Supreme Court (26.11.2021) In Electrosteel Castings Limited Vs. UV Asset Reconstruction Company Limited & Ors. [Civil Appeal No.6669 of 2021] held that; -
In any case, whether there shall be legally enforceable debt so far as the plaintiff – appellant (guarantor) herein is concerned even after the approved resolution plan against the corporate debtor (principal borrower) still there shall be the liability of the plaintiff and/or the assignee can be said to be secured creditor and/or whether any amount is due and payable by the plaintiff, are all questions which are required to be dealt with and considered by the DRT in the proceedings initiated under the SARFAESI Act.
Excerpts of the order;
# 1. Feeling aggrieved and dissatisfied with the impugned judgment and order dated 13.08.2021 passed by the High Court of Judicature at Madras in O.S.A. No.292 of 2019, by which the Division Bench of the High Court has dismissed the said appeal preferred by the original plaintiff rejecting the plaint/suit filed by the appellant herein – original plaintiff on the ground that the suit is barred by Section 34 of the SARFAESI Act, 2002, the original plaintiff has preferred the present appeal.
# 2. The facts leading to the present appeal in nutshell are as under:-
2.1 That original defendant No.3 - respondent No.3 herein (hereinafter referred to as original defendant No.3) availed the loan facility vide Rupee Loan Agreement dated 26.07.2011 from defendant No.2 - respondent No.2 herein – SREI Infrastructure Finance Limited and availed the financial assistance to the extent of Rs.500 crores. The appellant herein – original plaintiff stood as guarantor. A mortgage was created by the appellant herein – original plaintiff in favour of defendant No.2 – respondent No.2 herein – financial creditor over its factory land at Evalur, Tamil Nadu along with plant and machinery, by way of deposit of title deeds in terms of the declaration to secure the repayment, discharge and redemption by original defendant No.3. That original defendant No.3 – corporate debtor could not pay the loan amount, therefore the proceedings under the Insolvency Bankruptcy Code, 2016 (IBC) was initiated against the corporate debtor. An application under Section 7 of the IBC was filed by the State Bank of India against original defendant No.3 – corporate debtor. The default amount was INR 923,75,00,000/-. The resolution process was initiated and an interim resolution professional was appointed under the provisions of IBC. A resolution plan came to be approved by the Committee of Creditors under Section 30(4) of the IBC. The learned Adjudicating Authority vide order dated 17.04.2018 approved the resolution plan. Under the approved resolution plan an amount of INR 241,71,84,839.18 was required to be paid and 67,23,710 equity shares of the corporate debtor were to be allotted. As per the case on behalf of the plaintiff – appellant herein on payment of aforesaid amount and transfer of aforesaid shares No Due Certificate was issued in favour of the corporate debtor – original defendant No.3 on 25.06.2018 and the corporate debtor came to be discharged. It appears that thereafter an assignment agreement was executed between defendant No.2 – respondent No.2 herein and defendant No.1 – respondent No.1 herein on 30.06.2018, assigning all the rights, titles and interest in all the financial assistance provided by defendant No.2 – financial creditor - respondent No.2 herein in terms of agreement dated 26.07.2011 in favour of assignee - respondent No.1. As assignee - respondent No.1 herein pursuant to the assignment agreement dated 30.06.2018 had issued letter to all the interested parties, namely, assignor - financial creditor, guarantor and corporate debtor informing that assignor – financial creditor - respondent No.2 herein had absolutely assigned all the rights, title and interest in all the financial assistance granted by financial creditor - respondent No.2 herein from time to time to corporate debtor in favour of assignee - respondent No.1 herein vide assignment agreement dated 30.06.2018. The said letter was responded by the plaintiff – appellant herein stating the following :-
(i) “Respondent No.2 had duly filed its claim before the Resolution Professional in accordance with the provisions of IBC.
(ii) This claim was crystallised and admitted at INR 577.90 Crores and also formed part of the approved Resolution Plan of Vedanta Limited.
(iii) Pursuant to the approved Resolution Plan, the entire debt of Respondent No.2 has been discharged by way of allotment of shares and payment in cash on 6.06.2018 and 21.06.2018 respectively.
(iv) It was also highlighted that in terms of section 3.2(xi) of the approved Resolution Plan, upon discharge of financial creditors (including Respondent No.2), the financial creditors were required to redeliver and cause to be delivered to Petitioner all documents encumbered with the financial creditors.
(v) Therefore, when no due was outstanding and in fact redelivery of encumbered assets was required, there was no basis under contract or law for assignment of loan/debts/securities.
