Gujarat High Court
Prashant Shashi Ruia vs State Bank Of India on 13 March, 2020
Author: N.V.Anjaria
Bench: N.V.Anjaria, Ashokkumar C. Joshi
C/SCA/11199/2019 IA ORDER
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
CIVIL APPLICATION (FOR AMENDMENT) NO. 1 of 2019
In R/SPECIAL CIVIL APPLICATION NO. 11199 of 2019
With
CIVIL APPLICATION (FOR AMENDMENT) NO. 1 of 2019
In R/SPECIAL CIVIL APPLICATION NO. 11716 of 2019
With
CIVIL APPLICATION (FOR AMENDMENT) NO. 1 of 2019
In R/SPECIAL CIVIL APPLICATION NO. 11713 of 2019
With
CIVIL APPLICATION (FOR AMENDMENT) NO. 1 of 2019
In R/SPECIAL CIVIL APPLICATION NO. 11985 of 2019
With
CIVIL APPLICATION (FOR AMENDMENT) NO. 1 of 2019
In R/SPECIAL CIVIL APPLICATION NO. 11715 of 2019
With
CIVIL APPLICATION (FOR AMENDMENT) NO. 1 of 2019
In R/SPECIAL CIVIL APPLICATION NO. 19901 of 2019
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PRASHANT SHASHI RUIA Versus STATE BANK OF INDIA ========================================================== Appearance:
MR MIHIR THAKORE, SR. ADVOCATE WITH MR KEYUR GANDHI WITH MR RAHEEL S. PATEL WITH MR HARD S. SONI FOR NANAVATI ASSOCIATES for the PETITIONER(s) No. MR NAVIN PAHWA, SR. ADVOCATE WITH MS GRISHMA AHUJA WITH MR PARTH GOKHALE WITH MR SHALIN JANI FOR SHARDUL AMARCHAND MANGALDAS AND CO for the RESPONDENT(s) No. ========================================================== CORAM: HONOURABLE MR.JUSTICE N.V.ANJARIA and HONOURABLE DR. JUSTICE ASHOKKUMAR C. JOSHI Date : 13/03/2020 COMMON IA ORDER (PER : HONOURABLE MR.JUSTICE N.V.ANJARIA) All these applications involve common facts and issues. Therefore, they are heard together and are being treated simultaneously by this common Page 1 of 14 Downloaded on : Sun Jun 14 04:04:19 IST 2020 C/SCA/11199/2019 IA ORDER order.
1.1 The present applications are filed seeking amendment in the respective main Special Civil Applications.
1.2 The applicants are the original petitioners who have filed the Special Civil Applications seeking a writ of prohibition against Debts Recovery Tribunal-I - respondent No.2 herein from further conducting the proceedings of Original Application No.648 of 2019 pending before it and not to pass any orders against the petitioners till the Resolution Plan of Essar Steel India Limited - the principal borrower is not confirmed and implemented under the provisions of the Insolvency and Bankruptcy Code, 2016. The applicants-petitioners were the guarantors.
2. At the outset, the amendment which is prayed to be incorporated may be noticed.
(i) Paragraph 3.19 is sought to be inserted after paragraph 3.18 in the memorandum of petition which is as under.
3. "3.19. The NCLAT vide is Judgment dated 04.07.2019 rejected the Appeals of the Applicants, inter alia holding that the Guarantees stood extinguished on payment of monies to the lenders under the Resolution Plan. The relevant extract of the Judgment dated 04.07.2019 is reproduced herein under:
"30. So far as the Appellant- Mr. Prashant Ruia's right of subrogation under Section 140 of the Contract Act and right to be indemnified under Section 145 of the said Act is concerned, the question of exercising such right does not arise in the present case.Page 2 of 14 Downloaded on : Sun Jun 14 04:04:19 IST 2020
C/SCA/11199/2019 IA ORDER
31. The Appellant- Mr. Prashant Ruia has executed a 'Deed of Guarantee' between the lenders and the 'Corporate Debtor'. Such guarantee is with regard to clearance of debt. Once the debt payable by the 'Corporate Debtor' stands cleared in view of the approval of the plan by making payment in favor of the lenders ('Financial Creditors'), the effect of 'Deed of Guarantee' comes to an end as the debt stands paid. The guarantee having become ineffective in view of payment of debt by way of resolution to the original lenders ('Financial Creditors'), the question of right of subrogation of the Appellant's right under Section 140 of the Contract Act and the right to be indemnified under Section 145 of the Contract Act does not arise."
