National Company Law Appellate Tribunal
Union Bank Of India vs Sarveshwar Creation Pvt Ltd on 23 November, 2022
Author: Ashok Bhushan
Bench: Ashok Bhushan
NATIONAL COMPANY LAW APPELLATE TRIBUNAL,
PRINCIPAL BENCH, NEW DELHI
Company Appeal (AT) (Ins) No.1003 of 2020
IN THE MATTER OF:
Sarveshwar Creations Pvt. Ltd.
(Through its Resolution Professional)
Mr. Manoharlal Vij
8/28, 3rd Floor, WEA, Abdul Aziz Road,
Karol Bagh, New Delhi - 110 005 ...Appellant
Vs.
Union Bank of India
(Erstwhile Corporation Bank)
Through Manager Law
M-93, Connaught Circus,
New Delhi - 110 001 ...Respondent
Present:
For Appellant : Mr. Aditya Dewan Advocate for Liquidator
For Respondents : Mr. Savla, Sr. Advocate
With
Company Appeal (AT) (Ins) No.1104 of 2022 &
IA No. 3276, 3250 of 2022
IN THE MATTER OF:
Union Bank of India
(Erstwhile Corporation Bank)
Through Manager Law
M-93, Connaught Circus,
New Delhi - 110 001 ...Appellant
Vs.
Company Appeal (AT) (Ins) No. 1003 of 2020 &
Company Appeal (AT)(Ins) No 1104 of 2022
Page 1 of 15
Sarveshwar Creations Pvt. Ltd.
(Through its Liquidator)
AVM Resolution Professional LLP,
8/28, 3rd Floor, WEA, Abdul Aziz Road,
Karol Bagh, New Delhi - 110 005 ...Respondent
Present:
For Appellant : Mr. Savla, Sr. Advocate
For Respondents : Mr. Aditya Dewan Advocates for Liquidator
J U D G M E N T
( 23rd November, 2022) DR. ASHOK KUMAR MISHRA, TECHNICAL MEMBER
1. The Appellants have filed cross appeals under Section 61 of the 'Insolvency and Bankruptcy Code 2016' (the Code) against the impugned order dated 27.10.2020 passed by the 'National Company Law Tribunal, Bench -V, New Delhi (the Adjudicating Authority) in C.P (IB) No. 1874/(ND)/2019 (IA -3642 & 3790 of 2020).
2. In Appeal No. i.e. CA (AT) (Ins) No. 1104 of 2022, the Appellant Bank has sought following reliefs:
Allow the present cross Appeal and set aside the observation of the Adjudicating Authority to the extent that the Guarantee Agreement is in contravention of Section 185 & 186 of the Companies Act, 2013 Company Appeal (AT) (Ins) No. 1003 of 2020 & Company Appeal (AT)(Ins) No 1104 of 2022 Page 2 of 15 as stated in the impugned order dated 27.10.2020 passed by the National Company Law Tribunal, New Delhi in IA No. 3642 of 2020 and IA No. 3790 of 2020 in CP No. (IB) 1874/ND/2019 and grant the necessary reliefs to the Appellant in terms of the aforesaid IA No. 3790 of 2020 in CP (IB) No. 1874/ND/2019 and Costs incidental to this Appeal etc.
3. In Appeal No. CA (AT) (Ins) No. 1003 of 2020, the Resolution Professional/now Liquidator of Corporate Debtor (CD) /Sarveshwar Creations Pvt. Ltd has sought the following reliefs:
Allow the present Appeal and set aside to the aforesaid extent, the impugned order dated 27.10.2020 passed by the National Company Law Tribunal, New Delhi in IA No. 3642 of 2020 and IA No. 3790 of 2020 in CP No. (IB) 1874/ND/2019 and grant the necessary reliefs to the Appellant in terms of the aforesaid IA No. 3790 of 2020 in CP (IB) No. 1874/ND/2019 and Costs incidental to this Appeal etc.
4. The Appellant Bank has submitted the brief notes as enumerated herein below:
Company Appeal (AT) (Ins) No. 1003 of 2020 & Company Appeal (AT)(Ins) No 1104 of 2022 Page 3 of 15 Company Appeal (AT) (Ins) No. 1003 of 2020 & Company Appeal (AT)(Ins) No 1104 of 2022 Page 4 of 15 Company Appeal (AT) (Ins) No. 1003 of 2020 & Company Appeal (AT)(Ins) No 1104 of 2022 Page 5 of 15
5. The ld. Counsel for the Resolution Professional (RP)/Liquidator/Corporate Debtor (CD) has submitted that the lenders of the Holding Company could not be treated as Secured Financial Creditor in the CIRP of the subsidiary company since they didn't directly advance any facility to the CD and hence it could not be said that the CD owed them any financial debt in terms of the law laid down in the Code.
