ICICI Bank Limited vs Subodh Kumar Agarwal

Suchitra Kanuparthi, Member (Judicial)

The present application is filed by the applicant i.e. ICCI Bank who is the financial Creditor of the Corporate Debtor. The Committee of Creditors

of the Corporate Debtor through voting the concluded on 25.06.2021 has approved the resolution plan dated 22.06.2021 for the Corporate Debtor

submitted by the Resolution Applicant i.e. Taguda Pte Limited.

The application is being filed under Section 60(5) of Insolvency and Bankruptcy Code read with Rule 11 of the NCLT rules, 2016 seeking

adjudication of unresolved question of law arising out of final resolution plan and consequential directions thereof.

The Resolution Plan has submitted by the Taguda was approved with 91.06% voting on 25.06.2021. The applicant with its 8.94% share in the

Committee of Creditors dissented against the approval of the final resolution plan because of the uncertainty around enforceability of excluded

securities including third party securities and guarantees obtained by the creditor for loan given to the Corporate Debtor.

The applicant pointed out that pursuant to the orders of Hon’ble NCLAT dated 08.04.2021 and 24.06.2021, the applicant has filed the present

application for adjudication on question of law in relation to enforceability of excluded security including third party securities and guarantees. Further,

they reiterated, if the Hon’ble Tribunal were to decide that the excluded securities are enforceable the application is seeking conversation of its

votes on final resolution plan from dissent to assent.

The question of law as raised by the applicant as follows:-

Whether the Excluded Securities including guarantees would subsist and could be enforced even in a situation where the underlying debt is

converted into preference shares under the Final Resolution Plan pursuant to the CIRP?

Factual Background :-

The Order of initiating CIRP against the Corporate Debtor was passed on 14.05.2018. The plan submitted by Taguda on 02.02.2019 was rejected

by 77.61% votes share of the Committee of Creditors. The Committee of Creditors then agreed to file an application for liquidation of the Corporate

Debtor. One of the main reasons of rejection of the resolution plan was that certain third party securities obtained by the creditor of the Corporate

Debtor for the debt extended to the Corporate Debtor, were being assigned to an affiliate of Taguda, thereby taking away the rights of the creditor to

enforce such security and recover their monies.

On 07.11.2019 this Tribunal rejected the application seeking liquidation of the Corporate Debtor. However, the said order was carried by way of an

appeal to the Hon’ble NCLAT by the State Bank of India. Meanwhile, Taguda file an interim application in the SBI appeal seeking an order to

direct the Committee of Creditors to consider the revised resolution plan dated 28.10.2020. The Hon’ble NCLAT allowed the appeals and

remitted the matter back to the Committee of Creditors to consider the revised resolution plan filed by the applicant and also granted six weeks’

time to complete the process.

In the 19th meeting of Committee of Creditors held on 10.06.2021, the Committee of Creditors discussed the revised plan dated 09.06.2021.

Further, the Resolution plan was put forth voting on 13.06.2021. The voting was kept open from 16.06.2021 till 8:00 PM on 22.06.2021.

The applicant is aggrieved with certain clauses in the resolution plan namely :

“(g) Security: All Encumbrances provided by the Promoters or any third party, other than the Excluded Securities, in favour of the

Financial Creditors for securing the financial debt of the Company (hereinafter referred as the Assigned Securities) shall not be extinguished or

waived under this Resolution Plan and shall be assigned to Taguda India Private Limited (which entity is the ‘Identified Affiliate’), along

with the payment of INR 50 crore constituting the Assigned Debt by Taguda India Private Limited in the manner set out in Schedule XI. The

Excluded Securities shall also not be extinguished or waived under this Resolution Plan and will continue to be available with the Financial Creditors in

accordance with their terms, which may be exercised by the Financial Creditors at their discretion for its debt. All other securities or other

Encumbrances provided by the Company including on the fixed assets of the Company shall be extinguished as on the Final Settlement Date. The

Financial Creditor reserve the right to take any action against the Promotersâ€​.