(ii) In the next, copy of (a) judgment dated 04th July, 2019 passed by the National Company Law Appellate Tribunal, New Delhi as Annexure-P/13 as well as (b) copy of judgment dated 15th November, 2019 passed by the Supreme Court is sought to be placed on record as Annexure-P/14.
(iii) Copy of Resolution Plan along with the addendums thereto which were produced before the Apex Court is also prayed to be incorporated as part of the pleadings in the main petition.
(iv) Following grounds are sought to be added after ground F in the memo of petition, reading as under.
"G. The Petitioners submit that under the resolution plan the entire debt of ESIL owed to the Financial Creditors, such as the Respondent Banks, is acquired by the Resolution Applicant i.e. AM India, along with all underlying securities but excluding inter alia the personal guarantees issued for and on behalf of ESIL by the Petitioners, amongst others. Consequently, ESIL owes no debt to the Financial Creditor and Financial Creditors have no claim to recover in respect of the debt originally recoverable from the Corporate Debtor, the same having been assigned absolutely in favour of Page 3 of 14 Downloaded on : Sun Jun 14 04:04:19 IST 2020 C/SCA/11199/2019 IA ORDER AM India. This is the effect of assignment of debt as laid down by the Supreme Court In ICICI Bank Ltd v/s APS Star Industries Ltd (2010) 10 SCC 1 in the following words:
"46. As stated above, an outstanding in the account of a borrower(s) (customer) is a debt due and payable by the borrower(s) to the bank. Secondly, the bank is the owner of such debt. Such debt is an asset in the hands of the bank as a secured creditor or mortgagee or hypothecatee. The bank can always transfer its asset. Such transfer in no manner affects any right or interest of the borrower(s) (customer). Further, there is no prohibition in the BR Act, 1949 in the bank transferring its assets inter se. Even in the matter of assigning debts, it cannot be said that the banks are trading in debts, as held by the High Court(s). The assignor bank has never purchased the debt(s). It has advanced loans against security as part of its banking business. The account of a client in the books of the bank becomes Non Performing Asset when the client fails to repay. In assigning the debts with underlying security, the bank is only transferring its asset and is not acquiring any rights of is client(s). The bank transfers its asset for a particular agreed price and is no longer entitled to recover anything from the borrower(s). The moment ICICI Bank Ltd. transfers the debt with underlying security, the borrower(s) ceases to be the borrower(s) of the ICICI Bank Ltd. and becomes the borrower(s) of Kotak Mahindra Bank Ltd. (assignee).
47. At this stage, we wish to once again emphasize that debts are assets of the assignor bank The High Court(s) has erred in not appreciating that the assignor bank is only transferring its rights under a contract and its own asset, namely, the debt as also the mortgagee's rights in the mortgaged properties without in any manner affecting the rights of the borrower(s)/mortgagor(s) in the contract or in the assets. None of the clauses of the impugned Deed of Assignment transfers any obligations of the assignor towards the assignee"
H. The Petitioners submit that in the facts of the present case there exists no 'debt' as defined under Section 2(g) of the RDDB Act entailing jurisdiction to the DRT to entertain and/or adjudicate the proceedings before it. Furthermore, in absence of any debt being recoverable, the Lenders cannot continue the Page 4 of 14 Downloaded on : Sun Jun 14 04:04:19 IST 2020 C/SCA/11199/2019 IA ORDER proceedings under Section 17 read with Section 19 of the RDDB Act. Hence, appropriate directions are required to be passed to prohibit the DRT from adjudicating the proceedings, which are without jurisdiction.
I. The Petitioners submit that as there is no debt in existence recoverable by the Financial Creditors (they having assigned the debt to the AM India) the Financial Creditors cannot enforce the guarantee on the premise that they have recovered lesser consideration than the actual debt for assigning the debt. Once the Financial Creditors assign the debt irrespective of the consideration received by it, the Debt ceases to be an asset recoverable by the Financial Creditors. Consequently, the Financial Creditors have no recoveries on the basis of which it can enforce the guarantees executed by the Petitioners.
J. The Petitioners submit that instead of recovering the amount from ESIL, the Financial Creditors/Lenders (such the Respondent Banks)have sold/assigned the recoveries under the Resolution Plan to AM India for a specific consideration, consequent to which the said Financial Creditors shall have no recoveries left in respect of which they can enforce the guarantee. It is most respectfully submitted that the present case is not of part recovery of the debt as is sought to be made out by the Respondent Banks. Hence, the DRT would not have jurisdiction to entertain and adjudicate the proceedings before it.
