Continuing Guarantee & Co-extensive Liability

The question here is whether the guarantor is liable for the actions of the principal borrower after the invocation of the continuing guarantee. On invocation of guarantee, the contract of guarantee attains the finality and the liabilities and obligations of the guarantor stands defined & fixed, as on the date of invocation of the continuing guarantee & the aspect of limitation to sue the principal borrower and / or the guarantor gets delinked & thus have to be viewed separately.

Supreme Court of India (10.04.2006) in Syndicate Bank vs Channaveerappa Beleri & Ors. [Appeal (civil) 6894 of 1997]

# 9. A guarantor's liability depends upon the terms of his contract. A 'continuing guarantee' is different from an ordinary guarantee. There is also a difference between a guarantee which stipulates that the guarantor is liable to pay only on a demand by the creditor, and a guarantee which does not contain such a condition. Further, depending on the terms of guarantee, the liability of a guarantor may be limited to a particular sum, instead of the liability being to the same extent as that of the principal debtor. The liability to pay may arise, on the principal debtor and guarantor, at the same time or at different points of time. A claim may be even time-barred against the principal debtor, but still enforceable against the guarantor. The parties may agree that the liability of a guarantor shall arise at a later point of time than that of the principal debtor. We have referred to these aspects only to underline the fact that the extent of liability under a guarantee as also the question as to when the liability of a guarantor will arise, would depend purely on the terms of the contract.

 

# 11. But in the case on hand, the guarantee deeds specifically state that the guarantors agree to pay and satisfy the bank on demand and interest will be payable by the guarantors only from the date of demand. In a case where the guarantee is payable on demand, as held in the case of Bradford (supra) and Hartland (supra), the limitation begins to run when the demand is made and the guarantor commits breach by not complying with the demand.

 

# 13. What then is the meaning of the said words used in the guarantee bonds in question? The guarantee bond states that the guarantors agree to pay and satisfy the Bank 'on demand'. It specifically provides that the liability to pay interest would arise upon the guarantor only from the date of demand by the Bank for payment. It also provides that the guarantee shall be a continuing guarantee for payment of the ultimate balance to become due to the Bank by the borrower. The terms of guarantee, thus, make it clear that the liability to pay would arise on the guarantors only when a demand is made. Article 55 provides that the time will begin to run when the contract is 'broken'. Even if Article 113 is to be applied, the time begins to run only when the right to sue accrues. In this case, the contract was broken and the right to sue accrued only when a demand for payment was made by the Bank and it was refused by the guarantors. When a demand is made requiring payment within a stipulated period, say 15 days, the breach occurs or right to sue accrues, if payment is not made or is refused within 15 days. If while making the demand for payment, no period is stipulated within which the payment should be made, the breach occurs or right to sue accrues, when the demand is served on the guarantor.

 

# 14. We have to, however, enter a caveat here. When the demand is made by the creditor on the guarantor, under a guarantee which requires a demand, as a condition precedent for the liability of the guarantor, such demand should be for payment of a sum which is legally due and recoverable from the principal debtor. If the debt had already become time-barred against the principal debtor, the question of creditor demanding payment thereafter, for the first time, against the guarantor would not arise. When the demand is made against the guarantor, if the claim is a live claim (that is, a claim which is not barred) against the principal debtor, limitation in respect of the guarantor will run from the date of such demand and refusal/non compliance. Where guarantor becomes liable in pursuance of a demand validly made in time, the creditor can sue the guarantor within three years, even if the claim against the principal debtor gets subsequently time-barred. To clarify the above, the following illustration may be useful :

• Let us say that a creditor makes some advances to a borrower between 10.4.1991 and 1.6.1991 and the repayment thereof is guaranteed by the guarantor undertaking to pay on demand by the creditor, under a continuing guarantee dated 1.4.1991. Let us further say a demand is made by the creditor against the guarantor for payment on 1.3.1993. Though the limitation against the principal debtor may expire on 1.6.1994, as the demand was made on 1.3.1993 when the claim was 'live' against the principal debtor, the limitation as against the guarantor would be 3 years from 1.3.1993. On the other hand, if the creditor does not make a demand at all against the guarantor till 1.6.1994 when the claims against the principal debtor get time-barred, any demand against the guarantor made thereafter say on 15.9.1994 would not be valid or enforceable.