The definition reproduced above defined the rights of the parties under the such security and guarantees. However, the applicant claims that the

plan at clause 3.3 also provides that any balance financial debt forming part of admitted debt (unpaid debt) shall stand converted into non-convertible

redeemable preference share.

Further, the plan at clause 3.3 (iii) and (c) also provides the Resolution Applicant shall assigned the Financial debt of the company of amount equal

to Rs. 200 crores (residual debt) out of the admitted debt to an Indian wholly owned subsidy of Resolution Applicant for consideration of Rs. 5 crores.

Therefore, the applicant claims that the debt of Rs. 200 crores are being assigned for a payment of Rs. 5 crores and the rest of the debt would be

no longer available with the Financial Creditor as it would be assigned to SPV.

In the 20th meeting of CoC, it was clarified that the dissenting FC will not be getting new preference share but only liquidation value. The Member

of CoC have discussed and debated on the issue of enforceability of excluded security included inter-alia personal guarantees provided by the

promoters of the Corporate Debtor to the Financial Creditor. The applicant relied upon the Judgement of Hon’ble Supreme Court in the case of

Lalit Kumar Jain Vs Union of India reported in 2021 SSC Online SC 396 w, herein it was held that approval of Resolution Plan ipso facto

discharges the personal guarantor of the Corporate Debtor of her/his liability under the contract of the guarantees.

The applicant filed IA no. 1000/2021 before the Hon’ble NCLAT and sought clarification on the question of law as follows: -

(i) Whether the guarantee would subsist and could be enforced even in a situation where debt is converted into preference shares under a resolution plan pursuant

to Corporate Insolvency Resolution Process (CIRP)?

(ii) Whether the guarantee would subsist and could be enforced even in a situation where debt is assigned to a third party under a resolution plan pursuant to CIRP?

However, on 24.06.2021 when the IA was listed for hearing before the Hon’ble NCLAT the applicant informed that the clause 3.3 (iii) and

(c) have been deleted. After hearing the parties, the Hon’ble NCLAT dismissed the application, with the direction that the contention of ICCI

Bank were left opened for consideration, after Committee of Creditors considered the revised resolution plan and takes a decision. On 26.06.2021 the

application filed Civil appeal before the Hon’ble Supreme Court challenging the order of the Hon’ble NCLAT, however, the Hon’ble

Supreme Court on 06.07.2021 dismissed the appeal on the ground that there is no reason to interfere with the Order of the Hon’ble NCLAT.

Reply of the Respondent/RP

The Respondent claim that the present Petition is not maintainable as the issue has been raised by the applicant before the Hon’ble NCLAT

and Hon’ble Supreme Court. Hence, the Petition may be dismissed.

The Committee of Creditors has sought legal opinion and the Resolution Professional ensured that the Resolution Applicant and the legal counsel

of the Committee of Creditors were present in the Committee of Creditors meeting to respond to the queries raised by the member of Committee of

Creditors. The discussion as captured in the 21st meeting is reproduced below:-

“ICICI Bank raised the issue that enforcing the personal guarantee and also excluded securities is the right of the lenders. Also requested SAM to

give views on impact of the issue of preference shares and SPV structure was provided under Clause 3.3 (III) (h) in the resolution plan and now the

revised resolution plan provides the writing off of Rs. 200 crores debt by Corporate Debtor. ICIC Bank enquired how it would impact the right of

lenders in enforcing the guarantee and excluded securites.

SAM representative again reiterated that there is Hon’ble Supreme Court Judgement in the Lalit Kumar Jain matter on the related point. The

representative of SAM mentioned that, as per the above-mentioned judgement. The Supreme Court has clarified in this case that the debt of the

borrower is separate from the debt of the guarantor. The release or discharge of the corporate debtor in respect of the debt owned by it to the FCs an

outcome of the insolvency resolution process under IBC, would not absolve the personal guarantors of his or her liability which arises out of an

independent contract. The purpose of IBC is to provide for the settlement of the debt of the corporate debtor. As for the corporate debtor, the

resolution plan provides for complete discharge and settlement of the debt of the debt of the corporate debtor. Once the resolution plan is approved by

