This Article provides an overview of Order passed by Hon’ble National Company Law Appellate Tribunal (“NCLAT”) in the matter of Shantanu Jagdish Prakash vs State Bank of India and another passed in Comp. App. (Ins) No. 1609 of 2024 wherein NCLAT held that lenders can enforce the security documents even if they are not a party to the trusteeship agreement.
Brief Facts:
An application filed under Section 95 of the Code by State Bank of India (“SBI”) was admitted vide the Order dated 31.05.2024 (“Impugned Order’) and Personal Insolvency Resolution Process (“PIRP”) has been initiated against the Appellant who was the guarantor of the Corporate Debtor namely Educomp Solution Limited (“ESL”).
Questions of reference:
Assailing the Impugned Order, the Appellant/Personal Guarantor has raised the following contentions before Hon’ble National Company Law Appellate Tribunal (“NCLAT”):
(i) The application filed under Section 95 of the Code is barred by limitation;
(ii) There was no privity of contract between SBI and Appellant/ Personal Guarantor;
(iii) Debt has not been crystalized;
(iv) Impugned Order did not issue directions under Section 100 (2) of the Code regarding negotiations to be held between the personal guarantor and Creditor;
(v) Is a notice of demand issued under Section 13(2) of the SARFAESI Act can be construed as invocation of personal guarantee of personal guarantor?
Findings:
NCLAT, after considering various issues, has answered as follows:
(i) The application filed under Section 95 of the Code is barred by limitation:
Ø The account of the Corporate Debtor was declared as NPA on 31.03.2013, however, the loans were predating and the MRA was restructured on 25.03.2014 with the consent of all parties including the Appellant and therefore, the NPA date is ceased to the relevant as such.
Ø Appellant acknowledged its liability through a revival letter dated 30.11.2016 and therefore, the limitation would have expired on 30.11.2019.
Ø SBI issued a demand notice on 22.06.2018 requesting for payment within 60 days i.e., by 22.08.2018. Therefore, the limitation period would have started on 22.08.2018 and ended on 21.08.2021.
Ø The application was filed on 31.03.2021 much before the expiry of the limitation period. Thus, both the demand notice and Section 95 application were filed within the period of limitation.
(ii) There was no privity of contract between SBI and Appellant/ Personal Guarantor:
Ø The personal guarantee was executed between Appellant along with another guarantor and SBICAP Trustee Company Limited. SBI was not signatory to the said personal guarantee, as such, SBI could not have initiated Section 95 application against the Appellant/Personal Guarantor.
Ø Rejecting the contention raised, NCLAT observed that trusteeship deeds are generally signed between the trustee on behalf of the lenders and the personal/ corporate guarantor of the principal borrower. However, by its inherent nature and intent, the lenders or the Financial Creditors are the true/actual beneficiaries of such deed of guarantee.
Ø Section 95 of the Code provides right to the creditors to file application to initiate PIRP. The wording of Section 95(1) of the Code clearly stipulates that creditor may apply “either by himself or generally with other creditors”. Therefore, the creditor i.e., SBI was within its right to initiate Section 95 application against the Appellant. It is a settled position of law, that a party can enforce the contract made for its benefit. Therefore, SBI cannot be prevented from enforcing its rights on the alleged lack of privity of contract with the Appellant.
Ø Further, from perusal of terms of Master Restructuring Agreement (MRA) and Security Trustee Agreement (STA), it is clear that the security trustees are holding ‘Security’ not for themselves, but on behalf of, and for the benefit of, the Claimant/Lender. Therefore, the Lenders, can enforce the security documents even if they are not a party to the trusteeship agreement.
Ø NCLAT replied on the judgement of Hon’ble Supreme Court[i] wherein it was held that beneficiaries under the terms of a contract have the right to enforce the covenants thereof.
(iii) Debt has not been crystallized:
Ø Appellant contended that he has also filed a counter claim of Rs. 1540 Crores against SBI before DRT and sought for setting off Rs. 404,74,85,005.90/- against SBI and thus, the debt has not been crystallized.
Ø NCLAT held that, the mere fact that the case was pending before the DRT and certain counterclaims have been filed by the Appellant, will not make debts uncrystallized as the SBI has clearly furnished the details of debt along with supporting documents before NCLT.
(iv) Impugned Order did not issue directions under Section 100 (2) of the Code regarding negotiations to be held between personal guarantor and the Creditor?
Ø Reliance was placed on Section 100 (2) Code which specifies that if repayment plan is prepared by the debtor under Section 105 of the Code, then opportunity should be offered to the debtor.
Ø A query was put also to the Appellant as to whether he was in position to repay the demanded money by the SBI and whether he can offer any repayment plan even at this stage.
Ø The Appellant could not give any concrete reply and accordingly, the contention was rejected on the ground that the said section was only applicable, if the Resolution Professional makes an application in this regard.
Author’s view:
The decision settles a vital question of law and recognized the rights of the lenders to initiate insolvency resolution process on the strength of Trusteeship Agreement even though they were not a party to the said agreement. Further, by virtue of its fundamental nature embedded in the trusteeship arrangement, the lenders are recognized to be the true beneficiaries of such deeds and any argument curtailing exercise of such rights by lenders would be futile. Further, the statutory right conferred under Section 7/95 of the Code cannot be curtailed or made subservient to any arrangement entered by and between the parties. The order has strengthened the hands of financial creditors in enforcing their claims against corporate debtors/personal guarantors.
Author:
P Ravi Charan, Partner, Dentons Link Legal
Disclaimer: The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
[i] M.C. Chacko v. State Bank of Travancore, Trivandrum