K. Assuming without admitting, if the Financial Creditors are entitled to recover on the basis of personal guarantees in spite of having assigned the entire debt to AM India the effect would be that AM India who has acquired the entire debt and shall remain the sole Creditor of ESIL, will be able to recover the entire debt from ESIL, while the Respondent Banks will be entitled to recover in addition to the entire debt the amount guaranteed under personal guarantees. It is respectfully submitted that such a scenario would amount to double recovery and would also amount to splitting of the debt which is impermissible as laid down by the High Court of Australia in Hutchens v. Deauvillie Investments Pvt. Ltd [68 ALR 367]. The relevant passage from this judgment is reproduced below:
"Where the difficulty in general principle arises is in the suggestion that the benefit of Hutchens' liability as guarantor and the real property mortgage to secure it were alone transferred to Deauville with the result that Kenbrite remained liable as principal debtor to Page 5 of 14 Downloaded on : Sun Jun 14 04:04:19 IST 2020 C/SCA/11199/2019 IA ORDER helvetic. As we followed the argument, it was suggested that, by such a transaction, Hutchen's liability as a guarantor could be transformed into an independent liability to a different creditor from the creditor to whom the guaranteed debt remained owing. That suggestion would seem to lie ill with the basic principle that the debt owed by a guarantor, upon default by the principal debtor, is and remains the same debt as that owing by the principal debtor. Put differently, it would seem to be simply impossible as a matter of basic principle, to assign the benefit of a guarantee or the security for it (as distinct from the property secured) while retaining the benefit of the guaranteed debt and thereby to convert the one debt owing by both principal debtor and guarantor to the one creditor into two debts, one owing by the principal debtor to the creditor and the other owing by the guarantor to the assignee. If it were otherwise, the position would seem to be that, by assigning the benefit of a guarantee and the guarantor's security and retaining the benefit of a principal debtor's indebtedness and the principal debtor's security, a creditor could effectively divorce the guarantor's liability from that of the principal debtor and effectively deprive the guarantor of the rights which flowed from his position as such including (where available) his rights of subrogation. In that regard, the case of a purported assignment of the debt of a guarantor while retaining the benefit of the guaranteed debt is, subject to one qualification, analogous to that to which Jacobs JA refferedin International Leasing Corp Ltd v Aiken [1967] 2 NSWR 427 at 439: "If the debt is assigned but the guarantee is not assigned then the right in the original creditor to recover under the guarantee must at least be suspended so long as the debt is assigned. There cannot be two persons entitled to recover the amount of the same debt, one from the principal debtor, and so long as the principal debtor was in default, another from the surety. Let it be assumed otherwise and suppose that the original creditor, the assignor of the principal debt, could show that it was overdue and thereupon sued the surety. Let it be assumed that the surety paid. Then, the assignee sues the principal debtor. He must be entitled to succeed unless there are some special circumstances of estoppel in the particular case, a factor which I place to oneside. The assignee under an absolute assignment could not be deprived of his right to recover from the debtor because the Page 6 of 14 Downloaded on : Sun Jun 14 04:04:19 IST 2020 C/SCA/11199/2019 IA ORDER assignor had recovered from the surety."
L. The Hon'ble Supreme Court has recognised the fact that the liability of a guarantor is co-extensive and since the Resolution Plan has not included provisions as to payments to be made by such guarantor and in fact the Resolution Plan states that the payment shall be treated as full and final payment of all outstanding dues of the Corporate Debtor to each of the Financial Creditors and no rights subsists or accrues to the Financial Creditors under all agreements and arrangements, including but not limited to loan agreements and security agreements, and the guarantors and all stakeholders including Financial Creditors are bound under section 31 of the IBC, no rights subsist or accrues on the Financial Creditors and consequently no liability survives on the guarantors.
M. The Petitioners submit that on approval of the Resolution Plan by the Hon'ble Supreme Court and subsequent assignment of the entire debt of ESIL by the Respondent Banks to AM India, no debt remains recoverable by the Respondent Banks either from ESIL and/or Guarantors such as the Petitioners, inasmuch as the Respondent Banks cease to be even Creditors of ESIL.
N. It is most respectfully submitted that due to non- existence of the debt itself the DRT lacks jurisdiction to assume jurisdiction to entertain and adjudicate the proceedings initiated by the Respondent Banks against the Petitioners."
(v) The following prayer is prayed to be added in the prayer clause as prayer 9(AA).