• Be that as it may.

 

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Appointment of Liquidator other than IRP/RP

 

Appointment of Liquidator other than IRP/RP

Query; Whether the directions/guidelines issued by the Board vide letter no. Liq-12011/214/2023-IBBI/840 dated 18.07.2023 addressed to The Secretary, National Company Law Tribunal, Principal Bench, New Delhi, are consistent with the provisions of the Code.

Let's examine the provisions of the Code, Regulations & recommendations of BLRC.

A. Insolvency and Bankruptcy Code, 2016.

# 34. Appointment of liquidator and fee to be paid. -

(1) Where the Adjudicating Authority passes an order for liquidation of the corporate debtor under section 33, the resolution professional appointed for the corporate insolvency resolution process under 3[Chapter II shall, subject to submission of a written consent by the

resolution professional to the Adjudicatory Authority in specified form,] shall act as the liquidator for the purposes of liquidation unless replaced by the Adjudicating Authority under sub- section (4).

(2) On the appointment of a liquidator under this section, all powers of the board of directors, key managerial personnel and the partners of the corporate debtor, as the case may be, shall cease to have effect and shall be vested in the liquidator.

(3) The personnel of the corporate debtor shall extend all assistance and cooperation to the liquidator as may be required by him in managing the affairs of the corporate debtor and provisions of section 19 shall apply in relation to voluntary liquidation process as they apply in relation to liquidation process with the substitution of references to the liquidator for references to the interim resolution professional. (4) The Adjudicating Authority shall by order replace the resolution professional, if–

- (a) the resolution plan submitted by the resolution professional under section 30 was rejected for failure to meet the requirements mentioned in sub-section (2) of section 30; or - (b) the Board recommends the replacement of a resolution professional to the Adjudicating Authority for reasons to be recorded in writing; or

- (c) the resolution professional fails to submit written consent under sub-section (1).

(5) For the purposes of 3[clause (a) and clause (c)] of sub-section (4), the Adjudicating Authority may direct the Board to propose name of another insolvency professional to be appointed as a liquidator.

(6) The Board shall propose the name of another insolvency professional 4[along with written consent from the insolvency professional in the specified form] within ten days of the direction issued by the Adjudicating Authority under sub-section (5).

(7) The Adjudicating Authority shall, on receipt of the proposal of the Board for the appointment of an insolvency professional as liquidator, by an order appoint such insolvency professional as the liquidator.

(8) An insolvency professional proposed to be appointed as a liquidator shall charge such fee for the conduct of the liquidation proceedings and in such proportion to the value of the liquidation estate assets, as may be specified by the Board.

(9) The fees for the conduct of the liquidation proceedings under sub-section (8) shall be paid to the liquidator from the proceeds of the liquidation estate under section 53. Page No. 

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B. Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016.

# 3. Eligibility for appointment as liquidator.

(1) An insolvency professional shall be eligible to be appointed as a liquidator if he, and every partner or director of the insolvency professional entity of which he is a partner or director, is independent of the corporate debtor.

Explanation– A person shall be considered independent of the corporate debtor, if he-

(a) is eligible to be appointed as an independent director on the board of the corporate debtor under section 149 of the Companies Act, 2013 (18 of 2013), where the corporate debtor is a company;

(b) is not a related party of the corporate debtor; or

(c) has not been an employee or proprietor or a partner:

- (i) of a firm of auditors or secretarial auditors or cost auditors of the corporate debtor; or

- (ii) of a legal or a consulting firm, that has or had any transaction with the corporate debtor contributing ten per cent or more of the gross turnover of such firm, in the last three financial years. (2) A liquidator shall disclose the existence of any pecuniary or personal relationship with the concerned corporate debtor or any of its stakeholders as soon as he becomes aware of it, to the Board and the Adjudicating Authority.