It was also submitted by Ld. Counsel for the RP that lender is to demonstrate that the security document relating to the loan transaction are legally valid and enforceable and further the mortgage was created Company Appeal (AT) (Ins) No. 1003 of 2020 & Company Appeal (AT)(Ins) No 1104 of 2022 Page 6 of 15 validly in favour of the lender by the subsidiary of the Principal Borrower. It was also mentioned that the claim of the Bank as a secured financial creditor on the basis of corporate guarantee dated 06th May, 2017 is untenable on the ground that it has not complied with the provisions of Section 185 & 186 of the Companies Act, 2013 (the Act) though then prevailing in 2017. The Ld. Counsel also submitted that the constitutional courts have held that if there is a clear breach of a provision of a statute then the Doctrine of Indoor Management" under the Act or any other Act cannot be enforced. He also disputed the issue of guarantee created in 2013 and 2017 and was very much enforceable that only corporate guarantee dated 06.05.2017 is in existence and hence the claim is not enforceable in respect of previous guarantee.
6. Mr. Salva, Ld. Sr. Counsel for the Appellant took us through the impugned order and tried to persuade the Bench that the Appellant Bank is a secured financial creditor. He also submitted that the Bank has submitted the claim alongwith proof of claim in Form-C appearing at Annexure 13 page No. 175 to 179 of the Appeal paper book. At page 178, they also tried to pursue the bench that the security held and the value of the security is enumerated in Column No.8 where now only one property is left over of the CD i.e. industrial land and building at B-58, Sector 63, Noida owned by M/s. Sarveshwar Creations Pvt. Ltd. of Rs. 337 Lakh & liquidation Company Appeal (AT) (Ins) No. 1003 of 2020 & Company Appeal (AT)(Ins) No 1104 of 2022 Page 7 of 15 process has commenced so the Bank is fearing that they should not sell the property and utilise the amount for payment to other creditors. The Ld. Sr. counsel has also stated that this property is standing as a guarantee to the credit limits sanctioned to M/s. Seen India Pvt. Ltd. (Holding Company of CD [principal Debtor]). The Appellant also took us through various sanction letter of credit facilities from time to time by the Bank as appearing: at Annexure -2 dated 01.02.2013 page 86 of the Appeal paper book, various limit sanctioned appearing at page 87 - various security created, extract of various Board Meeting appearing at Annexure
-2, Board Resolution Passed by CD on 02.02.2013 appearing at Annexure 4, Guarantee Agreement appearing at Annexure -5 page 93 of the appeal paper book, Credit sanction intimation appearing at Annexure -6 page 100 of the Appeal Paper Book, Board Resolution dated 20.06.2013 and Corporate Guarantee dated 28.06.2013 appearing at page 115 Annexure
-7, Sanction letter dated 05.12.2013 appearing at page 123 Annexure - 8, Board Resolution dated 09.12.2013 appearing at page 129, Annexure - 9, Sanction letter dated 31.03.2017 appearing at page 142, Annexure -
10. Guarantee Agreement dated 06.05.2017 appearing at page 151-155 of the appeal paper book.
Company Appeal (AT) (Ins) No. 1003 of 2020 & Company Appeal (AT)(Ins) No 1104 of 2022 Page 8 of 15
7. We have carefully gone through the pleadings of the parties, submission made by the Ld. Sr. counsel/counsel of the parties and the law laid on the subject and our observations are as follows:
a. It is not in dispute that the subsidiary company, after approval of their Board, has executed the Corporate Guarantee. b. It is also not in dispute that the Corporate Debtor has not executed the Corporate Guarantee in 2013 and 2017 has stated above. c. It is also not in dispute that the CD has gone in CIRP from 13.02.2019 and public announcement was made on 17.02.2020, the Respondent bank submitted its claim in Form-C on 27.02.2020 for an amount of Rs. 26,53,15,260.61, purportedly the said money was stated to be owed to the Respondent Bank by virtue of the Corporate Debtor acting as a Corporate Guarantor for credit limits sanctioned to its Holding Company.
d. It is also not in dispute that Committee of Creditor was duly constituted by RP on 14.03.2020 with the claim of Syndicate Bank being provisionally admitted at that time.
e. It is also not in dispute that the RP and Respondent Bank exchanged several emails regarding admission of the claim/substantiation of the claim filed by the Respondent Bank as a secured financial creditor. Company Appeal (AT) (Ins) No. 1003 of 2020 & Company Appeal (AT)(Ins) No 1104 of 2022 Page 9 of 15 f. It is also not in dispute that the RP rejected the claim of the Respondent Bank on the ground that the Corporate Debtor has not complied with the provision of Section 185 (1) of the Act (pre-2018 amendment) and thereby the Respondent bank approached the Adjudicating Authority under Section 60(5) of the Code in August, 2020. g. It is also not in dispute that the Corporate Debtor has gone into liquidation.
