NCLAT affirmed the liability of co-borrowers in corporate insolvency, emphasizing their joint obligations and the enforceability of agreements despite any technical deficiencies.
The National Company Law Appellate Tribunal (NCLAT), Principal Bench led by Justice Ashok Bhushan (Chairperson) and Technical Members Mr. Barun Mitra and Mr. Arun Baroka reviewed an appeal and held that a Co-Borrower, having signed multiple agreements affirming joint and several liabilities, cannot evade responsibility for the debt owed to a financial creditor and that technical deficiencies in stamping do not invalidate the enforceability of such agreements, allowing for the initiation of Corporate Insolvency Resolution Process (CIRP) under Section 7 of the IBC. The NCLAT Bench further noted that the acknowledgement of debt through partial payments resets the limitation period, enabling the creditor to pursue insolvency proceedings effectively.
In the recent NCLAT judgment concerning the appeal filed by the Ex-Director of Narang Developers Pvt. Ltd. (NDPL) against the NCLT’s order initiating the Corporate Insolvency Resolution Process (CIRP) under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC), the Tribunal upheld the NCLT's decision. The case arose from a loan facility of Rs. 11.50 crores extended by Aditya Birla Finance Ltd. (Respondent No. 1) to NDPL, which was designated as a Co-Borrower. Despite acknowledging the loan's existence, NDPL defaulted, leading to its classification as a Non-Performing Asset (NPA) and subsequent initiation of CIRP by the NCLT.
The NCLAT analyzed several contentions raised by the Appellant. First, the argument that NDPL had no independent liability since the loan was primarily issued to other entities was dismissed. The Tribunal noted that NDPL had signed various agreements, including a Demand Promissory Note, confirming its joint and several liabilities as a Co-Borrower. The NCLAT referred to established legal precedents which affirm that both Co-Borrowers and Primary Borrowers share equal liabilities, reinforcing that NDPL could not evade its responsibility to repay the debt based on its assertion that the primary borrower was the main debtor.
Moreover, the Appellant's claim regarding the insufficiency of stamping on the Facility Agreement was deemed irrelevant to the admissibility of the Section 7 petition. The Tribunal highlighted that stamping deficiencies are curable and do not invalidate the agreement, referring to a Supreme Court decision that reinforces this stance. The NCLAT further evaluated the Appellant’s argument that the date of default fell within the suspension period outlined in Section 10-A of the IBC. The Tribunal concurred with the NCLT's findings, emphasizing that the default date did not fall within the specified time frame, and cited legal precedents indicating that an acknowledgement of debt can reset the limitation period.
The NCLAT also addressed NDPL's partial payments toward the loan, which indicated an acknowledgement of the outstanding debt and allowed for the filing of the Section 7 application within the appropriate time frame. The Tribunal firmly stated that the process of declaring an account as non-performing under the SARFAESI Act does not hinder the initiation of CIRP under the IBC.
Ultimately, the NCLAT concluded that the NCLT had correctly admitted the Section 7 application, affirming that NDPL's obligations as a Co-Borrower were clearly established. The appeal was dismissed, reiterating that the claims made by the Appellant lacked merit and did not provide sufficient grounds to overturn the initial decision to initiate CIRP against NDPL. This ruling underscores the principle that contractual obligations, as evidenced by signed agreements, carry significant weight in insolvency proceedings, ensuring that financial creditors can pursue their claims effectively within the framework of the IBC.
Mr. Chitranshul A. Sinha, Ms. Meghna Rao and Mr. Harshit Goel, Advocates represented the Appellant.
Mr. Krishnendu Datta, Sr. Advocate with Mr. Lalit Katariya, Mr. Akhil Sachar, Ms. Niharika Sharma and Ms. Ashrita Chindwarhe, Advocates appeared for the Respondent.
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