CoC and adjudicating authority, there is a settlement of debt of Corporate Debtor and not of the third party guarantors or third party security provides

etc. Treatment of the debt due from the guarantors is a separate matter and is not to be decided in this resolution plan. It is the reason that the

assignment of debt has been ensured. The same has been clarified in the email from SM to lenders as well. The resolution plan does not mention that

action for enforcement of guarantees or Excluded Securities cannot take against the guarantors or that securities cannot be enforced or that debt is

extinguished against third party i.e. Guarantor or excluded securities. IDBI enquired whether the revised plan dated 22nd June which proposed the

extinguishment of Rs. 200 crores is better plan then the earlier plan. Where SAM team responded that the resolution plan is for settlement of Debt of

Corporate Debtor. They have ensured that the plan is compliance in respect of IBC and the regulations vis-Ã -vis settlement of debt of Corporate

Debtor. SAM team responded that borrower debt is different from guarantor’s debt and accordingly languages has been provided in the resolution

plan to ensure that it is compliant with IBC and regulations made thereunder and also now in form of residual debt the enforcement of guarantees and

excluded security is ensured. Moreover, the same is not specifically barred as per the terms of the resolution plan and it is an open position of law yet

to be settled/clarified by the courts.

To conclude, the representative from SBI added that as bankers in the process, we know how much we recover out of our respective

admitted debt and whatever remains in our haircut/sacrifice amount. Therefore, we can proceed to enforce the excluded securities

against the sacrifice amount i.e. what we do not recover from the insolvency process. There should not be any confusion regarding this

from commercial perspective.â€​

The Respondent further contended that the Resolution plan has been approved by approximately 91.00% of Members of Committee of Creditors,

the applicant has used its commercial wisdom and exercise its dissenting vote and if the present application is permitted it will open doors of

Committee of Creditors Members to seek change of its vote on the resolution plan either in accounts of change of mind or based on different

interpretation of clauses of the resolution plan and further delay the CIRP of the Corporate Debtor. The Respondent/RP mentioned that his role is

purely administrative in nature and he has acted at all times in complete adherence to the Code.

Rejoinder by the applicant:-

The applicant claimed that the application is maintainable pursuant to specific liberty granted by an Order of the Hon’ble NCLAT dated

08.04.2021 and 24.06.2021. This application is essentially seeking adjudication of unresolved question of law arising out of the resolution plan and

consequential directions thereof.

The Resolution plan as approved by the Committee of Creditors is pending approval under Section 31 of the Code. The applicant is only raising

serious unresolved question of law with regard to enforceability of excluded securities. The applicant further mentions that its support the successful

resolution of the Corporate Debtor but was unable to support the Resolution plan submitted by Taguda Pte Limited due to ambiguity on question of

law. Hence, the application is maintainable and is well within jurisdiction of this Tribunal to decide the relief sought therein.

Findings:-

The legal question of law which arises for consideration is whether the post approval of the resolution plan, the Financial Creditor of Corporate

Debtor would continue to re-course to enforce the excluded securities.

The factual matrix reveals that the Order of the admission of CIRP of the Corporate Debtor was passed on 14.05.2018. On 02.02.2019, the

resolution plan submitted by Taguda Pte limited was rejected by 77.61% voting and the Committee of Creditors had resolved to liquidate the Corporate

Debtor. The reasons for rejection being that certain third-party security obtained by the Creditor of the Corporate Debtor were being assigned to an

affiliate of Taguda, thereby taking away the rights of the Creditor to enforce the securities and recover their monies.

However, this Tribunal on 07.11.2019 dismissed the application seeking liquidation of the Corporate Debtor and approved the resolution plan

submitted by the Taguda. State Bank of India filed an appeal before the Hon’ble NCLAT. During the pendency of the appeal Taguda submitted

revised resolution plan dated 28.10.2020, wherein it had, inter alia increased the upfront payment from Rs. 200 crores to Rs. 227 crores. The

Hon’ble NCLAT set aside the order of the NCLT and directed the Committee of Creditors to consider the revised resolution plan of Taguda.