h. Both the Ld. Sr. Counsels/Ld counsel took us through the provisions of Section 185 of the Act and through the letter of Corporation bank dated 14.10.2016 regarding regularization of overdues and pending reply to the audit observation address to the holding company wherein it has been mentioned that the properties held as collateral securities implication of section 185 and 186 of the Act not ascertained from legal department appearing at page 159 of the Appeal paper book. For brevity and clarity, Section 185 of the Act is depicted herein below:
"Substituted by Act 1 of 2018, S.61, for S.185 (w.e.f.07.05.2018). Prior to its substation S.185 read as under - "185- Loan to Directors, etc (1)- Save as otherwise provided in this Act, no company shall, directly or indirectly, advance any loan, including any loan represented by a book debt, to any of its directors or to any other person in whom the Director is interested or give any Company Appeal (AT) (Ins) No. 1003 of 2020 & Company Appeal (AT)(Ins) No 1104 of 2022 Page 10 of 15 guarantee or provide any security in connection with any loan taken by him or such other person:
(a) The giving of any loan to a managing or whole-time director-
(i) As a part of the conditions of service extended by the company to all its employees; or
(ii) Pursuant to any scheme approved by the members by a special resolution; or
(b) A company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan and in respect of such loans an interest is charged at a rate not less than the bank rate declared by the Reserve Bank of India;
(c) Any loan made by a holding company to its wholly owned subsidiary company or any guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary company; or
(d) Any guarantee given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company:
Provided that the loans made under clause (c) and (d) Company Appeal (AT) (Ins) No. 1003 of 2020 & Company Appeal (AT)(Ins) No 1104 of 2022 Page 11 of 15 are utilized by the subsidiary company for its principal business activities.
Explanation - for the purposes of this section, the expression "to any other persons in whom Director is interested" means -
(a) Any Director of the lending company, or of a company which is its holding company or any partner or relative of any such director;
(b) Any firm in which any such director or relative is a partner;
(c) Any private company of which any such director is a director or member;
(d) Anybody corporate at a general meeting of which not less than twenty-five per cent of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together;
or
(e) Anybody corporate, the Board of Directors, Managing Director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.
Company Appeal (AT) (Ins) No. 1003 of 2020 & Company Appeal (AT)(Ins) No 1104 of 2022 Page 12 of 15 (2) if any loan is advanced or a guarantee or security is given or provided in contravention of the provisions of sub-section (1), the company shall be punishable with fine which shall not be less than five lakh rupees but which may extend to 25 lakh Rupees, and the director or the other person to whom any loan is advanced or guarantee or security is given or provided in connection with any loan taken by him or the other person, shall be punishable with imprisonment which may extend to six months or with fine which shall not be less than five lakh rupees but which may extend to twenty- five lakh rupees, or with both."
i. It is very much clear that the fresh guarantee executed on 06.05.2017 between the Bank and the Corporate Debtor of Rs.3007.85 lakh is still existing and Corporate Debtor is liable to that extent to repay the same together with interest as stipulated in the loan documents and so executed between the parties.
j. It is clearly written that the Guarantor has agreed to indemnify the bank against all loss and repay and satisfy the bank on demand, the general balance due from the borrower.
Company Appeal (AT) (Ins) No. 1003 of 2020 & Company Appeal (AT)(Ins) No 1104 of 2022 Page 13 of 15 k. It is also very much clear that the second Deed of Guarantee executed on 06.05.2017 is not in continuation of earlier deed of guarantee dated 28.06.2013 as elaborately explained in para 74 of the impugned order. l. As far as the issue of contravention of provision of Section 185 of the Act prevailing as on that date (pre -07.05.2018 amendment to the Act) is concerned, it is very much clear that this is the provision which the company has to comply internally and if they fail to comply the necessary punishment is available in the same section i.e. Section 185, both monetary penalty and /or imprisonment. As far as bank is concerned, they have been provided time to time the Board Resolution showing the approval of the Board. Hence, if there is any irregularity then for that the Members of the Board are responsible. If the official of the bank have committed some irregularity, then it is the Bank who has to prosecute these officers against the provisions laid down under the law applicable to them. Bank is required to investigate internally. However, as far as the public fund with the public sector bank is concerned, the "Doctrine of Indoor Management" will be wholly and exclusively applicable.
m. In view of above observations, we do not find any inconformity in the impugned order and constraint to uphold the impugned order. Company Appeal (AT) (Ins) No. 1003 of 2020 & Company Appeal (AT)(Ins) No 1104 of 2022 Page 14 of 15 Accordingly, we are in agreement with the impugned order passed by the Adjudicating Authority.
In view of the above observation, we dismiss the Company Appeal (AT) (Ins) No. 1003 of 2020 and dispose of Company Appeal (AT) (Ins) No. 1104 of 2022 accordingly.
Interim order, if any, passed by this Tribunal stands vacated.
[Justice Ashok Bhushan] Chairperson [Dr. Ashok Kumar Mishra] Member (Technical) [Dr. Alok Srivastava] Member (Technical) Raushan Company Appeal (AT) (Ins) No. 1003 of 2020 & Company Appeal (AT)(Ins) No 1104 of 2022 Page 15 of 15