(vi) It was emphasised that the assignment agreement dated 30.06.2018 was null, void ab initio and without any basis.”
2.2 That thereafter on the basis of the assignment agreement dated 30.06.2018, the assignee – original defendant No.1 – respondent No.1 herein initiated the proceedings against the plaintiff – appellant herein, who stood as guarantor, under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) by issuing a notice dated 27.12.2018, demanding the payment of INR 587,10,08,309 due under the rupee term loan agreement dated 26.07.2011. Notice dated 27.12.2018 of the SARFAESI Act was responded by the plaintiff – appellant herein vide reply dated 20.02.2019 stating that pursuant to repayment of amount in terms of the approved resolution plan, all the claims of financial creditor - respondent No.2 herein stand extinguished and consequently, no claim can be made by the assignee - respondent No.1 herein for the same default and that no amount is due and payable to assignee - respondent No.1. That thereafter a possession notice dated 19.06.2019 was issued under rule 8 (1) of the Security Interest (Enforcement) Rules, 2002 by the assignee to the plaintiff – appellant herein. Thus a possession notice was published in the newspaper on 22.06.2019.
2.3 That thereafter the plaintiff – appellant herein instituted a Civil Suit being C.S.(D) No.18962 of 2019 on 22.06.2019 before the High Court of Madras and prayed for the following reliefs:-
“(i). To declare that the 1st Defendant acquired no rights against the Applicant herein under the Assignment Deed dated 30.06.2018, arid consequently, declare that the 1st Defendant is not a secured creditor vis-a-vis, the Applicant herein; and
(ii). Consequently, to declare Possession Notice dated 19.6.2019 issued by the 1st Defendant herein has null and vend and render justice.”
2.4 The suit was filed with an application seeking leave to file the suit with the aforesaid prayers. As observed hereinabove, the suit was filed on 22.06.2019. Immediately thereafter appellant herein – plaintiff also filed an application before the Debt Recovery Tribunal (DRT), Chennai under Section 17(1) of SARFAESI Act on 17.07.2019 against the possession notice dated 19.06.2019 praying that the assignee has acquired no rights under the assignment agreement dated 30.06.2018 and consequently, assignee - respondent No.1 is not a secured creditor vis-a-vis the appellant – plaintiff and also to declare possession notice dated 19.06.2019 as null and void. The registry of DRT returned the application filed under Section 17(1) of SARFAESI Act by observing as under:-
“Counsel for the Appellant has represented SA without complying with the defects read out, however with an endorsement that he is a proper and necessary party and that relief prayed for vide Para VII(i) is maintainable. He has reiterated that relief has to be sought in relation to the notice under challenge. May be returned.”
2.5 The defendants appeared before the High Court in C.S.(D) No.18962 of 2019, affidavits and counter affidavits were filed by the parties to the suit. By order dated 30.09.2019, the learned Single Judge of the High Court dismissed application No.4322 of 2019 and C.S.(D) No.18962 of 2019 on the ground of jurisdiction observing that the suit is for land and property situated outside the jurisdiction of the court and therefore the suit is not maintainable. It was also observed and held that the civil court’s jurisdiction is barred in view of Section 34 of the SARFAESI Act and only DRT had competence to decide the matter.
3. Feeling aggrieved and dissatisfied with the order passed by the learned Single Judge of the High Court dismissing the application as well as the suit vide order dated 30.09.2019, appellant herein – original plaintiff filed an appeal before the Division Bench of the High Court being O.S.A. No.292 of 2019. By the impugned judgment and order the Division Bench of the High Court has dismissed the said appeal in view of the bar under Section 34 of the SARFAESI Act.
4. Feeling aggrieved and dissatisfied with the impugned judgment and order passed by the Division Bench of the High Court confirming the judgment and order passed by the learned Single Judge rejecting the plaint/dismissing the suit as not maintainable in view of the bar under Section 34 of the SARFAESI Act, original plaintiff – appellant herein has preferred the present appeal.
7.1 It is the case on behalf of the plaintiff – appellant herein that in the plaint there are allegations of the ‘fraud’ with respect to the assignment agreement dated 30.06.2018 and it is the case on behalf of the plaintiff – appellant herein that assignment agreement is ‘fraudulent’ in as much as after the full payment as per the approved resolution plan under the IBC and the original corporate debtor is discharged, there shall not be any debt by the plaintiff – appellant herein as a guarantor and therefore Assignment deed is fraudulent. Therefore, it is the case on behalf of the plaintiff – appellant herein that the suit in which there are allegations of ‘fraud’ with respect to the assignment deed shall be maintainable and the bar under Section 34 of SARFAESI Act shall not be applicable.