"[AA] That this Hon'ble Court be please to issue a Writ of Prohibition and/or an appropriate Writ and/or Order and/or direction prohibiting and/or quashing and setting aside the proceedings being Original Application No.648 of 2018 pending before the Debt Recovery Tribunal;"
3. In the backdrop of the proceedings of the Special Civil Applications and the prayer for amendment, the facts are that the Resolution Plan of the principal borrower then pending before the National Company Law Tribunal, Ahmedabad Bench, came Page 7 of 14 Downloaded on : Sun Jun 14 04:04:19 IST 2020 C/SCA/11199/2019 IA ORDER to be approved by the Tribunal. It was thereafter challenged by various stakeholders including the respondent No.1 before the National Company Law Appellate Tribunal, New Delhi (NCLAT). The NCLAT appears to have concluded that since the debt is entirely paid, liability of the guarantors is extinguished and therefore, question of subrogation would not arise.
3.1 The matter was carried before the Supreme Court. The Supreme Court by its judgment and order dated 15th November, 2019 finally approved the Resolution Plan for the principal borrower - Essar Steel India Limited. It is after the aforesaid proceedings and the judgment of the Supreme Court finally approving the Resolution Plan, in the proceedings pending before the Debt Recovery Tribunal at the instance of the petitioners - guarantors, the amendment as mentioned above is prayed for in the main petitions.
4. Heard learned senior advocate Mr.Mihir Thakore assisted by learned advocate Mr.Keyur Gandhi for Nanavati Associates for the applicants- petitioners and learned senior advocate Mr.Navin Pahwa with learned advocate Ms.Grishma Ahuja for Shardul Amarchand Mangaldas & Co. for respondent No.1. Respondent No.2 is Presiding Officer, Debts Recovery Tribunal-I, who is served.
4.1 Learned senior counsel for the applicants submitted that the amendment sought to be Page 8 of 14 Downloaded on : Sun Jun 14 04:04:19 IST 2020 C/SCA/11199/2019 IA ORDER
incorporated is for placing on record the relevant facts and the copies of the orders passed by the NCLAT and the Supreme Court which dealt with the Resolution Plan for the principal borrower. It was submitted that the said issue directly was related to the controversy pending before Debts Recovery Tribunal, and in the realm of dispute being agitated by the petitioners-guarantors and that the issues arise therein would have to be decided on the basis of the said subsequent developments and the orders passed by the NCLAT and the Supreme Court.
4.2 On the other hand, learned senior advocate for respondent No.1 submitted that the amendment prayed for by the applicants is such that it would change the whole nature of the controversy in the petition. It was next submitted that after the judgment of the Supreme Court dated 15th November, 2019, the petitions have become infructuous, therefore no amendment is required in the petitions. It was further sought to be contended that entertaining the application for amendment would amount to acting in conflict with the orders and observations of the Supreme Court. It was then submitted that the amendment is actuated with mala fide intention and delaying the recovery proceedings. It was submitted further that the averments made in relation to the amendment run contradictory to the contents of the petition. It was next submitted that the question of continued liability of the guarantors is an aspect of substantive merit.
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5. As could be seen from the contents of the amendment, it pertains to the incorporation of facts in relation to the subsequent developments which have taken place in form by passing of Resolution Plan. Approval of Resolution Plan by the Tribunal and the Appellate Tribunal would further considered by the Supreme Court in its decision. It could not be gainsaid that these developments which are sought to be incorporated by way of amendment in the petitions would have bearing on the rights of the petitioners and contentions of the rival parties.
5.1 It could be rightly submitted by learned counsel for the applicants that it would not change the nature of petition in asmuch as the amendment is sought only that the modified prayer of writ of prohibition which was already originally prayed for. At the time of filing of the petition, Resolution Plan was not approved by the National Company Law Tribunal (NCLT) which was subsequently considered by the NCLAT and the Supreme Court. Therefore, when the proceedings were filed before the Debts Recovery Tribunal, it was complete uncertainty over the implementation of the Resolution Plan. The rights of the parties have to be addressed now on the basis of the Resolution Plan approved by the Supreme Court and its effect would have to be examined in the adjudication of the Special Civil Application.
