The Delhi High Court bench of Justice Sanjeev Narula was hearing an interesting Petition, where the Petitioner challenged the SARFAESI Proceedings initiated by the Respondent/ Financial Creditor against the Petitioner/ Personal Guarantor of the Corporate Debtor. Petitioner argued that the SARFAESI proceedings initiated by Respondent No. 1 after the approval of the resolution plan were in contravention of the IBC. The High Court rejected the Petition.
In the present case, a short question was raised before the High Court that once a resolution plan qua the borrower was approved under Section 31 of the Insolvency and Bankruptcy Code, 2016, the bank’s claims stood addressed. Thus, it could not have sought recovery for amounts over and above the amount approved by the NCLT and seeks mandamus to that effect. Is the petition maintainable for the above reliefs?
Facts:
The Petitioner stood as a guarantor to a loan of Rs. 34 crores advanced by Respondent No.1 to the borrower. Subsequently, CIRP under the Insolvency and Bankruptcy Code, 2016 were initiated against Respondent No.3 /Corporate Debtor in the year 2018. Respondent No.1 participated in the said proceedings as a financial creditor, and filed its claim for Rs. 10,35,18,740/- before the NCLT. A resolution plan, accepted by the Committee of Creditors was approved by the NCLT. Under the approved resolution plan, the resolution applicant/ Respondent No.2 was to make a payment of Rs. 10,35,00,000/- to Respondent No.1, but it defaulted. Thereafter, proceedings were initiated by Respondent No.1 under Section 13(4) of the SARFAESI Act, and in furtherance thereto, proceedings were also instituted under Section 14 of the SARFAESI Act, for taking possession of the security offered by the Guarantor – being the dwelling unit of the Petitioner – as well as for appointment of a receiver. The Petitioner was aggrieved by such action of Respondent No.1.
Petitioner's Submission:
Counsel for the Petitioner contended that the impugned SARFAESI action has been initiated with the sole intent to recover amounts in excess of the resolution plan, and is thus, ex facie illegal and ultra vires the approval order of the NCLT.
Counsel for the Petitioner submitted that during the pendency of CIRP, Respondent No. 1 had issued a demand notice dated 26th July 2019 under Section 13(2) of the SARFAESI Act, calling upon Respondent No. 3 and Petitioner to pay dues worth Rs. 12,31,43,655/-. Respondent No.1 then participated in the CIRP as a financial creditor and submitted its claims in Form C (for Rs. 10,35,18,740/-). Respondent No. 2 proposed a resolution plan, which was accepted by the majority of the CoC, of which Respondent No. 1 was also a member. It was then approved by the NCLT vide the Approval Order noted above and became binding upon Respondent No.1.
Counsel for the Petitioner argued that once the resolution plan is approved, the loan stands restructured and the financial creditor is estopped from taking any further recovery action in respect of the same claims. However, even after the passing of the Approval Order, another possession notice was issued by Respondent No. 1 dated 02nd September 2021 under Section 13(4) of the SARFAESI Act. Thereafter, proceedings under Section 14 of the SARFAESI Act were launched by Respondent No. 1. Initiation of SARFAESI proceedings on the basis of the aforenoted notices – issued before and after the Approval Order respectively, is bad in law. In fact, the Petitioner had filed an application under Section 17 of the SARFAESI Act before the DRT, Lucknow Bench in S.A. against the issuance of the same by Respondent No.1.
Counsel for the Petitioner submitted that Respondent No.1 has not declared the restructured loan as a non-performing asset, in order to initiate any legal proceedings under Section 13 of the SARFAESI Act. The bank instead relied upon the default made by the corporate debtor prior to the Approval Order (as noted above). The alleged default is unrelated to the new management of the corporate debtor and therefore, the entire premise for proceedings under the SARFAESI Act is illegal and liable to be quashed.
Counsel for the Petitioner contended that Section 31 of IBC deals with the approval of the resolution plan. The resolution plan is approved by the NCLT only if the Adjudicating Authority is satisfied that the resolution plan, as approved by the CoC under Section 30(4), meets the requirements of Section 30(2) of the IBC. Once approval is granted, it is binding on the corporate debtor and all its members, employees, and creditors including guarantors and other stakeholders involved in the resolution plan. Further, the IBC has an overriding effect over other laws as per Section 238. Thus, on a conjoint reading of Section 31(1) and 238 of IBC, it is evident that the provisions of the IBC must prevail, and therefore, the proceedings initiated by Respondent No. 1 after the approval of the resolution plan are in contravention of the IBC. The default in payment by Respondent No. 2, has to be recovered by Respondent No. 1 from Respondent No. 2, following due process of law, and no action can be initiated against the Petitioner in this regard.
Counsel for the Petitioner concluded that any deviation from the terms laid out in the resolution plan is detrimental to the interest of the majority stakeholders, and therefore, the Court should intervene and interdict the proceedings initiated by the bank under Section 13(4) of the SARFAESI Act.
Respondent’s Submission:
Counsel for the Respondent submitted the counter-arguments that the remedy available with the Petitioner, if any, in respect of Section 13(4) of the SARFAESI Act, cannot be exercised before the High Court. Petitioner, aggrieved with the action of Respondent No.1, has already filed an application before the DRT, Lucknow.2 This matter is sub-judice and listed for final disposal. Thus, the present petition should not be entertained by the High Court.
