in sub-section (21) of Section 5 which says 'operational debt'
means a claim in respect of provision of goods. 'Claim' is defined in Section
sub-section (6) of Section 3. A reading of Clause (b) of sub-section (6) of
Section 3 of the Code clearly means right to remedy for breach of contract
under any law for the time being in force if such breach gives a right for
payment of money, it is a claim.
B. Provisions Under the Act:
“operational creditor” means a person to whom an operational debt is
owed and includes any person to whom such debt has been legally assigned or
transferred;
“operational debt” means a claim in respect of the provision of
goods or services including employment or a debt in respect of the repayment of
dues arising under any law for the time being in force and payable to the
Central Government, any State Government or any local authority;
(6) “claim” means—
(a) a right to payment, whether or not such right is reduced to
judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured;
(b) right
to remedy for breach of contract under any law for the time being in force,
if such breach gives rise to a right to payment, whether or not such right is
reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured
or unsecured;
Findings of the NCLT Bench:
On reading of definition of claim and
operation debt together “means a (claim) ‘right to remedy for breach of
contract under any law for the time being in force’ in respect of provision of
Goods or Services including employment …………
Pursuant
to provision of Contract Act “The provisional of the Contract Act clearly shows
that the liability of the on the Guarantor is con-extensive to that of the
Principal Debtor”
The key issue for consideration before NCLAT
was whether Guarantor can be considered as Corporate Debtor in case of claim by
operational creditor.
Hon’ble NCLT states that , when the
definition of the word 'claim' in Section 3 of the Code is inserted into the
definition of 'operational debt' in sub-section (21) of Section 5, it includes
the amount payable under the Guarantee Agreement also. No doubt, in case of
'financial debt', Section 8 Clause (i) specifically says about the liability in
respect of any of the guarantee for any of the items referred to in sub-clauses
(a) to (h). There is no such specific clause in case of 'operational debt'.
But, reading the definition of 'claim' into the definition of 'operational
debt', it could only mean that the amount due from the buyer of the goods, and
which is due to the seller of the goods and is guaranteed by the Guarantee Agreement,
is also an 'operational debt'.
Further, The provisions of the Contract Act
clearly go to show that the liability of the Principal Borrower and that of the
Guarantor is co-extensive to that of the Principal Debtor. On this aspect,
learned Counsel for the Applicant also relied upon the decision in Central
Bank of India v. C.L. Vimla . Therefore, the objection raised by the Central Bank of
India, that Operational Creditor cannot proceed against the Respondent from
whom the 'financial debt' is due to them, do not merit acceptance.
In view of
the above discussion, this Petition deserves to be admitted and accordingly it
is admitted
Conclusion: In the above
case law the:
·
Hon'ble
High Court of Gujarat in Company Petition No. 297 of 2016 vide its orders dated
28.11.2016 and 6.12.2016 ordered for liquidation proceedings and appointed
Official Liquidator to take over charge and possession of assets of Ardor
International Ltd. (Original Debtor).
However, due to
guarantee agreement Operational Creditor filed insolvency application against
Guarantor (respondent in the case).
However, the winding
up order is passed not in respect of the Respondent Company and it is in
respect of Ardor International Limited
·
Pursuant
to decision in Central Bank of India v. C.L. Vimla it is clear
that “the liability of the Principal Borrower and that of the Guarantor is
co-extensive to that of the Principal Debtor”
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