7.2 However, it is required to be noted that except the words used ‘fraud’/’fraudulent’ there are no specific particulars pleaded with respect to the ‘fraud’. It appears that by a clever drafting and using the words ‘fraud’/’fraudulent’ without any specific particulars with respect to the ‘fraud’, the plaintiff – appellant herein intends to get out of the bar under Section 34 of the SARFAESI Act and wants the suit to be maintainable. As per the settled preposition of law mere mentioning and using the word ‘fraud’/’fraudulent’ is not sufficient to satisfy the test of ‘fraud’.on of law such a pleading/using the word ‘fraud’/ ‘fraudulent’ without any material particulars would not tantamount to pleading of ‘fraud’. In case of Bishundeo Narain and Anr. (Supra) in para 28, it is observed and held as under:-
“.... Now if there is one rule which is better established than any other, it is that in cases of fraud, undue influence and coercion, the parties pleading it must set forth full particulars and the case can only be decided on the particulars as laid. There can be no departure from them in evidence. General allegations are insufficient even to amount to an averment of fraud of which any court ought to take notice however strong the language in which they are couched may be, and the same applies to undue influence and coercion. See Order 6, Rule 4, Civil Procedure Code.”
7.3 Similar view has been expressed in the case of Ladli Parshad Jaiswal (Supra) and after considering the decision of the Privy Council in Bharat Dharma Syndicate vs. Harish Chandra (64 IA 146), it is held that a litigant who prefers allegation of fraud or other improper conduct must place on record precise and specific details of these charges. Even as per Order VI Rule 4 in all cases in which the party pleading relies on any misrepresentation, fraud, breach of trust, wilful default, or undue influence, particulars shall be stated in the pleading. Similarly in the case of K.C Sharma & Company (Supra) it is held that ‘fraud’ has to be pleaded with necessary particulars. In the case of Ram Singh and Ors. (Supra), it is observed and held by this Court that when the suit is barred by any law, the plaintiff cannot be allowed to circumvent that provision by means of clever drafting so as to avoid mention of those circumstances by which the suit is barred by law of limitation.
7.4 In the case of T. Arivandandam vs. T.V. Satyapal & Anr. (1977) 4 SCC 467, it is observed and held in para 5 as under:-
“5. We have not the slightest hesitation in condemning the petitioner for the gross abuse of the process of the court repeatedly and unrepentantly resorted to. From the statement of the facts found in the judgment of the High Court, it is perfectly plain that the suit now pending before the First Munsif's Court, Bangalore, is a flagrant misuse of the mercies of the law in receiving plaints. The learned Munsif must remember that if on a meaningful — not formal — reading of the plaint it is manifestly vexatious, and meritless, in the sense of not disclosing a clear right to sue, he should exercise his power under Order 7, Rule 11 CPC taking care to see that the ground mentioned therein is fulfilled. And, if clever drafting has created the illusion of a cause of action, nip it in the bud at the first hearing by examining the party searchingly under Order 10, CPC. An activist Judge is the answer to irresponsible law suits.”
7.5 A similar view has been expressed by this court in the recent decision in the case of P. Selathal & Ors. (Supra).
8. Having considered the pleadings and averments in the suit more particularly the use of word ‘fraud’ even considering the case on behalf of the plaintiff, we find that the allegations of ‘fraud’ are made without any particulars and only with a view to get out of the bar under Section 34 of the SARFAESI Act and by such a clever drafting the plaintiff intends to bring the suit maintainable despite the bar under Section 34 of the SARFAESI Act, which is not permissible at all and which cannot be approved. Even otherwise it is required to be noted that it is the case on behalf of the plaintiff – appellant herein that in view of the approved resolution plan under IBC and thereafter the original corporate debtor being discharged there shall not be any debt so far as the plaintiff – appellant herein is concerned and therefore the assignment deed can be said to be ‘fraudulent’. The aforesaid cannot be accepted. By that itself the assignment deed cannot be said to be ‘fraudulent’. In any case, whether there shall be legally enforceable debt so far as the plaintiff – appellant herein is concerned even after the approved resolution plan against the corporate debtor still there shall be the liability of the plaintiff and/or the assignee can be said to be secured creditor and/or whether any amount is due and payable by the plaintiff, are all questions which are required to be dealt with and considered by the DRT in the proceedings initiated under the SARFAESI Act. It is required to be noted that as such in the present case the assignee has already initiated the proceedings under Section 13 which can be challenged by the plaintiff – appellant herein by way of application under Section 17 of the SARFAESI Act before the DRT on whatever the legally available defences which may be available to it. We are of the firm opinion that the suit filed by the plaintiff – appellant herein was absolutely not maintainable in view of the bar contained under Section 34 of the SARFAESI Act. Therefore, as such the courts below have not committed any error in rejecting the plaint/dismissing the suit in view of the bar under Section 34 of the SARFAESI Act.