5.1.1 When the proposed amendment dealing with the facts emerging from the subsequent events relating to the controversy and when it further seeks to produce Page 10 of 14 Downloaded on : Sun Jun 14 04:04:19 IST 2020 C/SCA/11199/2019 IA ORDER the orders of the NCLAT and of the Supreme Court, such amendment deserves to be part of the pleadings in the main petition so as to address the controversy involved in wholesome amendment. The submission of the respondent that amendment would have the effect of changing the nature of the controversy and the subject matter of the petition, it could hardly be countenanced 5.2 The next submission that after the judgment of the Supreme Court dated 15th November, 2019, the petition has become infructuous would not hold any merit as the following observations from the order of the Supreme Court could be immediately noticed.
"Following this judgment, it is difficult to accept Shri Rohatgi's argument that that part of the resolution plan which states that the claims of the guarantor on account of subrogation shall be extinguished, cannot be applied to the guarantees furnished by the erstwhile directors of the corporate debtor. So far as the present case is concerned, we hasten to add that we are saying nothing which may affect the pending litigation on account of invocation of these guarantees. However, the NCLAT judgment being contrary to Section 31(1) of the Code and this Court's judgment in State Bank of India (supra), is set aside.
(emphasis supplied) 5.2 Based on the aforesaid observations of the Supreme Court, the submission raised on part of the applicants was that the observations of the Supreme Court only provide that the guarantors, if required to pay, will have no right of subrogation as it is not provided in the Resolution Plan and that the judgment of the Supreme Court does not opine on the issue whether the guarantors liability will continue or not. This is the aspect where the rival Page 11 of 14 Downloaded on : Sun Jun 14 04:04:19 IST 2020 C/SCA/11199/2019 IA ORDER contentions centers round. For examining the rival case, the facts pleaded by way of amendment and the orders and judgment of the Supreme Court is required to be permitted to be on record of the Special Civil Applications. The Apex Court has nowhere stated in the judgment that the proceedings before the Debts Recovery Tribunal are rendered infructuous. On the contrary, the judgment of the Supreme Court when placed on record with attendant facts and findings, it would support the pleadings to help the Tribunal to arrive at a proper decision.
5.3 The submission that entertaining the amendment application would be against the judgment of the Supreme Court does not hold the field when the above quoted observations of the Supreme Court are considered. As already observed, on the contrary, the judgment of the Supreme Court and the observations made therein would guide the adjudication of the Special Civil Applications and the fate of the petitions either way would depend upon what is laid down by the Supreme Court. Therefore also, it is quite proper that the order of the Supreme Court is permitted to be placed on record of the Special Civil Applications.
5.4 Unless the amendment is allowed, there is also likelihood of multiplicity of proceedings. Amendment would help the court to address the controversy in its totality and to arrive at a proper conclusion on the basis of the subsequent developments including the judgments of the Supreme Page 12 of 14 Downloaded on : Sun Jun 14 04:04:19 IST 2020 C/SCA/11199/2019 IA ORDER Court. One of the objects of allowing the amendment is to enable the court to consider the controversy before it in wholesome manner and to avoid the multiplicity.
5.5 Other varoius submissions sought to be raised on behalf of the respondent No.1 by learned senior counsel pertained to the merits of the main controversy pending in the proceedings of the Special Civil Applications and with regard to the rights and contentions of the parties therein. They were not germane to be considered for grantability or otherwise of the amendment application. Therefore, they are not required to be dealt with and accordingly not dealt with.
6. The amendment as pleaded and the judgments of the NCLAT and Supreme Court sought to be made part of the record of the Special Civil Applications would be needed to be considered and applied in the process of deciding the controversy between the parties. The amendment is quite germane and necessary. The proposed amendment in no way changes the nature of the controversy. It rather seeks to include the facts in the nature of subsequent developments and to place on record the judgment of NCLAT and the Supreme Court which are the subsequent events having direct linkage with the controversy between the parties and the issues involved.
6.1 While allowing the amendment applications, it is made clear that except addressing the question Page 13 of 14 Downloaded on : Sun Jun 14 04:04:19 IST 2020 C/SCA/11199/2019 IA ORDER of allowing the amendment, we have not gone into any of the aspects of the merits. We have not expressed anything on the effect of the judgment of the Supreme Court on the controversy in the main petition. All these issues are to be examined in the main petition, for which all the contentions of both the sides are kept open.
7. Accordingly, the present Civil Applications are allowed. Amendment as prayed for is permitted by allowing the prayer in terms of paragraphs 13(A) and 13(B). The amendment shall be carried out within two weeks from today.
(N.V.ANJARIA, J) (DR. ASHOKKUMAR C. JOSHI,J) Anup Page 14 of 14 Downloaded on : Sun Jun 14 04:04:19 IST 2020