(3) An insolvency professional shall not continue as a liquidator if the insolvency professional entity of which he is a director or partner, or any other partner or director of such insolvency professional entity represents any other stakeholder in the same liquidation process.

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C. BLRC Recommendations;

5.5.3 Steps at the start of the Liquidation

A liquidation order is accompanied by a set of other orders issued by the Adjudicator to:

XXXX

b. Appoint a Liquidator

The RP from the IRP may continue as the liquidator as long as the Regulator raises no objection to her continuing in this role.

If there is a complaint against the RP at any stage during the IRP or after the liquidation order is passed, the Adjudicator must apply to the Regulator for an alternative RP as a replacement.

The roles of the liquidator is described in detail in Section 5.5.9.

Box 5.17: Drafting instructions for the appointment of a Liquidator

1. The liquidator can be selected through any of the following ways:

a. The RP of the IRP can continue as the liquidator.

b. The Regulator can recommend, with reason, a new liquidator to replace the RP to the Adjudicator.

c. The Adjudicator can apply to the Regulator for a replacement liquidator.

2. The Adjudicator will either issue an order for the RP to continue as a liquidator, or the Adjudicator will issue an order to appoint the liquidator recommended by the Regulator.

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D. High Court Karnataka orders dated 09.01.2024

Heard the learned counsel for the petitioner and the learned Additional Solicitor General of India, Sri.Aravind Kamath representing the Insolvency and Bankruptcy Board of India (‘the Board’ for short).

The petitioner calls in question a Circular dated 18.07.2023 issued by the Board, which directs that the Resolution Professional should not continue as a Resolution Professional in the event the Company is said to be put in to Liquidation or act as a Liquidator for the process of liquidation of the said particular Company.

This the learned counsel for the petitioner submits is a sweeping direction, which disturbs the petitioner to act as Liquidator on the strength of him being appointed as a Resolution Professional and therefore submits that his rights are taken away of acting as a Liquidator. He would further contend that such sweeping directions cannot be given by the Board, invoking its power under Section 34(4)(b) of the IBC.

The matter would require consideration.

Learned ASGI seeks two weeks time to justify the issuance of the general directions by the Board.Till such time, the petitioner insofar as he is appointed as Resolution Professional/Liquidator in the subject liquidation shall not be precipitated.

Registry to print the name of the learned counsel Smt.Anupama Hegde as appearing for respondent/Board.

Observations; Hon’ble High Court has not stayed the operation of the directions as per letter 18.07.2023. It has stayed the operation of the directions insofar the petitioner is concerned.

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E. IBBI Letter No. Liq-12011/214/2023-IBBI/840 dated 18.07.2023 addressed to The Secretary, National Company Law Tribunal, Principal Bench, New Delhi.

Para # 3. In view of above justification, the Board in exercise of its powers conferred under section 34(4)(b), recommends that an IP other than the RP/IRP may be appointed as liquidator in all the cases where liquidator order is to be passed henceforth. The liquidator can be appointed from the panel list of IBBI.

Observations; Board does not have any powers to issue any directions to the Adjudicating Authority.

- # 196. Powers and functions of Board. -

- (1) The Board shall, subject to the general direction of the Central Government, perform all or any of the following functions namely: -

- XXXX

- (p) issue necessary guidelines to the insolvency professional agencies, insolvency professionals and information utilities;

In my view, NCLT should not have entertained any such directions/guidelines issued by the Board 

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F. Analysis;

a. Provisions of the Code read with the recommendations of BLRC provide that normally IRP/RP will continue/appointed as Liquidator unless the Board (Regulator) has some reasons, obviously based on some perverse findings against specific IRP/RP.

b. Thus the generalized sweeping recommendations of the Board as per letter dated 18.07.2023 are against the provisions of the Code and definitely beyond the powers for issuing directions/guidelines to Adjudicating Authority under Section 196 of the Code.

