NCLAT analyse the enforceability of pre-existing and subsequent corporate guarantees and novation claims.
The National Company Law Appellate Tribunal (NCLAT), Principal Bench comprising Justice Ashok Bhushan (Chairperson) and Arun Baroka (Technical Member) was hearing an appeal and held that the Corporate guarantees executed prior to subsequent guarantees remain binding and enforceable, thus justifying the initiation of insolvency proceedings under the earlier guarantees despite the novation claims.
This appeal challenges the NCLT, Mumbai Bench-IV's order dated January 3, 2024, which admitted a Section 7 application filed by the Central Bank of India against Superfine Profile and Extrusions Pvt. Ltd. The application was filed under the Insolvency and Bankruptcy Code (IBC) for initiating corporate insolvency resolution proceedings (CIRP) due to alleged default on loans secured by corporate guarantees.
Factual Summary:
On November 27, 2013, the Central Bank of India sanctioned credit facilities to the Corporate Debtor, including cash credit and term loans. The Corporate Debtor executed corporate guarantee deeds on August 22, 2015, and November 18, 2016, to cover these facilities.
Subsequent guarantees were executed on November 6, 2020, with additional facilities sanctioned by the bank. The Corporate Debtor's account was classified as a Non-Performing Asset (NPA) on November 29, 2020.
Notices under the SARFAESI Act were issued on June 29, 2022, and March 6, 2023, demanding repayment of the defaulted amount. The Section 7 application was filed on March 6, 2023, claiming a total default amount of Rs. 94.71 crores.
Appeal Arguments:
Appellant's Submission: The appellant argued that the Section 7 application was not maintainable due to subsequent guarantees executed on November 6, 2020, which they claim novated the earlier guarantees. They contended that the bank should have invoked the November 6, 2020 guarantee rather than relying on the earlier guarantees.
Respondent’s Submission: The Central Bank of India countered that the earlier guarantees remain valid despite the subsequent guarantees and that the application was correctly filed under the earlier guarantees since the debt and default continued. The bank also pointed out that despite several opportunities, the restructuring proposal was not finalized.
Tribunal’s Findings:
The NCLAT observed that the guarantees dated August 22, 2015, and November 18, 2016, continued to bind the Corporate Debtor even after the subsequent guarantees and sanctions. The court noted that the guarantees executed on November 6, 2020, did not supersede the earlier ones but merely added to the security.
The NCLAT found that the Section 7 application was rightly admitted as the debt was confirmed, and the Corporate Debtor’s defaults were significant. The tribunal emphasized that the bank's action in invoking the earlier guarantees was justified and in accordance with the contractual terms.
Conclusion:
The appeal challenging the admission of the Section 7 application was dismissed. The NCLAT upheld the NCLT’s order, affirming that the application was within the bounds of the IBC and that the invocation of earlier guarantees was appropriate.
The judgment encapsulates the core issues and findings, focusing on the applicability and novation of corporate guarantees in the context of insolvency proceedings.
Counsel Appearance:
Krishnendu Datta, Sr. Advocate with Lalit Katariya, Akhil Sachar, Ms. Sunanda Tulsyan, Advocates appeared for the Appellant.
Abhijeet Sinha, Sr. Advocate with Kunal Tandon, Rahul Nagar, Ms. Niti Jain, Ms. Bhavna Vijay, Advocates and D. K. Dhoke, Officer appeared for Respondent No. 1 (CBI).
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