The said plan was submitted to the Committee of Creditors on 09.06.2021 and 13.06.2021. The resolution plan provided that the residual

debt/unpaid debt could be converted into preference share, hence the applicant file an application to seek clarification before the Hon’ble

NCLAT. During the pendency of the matter before the Hon’ble NCLAT Taguda submitted another revised resolution plan on 22.06.2021,

wherein the Taguda deleted clause 3.3 (iii) (c) regarding assignment of debt, however, Clause 3.3 (iii) (g) regarding conversation of unpaid debt was

retained. On 24.06.2021, the Hon’ble NCLAT dismissed the IA filed by the applicant. The Order of Hon’ble NCLAT at para 3 categorically

held that “what is being sought from this Tribunal is prejudging an issue which has not arisen on the judicial side and upon approval of plan by the

CoC, the matter would than go before the adjudicating authority at that stage, the adjudicating authority will look into legality or otherwise provision of

the resolution plan. Para 13 of the Order is reproduced below:-

“ We have gone through the Application and heard Learned Counsel for the parties. It appears to us that what is being sought from this Tribunal is pre-judging

an issue which has yet not arisen on the judicial side. We are not required to give findings in the name of clarification for hypothetical question. The Resolution Plan

is before the Committee of Creditors and it is for the CoC to take a decision in its wisdom on the given Resolution Plan if it complies with the requirements under

provisions of IBC. If the request of the Applicant is accepted, it would set a wrong precedent where parties would start litigating on the contents of the Resolution

Plan before the Adjudicating Authority and this Tribunal even before the Resolution Plan is considered and accepted/rejected by the CoC. It is not for this Tribunal

to pre-judge issues. After the CoC takes the commercial decision in its wisdom, the matter will then go before the Adjudicating Authority and at that stage the

Adjudicating Authority will look into the legality or otherwise (in terms of the provisions of the IBC) of the Resolution Plan. Hence, dismissed the application.

It is important to refer to the salient features of the resolution plan per se to decide whether the resolution plan takes away the rights of

enforcement of excluded securities and whether any recourse is available to the Financial Creditor to enforce the guarantees. The resolution plan

proposes that on the final settlement debt, the residual debt of Rs. 200 crores out of the admitted debt shall be written off and permanently extinguish

in the book of accounts of the company against the payment of nil consideration. Clause 3.3 (iii) (c) The Resolution Applicant proposes that the Final

Settlement Date, the Financial Debt of the Company of amount equal to INR 200 Crore (Residual Debt) out of the Admitted Debt shall be written off

and permanently extinguished in the books of the Company against payment of ‘Nilâ€​ consideration.

Further at clause 3.3 (iii) (h) it is proposed that any balance financial debt forming part of admitted debt (unpaid debt) shall be converted into non-

convertible redeemable preference share (new preference share). Clause (H) is reproduced below:-

“In order to implement the proposal, set out in this Clause 3.3(iii) €, the Resolution Applicant proposes that any balance Financial Debt forming part of the

Admitted Debt (Unpaid Debt), i.e. the Admitted Debt as reduced by the amounts mentioned in sub Clauses (a), (b), (c) and (d) above, shall stand converted into Non-

Convertible Redeemable Preference Shares (New Preference Shares) of the Company being zero divided and non-cumulative in nature at their face value. The Unpaid

Debt shall be converted into the New Preference Shares as per the detailed terms set out in Schedule V simultaneously with the payment of the final tranche of INR 27

crore (which shall be payable by the Resolution Applicant on or before the 120th day from the Closing Date). Subject to the Applicable Laws, the memorandum of

association and the articles of association of the Company, the New Preference Shares, which shall be issued to the Financial Creditors upon conversion of the

Unpaid Debt, shall not have rights to receive any dividends and/or voting rights of any nature whatsoever. The New Preference Shares shall not have any rights

appoint director on the board of the Corporate Debtor. The detailed terms of such New Preference Shares are set out in Schedule XII. Further, the rights and

obligations of the New Preference Shares shall be governed by the memorandum of association and the articles of association of the Company as well as the

agreements, if any, as may be entered into by the Resolution Applicant and the Financial Creditors. Upon approval of the Resolution Plan by the Adjudicating

Authority, the provisions of Section 43 and 47 of the Act (including the rules made thereunder) and other Applicable Laws, if any, shall not be applicable to the terms

of New Preference Shares set out in Schedule XIIâ€​.