Counsel for the Respondent argued that despite the approval of the plan, Respondent No. 2 has failed to adhere to the timeline of payments. As on date, out of 24 instalments, 15 are still pending, amounting to Rs.4,53,60,000/-, and Respondent No. 1 reserves its right to take appropriate legal remedy against Respondent No. 2 for the same. In fact, Respondent No. 1 had filed an application before the NCLT seeking directions to Respondent No. 2 with respect to payment of instalments in a time-bound manner. The said application was disposed of on 21st February 2022, with a direction to the resolution applicant to act strictly as per the approved resolution plan.
He further stated that irrespective, the Petitioner, as a guarantor, is not discharged of its liability on account of sanction and approval of a resolution plan by the NCLT. For this, reliance is placed on the judgment of the Supreme Court in State Bank of India v. V. Ramakrishnan and Another, REED 2018 SC 08560 and Lalit Kumar Jain v. Union of India and Others, REED 2021 SC 05510.
Counsel for the Respondent concluded that while the amount of Rs.10,35,18,740/- (including interest due as on the date of commencement of insolvency) was admitted for payment by Respondent No. 2 under the approved resolution plan, the total outstanding that Respondent No. 1 is entitled to receive is much more, and accordingly, it has lawfully invoked its remedy against the personal guarantors and issued notices under SARFAESI Act. As on 28th February 2022, the total outstanding has been calculated as Rs. 6,56,00,000/-. This right of Respondent No. 1 against collateral securities which is sought to be enforced by it, for recovery of its dues, is independent of the plan which stood approved by the NCLT vide the Approval Order.
Court's Analysis:
The law relating to the maintainability of a writ petition in matters relating to the SARFAESI Act is no longer res Integra. The Supreme Court in Phoenix ARC Pvt. Ltd. v. Vishwa Bharti Vidya Mandir and Others, REED 2022 SC 01201, has held that where proceedings are initiated under the SARFAESI Act, and the borrower is aggrieved by any of the actions of the bank for which the borrower has a remedy under the SARFAESI Act, no writ petition should be entertained.
The High Court noted that similar views have been expressed by this Court in M/s Trinkeshwar Developers and Builders Pvt. Ltd. v. North Municipal Corporation & Ors., REED 2022 Del 02227, wherein it was held that a petitioner cannot invoke the writ jurisdiction of the court under Article 226 of the Constitution of India to indirectly seek the relief which the petitioner has failed to obtain otherwise. As noted above, the Petitioner’s challenge to the action of Respondent No. 1 is already the subject matter of challenge before the DRT, which is pending adjudication, and therefore, the present writ cannot be entertained.
The Petitioner has also raised a grievance regarding the proceedings being in derogation of the Approval Order of the NCLT and implored for this Court’s intervention on the ground that there is no other remedy available. This contention is founded on the plea that, with the approval of the resolution plan, the guarantors’ liabilities are also discharged. This contention has been categorically negated by the Supreme Court in Lalit Kumar Jain v. Union of India, REED 2021 SC 05510.
The Supreme Court had, in very clear terms, held that discharge of the corporate debtor from a debt owed by it to its creditors, by way of an involuntary process such as insolvency proceedings, does not absolve the guarantor of its liability since it arises out of an independent contract. Thus, the passing of a resolution plan does not ipso facto discharge the personal guarantor. The judgment of the Supreme Court in State Bank of India v. V. Ramakrishnan, REED 2018 SC 08560, also puts forth the aforementioned principle and is contrary to the proposition canvassed by the Petitioner. As regards the extent of liability of a personal guarantor is concerned, the same would have to be determined in light of the agreement between the borrower, i.e., the corporate debtor, and the personal guarantor, for which the appropriate forum would be the Debt Recovery Tribunal and not the High Court. Thus, if the Petitioner is not absolved of his liability, the proceedings initiated by the bank under the SARFAESI Act cannot be held to be unconstitutional or in derogation of the Approval Order of the NCLT.
In relation to the other grievance raised by Respondent No. 1 qua non-implementation of the resolution plan, it must be noted that the aggrieved party is actually Respondent No. 1, who has not been paid in terms of the resolution plan approved by NCLT. As pointed out by the counsel for Respondent No. 1, there has been a default on the part of the resolution applicant in payment of instalments, and as per the counter affidavit (as noted above), 15 instalments amounting to Rs. 4,53,60,000/- remain pending. It is therefore for Respondent No. 1 to now take action for recovery of its dues from the resolution applicant, as it may deem fit, utilizing any remedy available to it under law.
The High Court observed that Section 33(3) of the IBC, envisages a liquidation process in the event of contravention of a resolution plan. Under the provision of Section 33(3) of the IBC, Respondent No. 1 certainly has the right to proceed against the collateral securities for recovery of its dues - which are independent of the resolution plan approved by the NCLT. If the resolution plan approved by the Adjudicating Authority is contravened by the concerned corporate debtor, any person other than the corporate debtor, whose interests are prejudicially affected, may make an application to the Adjudicating Authority for an order for liquidation. Where a resolution applicant succeeds as a corporate debtor but fails to comply with its assurance in terms of the resolution plan, then subsequent step to be taken has been specified in Section 33(3) of the IBC. This is the scheme under the IBC, and if the Parliament, in its wisdom, has only provided the remedy of a liquidation process under Section 33(3) of IBC as a consequence of the non-implementation of the resolution plan by the concerned corporate debtor, this Court cannot create another remedy just because the afore-noted remedy is not sufficient or suitable for the Petitioner. Therefore, the Petitioner’s grievance regarding the non-implementation of the resolution plan, too, cannot be a ground for this Court to entertain the instant petition.
In view of the above, the High Court found no merit in the present petition. The Petition was dismissed.
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