Disclaimer: The sole purpose of this blog is to create awareness on the subject and must not be used as a guide for taking or recommending any action or decision, commercial or otherwise. One must do his own research and seek professional advice if he intends to take any action or decision in the matters covered in this blog.

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Regulations for Liquidator’s Fees, i.e. Regulation 39D of CIRP Regulations & Regulation 4(1) & 4(1A) of Liquidation Regulations are ultra-vires, being inconsistent with the Provisions of the Code (IBC, 2016).

Regulations for Liquidator’s Fees, i.e.  Regulation 39D of CIRP Regulations  &  Regulation 4(1) & 4(1A) of Liquidation Regulations are ultra-vires, being inconsistent with the Provisions of the Code (IBC, 2016). 

Insolvency and Bankruptcy Code, 2016.

# 34. Appointment of liquidator and fee to be paid. -

XXXXX

(8) An insolvency professional proposed to be appointed as a liquidator shall charge such fee for the conduct of the liquidation proceedings and in such proportion to the value of the liquidation estate assets, as may be specified by the Board.

(9) The fees for the conduct of the liquidation proceedings under sub-section (8) shall be paid to the liquidator from the proceeds of the liquidation estate under section 53.

# 53. Distribution of assets. -

(1) Notwithstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force, the proceeds from the sale of the liquidation assets shall be distributed in the following order of priority and within such period as may be specified, namely: -

• (a) the insolvency resolution process costs and the liquidation costs paid in full; XXXXX

(3) The fees payable to the liquidator shall be deducted proportionately from the proceeds payable to each class of recipients under sub-section (1), and the proceeds to the relevant recipient shall be distributed after such deduction.

# 196. Powers and functions of Board. -

(1) The Board shall, subject to the general direction of the Central Government, perform all or any of the following functions namely: -

XXXXX

(t) make regulations and guidelines on matters relating to insolvency and bankruptcy as may be required under this Code, including mechanism for time bound disposal of the assets of the corporate debtor or debtor; and

(u) perform such other functions as may be prescribed.

XXXX

# 240. Power to make regulations. –

(1) The Board may, by notification, make regulations consistent with this Code and the rules made thereunder, to carry out the provisions of this Code.

(2) In particular, and without prejudice to the generality of the foregoing power, such regulations may provide for all or any of the following matters, namely: —

XXXXX

(x) the fee for the conduct of the liquidation proceedings and proportion to the value of the liquidation estate assets under sub-section (8) of section 34;

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Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

# 39D. Fee of the liquidator

While approving a resolution plan under section 30 or deciding to liquidate the corporate debtor under section 33, the committee may, in consultation with the resolution professional, fix the fee payable to the liquidator, if an order for liquidation is passed under section 33, for

1. the period, if any, used for compromise or arrangement under section 230 of the Companies Act, 2013;

2. the period, if any, used for sale under clauses (e) and (f) of regulation 32 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016; and

      (c)  the balance period of liquidation.]

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Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016. 

# 4. Liquidator’s fee.

(1) The fee payable to the liquidator shall be in accordance with the decision taken by the committee of creditors under regulation 39D of the Insolvency and Bankruptcy Board of India Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

(1A) Where no fee has been fixed under sub-regulation (1), the consultation committee may fix the fee of the liquidator in its first meeting.

(2) In cases other than those covered under sub-regulation (1) 14[and (1A)], the liquidator shall be entitled to a fee-

(a) at the same rate as the resolution professional was entitled to during the corporate insolvency resolution process, for the period of compromise or arrangement under section 230 of the Companies Act, 2013 (18 of 2013); and

(b) as a percentage of the amount realised net of other liquidation costs, and of the amount distributed, for the balance period of liquidation, as under:

 