Further, clause (g) defined the security which included excluded securities, however, it is provided that the excluded securities shall not be

extinguished or waived under the resolution plan will continue to available with the Financial Creditor in accordance with their terms which may be

exercise by the Financial Creditor at their discretion for its debts. Clause (g) is reproduced below:-

“Security: All Encumbrances provided by the Promoters or any third party, other than the Excluded Securities, in favour of the Financial Creditors for securing the

financial debt of the Company (hereinafter referred as the Assigned Securities), which are valued by Resolution Applicant and included as part of Resolution Plan

amount, shall not be extinguished or waived under this Resolution Plan and shall be assigned to Taguda India Private Limited (Which entity is the ‘Identified

Affiliate’), along with the payment of INR 50 crore constituting the Assigned Debt by Taguda India Private Limited in the manner set out in Schedule XI. The

Excluded Securities shall also not be extinguished or waived under this Resolution Plan and will continue be available with the Financial Creditors in accordance with

their terms, which may be exercised by the Financial Creditors at their discretion for its debt. All other securities or other Encumbrances provided by the Company

including on the fixed assets of the Company shall be extinguished as on the Final Settlement Date. The Financial Creditors reserve the right to take any action

against the Promoters.â€​

The Resolution Plan also defines the terms excluded securities which are as follow:-

“Excluded Securities shall mean the Promoter Guarantee, corporate guarantee dated 10 August 2016 given by Ushdev Engitech Limited to ICICI Bank, and the

Encumbrances created on the following immovable properties by the Promoters or third parties in favour of the Financial Creditors: (i) Basement No. 8., (ii) Unit 1, 2 &

2nd floor, Old Harileela House, Mumbai; (iii) Villa no. 92 &94 at Lavasa; and (iv) Shop no. 8, 9, 10 Tiara Complex, Thane (exclusively charged to Bank of

Maharashtra)â€​.

Heard the counsel for the applicant and the counsel for the Respondent/RP and perused the documents. This Bench is of the prima facie view that

though the excluded securities as defined under the resolution plan means the promoter guarantee, Corporate guarantee issued by the Ushdev

International Limited , the encumbrance created on the following immovable by the promoter of third parties, but however, these expressly declared

excluded security are subsumed under clause 3.3 (iii) (c) and (h) wherein the plan proposal any balance financial debt forming part of admitted debt

(unpaid debt) shall be converted into non-convertible redeemable preference share of the company being zero dividend and non-cumulative in nature

at their face value. Further, the unpaid debt shall be converted into new preference share as detailed in schedule V. When the unpaid debt is

converted into preference share there is no question of any outstanding liability which is available for enforcement qua the excluded the securities as

provided to the Financial Creditor. It is seen that 91.06% of the CoC have taken a commercial decision to approve the said resolution plan, hence the

approval of the resolution plan ipso facto discharge the enforcement of excluded securities. When there is no debt which is realisable there is no

question of any enforcement thereof. The applicant being dissenting Financial Creditor has opted to choose out of the plan but will be entitled to the

rights available to the dissenting Financial Creditor as per Section 53 of the Code.

This Bench therefore, concludes that the excluded securities are subsumed in the definition of unpaid debt and nothing remain to be realisable

when the debt is extinguished and converted in to preference share as provided under the plan. The discussion of the CoC Members captured in the

minutes of the meeting no way helps the applicant to enforce the excluded securities. In fact, there is novation of contract by approval of resolution

plan by the CoC and all the CoC Members have acquiesced their rights to enforce such excluded securities and the applicant bank being part of the

CoC, though being dissenting creditors is bound by the decision of the majority of CoC members. In view of the aforesaid, the application is dismissed.

With the above observation, the present IA 1799 of 2021 in CP(IB) 1790 of 2017 is dismissed.