9. In view of the above and for the reasons stated above, the present appeal fails and the same deserves to be dismissed and is accordingly dismissed. However, it will be open for the appellant herein to initiate appropriate proceedings before the DRT under Section 17 of the SARFAESI Act against the initiation of the proceedings by the assignee – respondent No.1 herein under Section 13 of the SARFAESI Act inter alia on the ground:- (1) that the assignee cannot be said to be secured creditor so far as the appellant is concerned; (2) that there is no amount due and payable by the plaintiff – appellant herein on the ground that in view of the proceedings under IBC against the corporate debtor and the corporate debtor being discharged after the approved resolution plan, there shall not be any enforceable debt
against the appellant. If such an application is filed within a period of two weeks from today the same be considered in accordance with law and on merits after complying with all other requirements which may be required while filing the application under Section 17 of the SARFAESI Act. However, it is made clear that we have not expressed anything on merits in favour of either of the parties on the aforesaid two issues. Present appeal is accordingly dismissed, however, in the facts and circumstances of the case there shall be no order as to costs
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Blogger’s Comments; A guarantor is not absolved from its liabilities on conclusion of insolvency proceedings of the Principal Borrower. The same is amply clear from the observations of Hon’ble NCLAT (08.03.2021) in State Bank of India Vs Animesh Mukhopadhyay, Resolution Professional of Zenith Finesee India Pvt. Ltd. [Company Appeal (AT) (Ins.) No. 186 of 2021] as under;
If the above provisions of Section 60 (2) and (3) are kept in view, it can be said that IBC has no aversion to simultaneously proceeding against the Corporate Debtor and Corporate Guarantor. If two Applications can be filed, for the same amount against Principal Borrower and Guarantor keeping in view the above provisions, the Applications can also be maintained
We are also of the view that simultaneously remedy is central to a contract of guarantee and where Principal Borrower and surety are undergoing CIRP, the Creditor should be able to file claims in CIRP of both of them.
Under the Contract of Guarantee, it is only when the Creditor would receive amount, the question of no more due or adjustment would arise. It would be a matter of adjustment when the Creditor receives debt due from the Borrower/ Guarantor in the respective CIRP that the same should be taken note of and adjusted in the other CIRP.
Till payment is received in one CIRP, claim can be maintained in both CIRPs for same amount and representation in CoC in both CIRPs to the extent of amount due will be justified. This is the reason why Section 60 (3) provides for transfer of proceeding to Adjudicating Authority where already there is a pending proceeding.
There is no question of looking into Judgments when Section 60 of IBC is clear and makes the two CIRPs maintainable in such matters. If they are maintainable, claim in both (subject to adjustments on receipts) would also be maintainable. There is no need to be tied down with Judgments if we see Section 60 which has been reproduced (supra). That is the law.
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The Indian Contract Act, 1872.
# Section 134. Discharge of surety by release or discharge of principal debtor.—The surety is discharged by any contract between the creditor and the principal debtor, by which the principal debtor is released, or by any act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor.
Illustrations
(a) A gives a guarantee to C for goods to be supplied by C to B. C supplies goods to B, and afterwards B becomes embarrassed and contracts with his creditors (including C) to assign to them his property in consideration of their releasing him from their demands. Here B is released from his debt by the contract with C, and A is discharged from his suretyship.
(b) A contracts with B to grow a crop of indigo on A‟s land and to deliver it to B at a fixed rate, and C guarantees A‟s performance of this contract. B diverts a stream of water which is necessary for the irrigation of A‟s land and thereby prevents him from raising the indigo. C is no longer liable on his guarantee.
(c) A contracts with B for a fixed price to build a house for B within a stipulated time, B supplying the necessary timber. C guarantees A‟s performance of the contract. B omits to supply the timber. C is discharged from his suretyship.
The question here is whether the initiation of insolvency proceedings under section 10 of IBC (Initiation of insolvency proceedings by CD/ Principal Borrower itself), would absolve the guarantor/surety of its liabilities.
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