Amount of Realisation / Distribution (In rupees)	Percentage of fee on the amount realised / distributed
	in the first six months	in the next six months	thereafter
Amount of Realisation (exclusive of liquidation costs)
On the first 1 crore	5.00	3.75	1.88
On the next 9 crore	3.75	2.80	1.41
On the next 40 crore	2.50	1.88	0.94
On the next 50 crore	1.25	0.94	0.51
On further sums realized	0.25	0.19	0.10
Amount Distributed to Stakeholders
On the first 1 crore	2.50	1.88	0.94
On the next 9 crore	1.88	1.40	0.71
On the next 40 crore	1.25	0.94	0.47
On the next 50 crore	0.63	0.48	0.25
On further sums distributed	0.13	0.10	0.05

Clarification: For the purposes of clause (b), it is hereby clarified that where a liquidator realises any amount, but does not distribute the same, he shall be entitled to a fee corresponding to the amount realised by him. Where a liquidator distributes any amount, which is not realised by him, he shall be entitled to a fee corresponding to the amount distributed by him.]

(3) Where the fee is payable under clause (b) of sub-regulation (2), the liquidator shall be entitled to receive half of the fee payable on realisation only after such realised amount is distributed.

Clarification: Regulation 4 of these regulations, as it stood before the commencement of the Insolvency and Bankruptcy Board of India (Liquidation Process) (Amendment) Regulations, 2019 shall continue to be applicable in relation to the liquidation processes already commenced before the coming into force of the said amendment Regulations.

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Analysis;

A. From the provisions of the Code following emerges;

1. Liquidators can charge fees in such proportion to the value of the liquidation estate assets, as may be specified by the Board.[section 34(8)]

2. Section 240(1) provides authority to the Board (IBBI) to make regulations consistent with this Code and the rules made thereunder, to carry out the provisions of this Code.

3. Section 240(2)(x) provides authority to the Board (IBBI) to specify the fee for the conduct of the liquidation proceedings and proportion to the value of the liquidation estate assets under sub-section (8) of section 34;

4. Provisions of the Code do not authorize the Board to delegate its (Board) authority to specify/fix the fees of the liquidator to either Committee of Creditors (CoC)  or Stakeholders Consultation Committee (SCC).

5. The fees for the conduct of the liquidation proceedings under section 34(8) shall be paid to the liquidator from the proceeds of the liquidation estate under section 53. [section 34(9)]

6. Liquidator’s fees shall be paid by way of deduction proportionately from the proceeds payable to each class of recipients under section 53 (1), and the proceeds to the relevant recipient shall be distributed after such deduction. [section 53(3)].

7. Status of Liquidator's fees remains as “Payable” till such time proceeds of the liquidation estate are distributed to the stakeholders under section 53(1).

8. In no case Liquidator’s fees can be paid on a monthly basis or can be funded by SCC members.

B. Under Regulation 39D of CIRP Regulations, Board has delegated  the authority to fix the fees of the liquidator, to CoC, whereas provisions of the Code do not permit the Board to delegate the authority to specify/fix the fees of the liquidator. As such the said regulation is inconsistent to the provisions of the Code, hence are ultra-vires

C. Under Regulation 4(1) & 4(1A) of Liquidation Regulations, Board has delegated  the authority to fix the fees of the liquidator, to SCC, whereas provisions of the Code do not permit the Board to delegate the authority to specify/fix the fees of the liquidator. As such the said regulations is inconsistent to the provisions of the Code, hence are ultra-vires

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Case Law;

i). Hon’ble Supreme Court of India (2006.03.24) in Kerala Samsthana Chethu Thozhilali Union v. State of Kerala [(2006) 4 SCC 327] held that: 

• "17. A rule is not only required to be made in conformity with the provisions of the Act where under it is made, but the same must be in conformity with the provisions of any other Act, as a subordinate legislation cannot be violative of any plenary legislation made by the Parliament or the State Legislature. 

• 37. Furthermore, the terms and conditions which can be imposed by the State for the purpose of parting with its right of exclusive privilege more or less has been exhaustively dealt with in the illustrations in sub-section (2) of Section 29 of the Act. There cannot be any doubt whatsoever that the general power to make rules is contained in sub-section (1) of Section 29. The provisions contained in sub-section (2) are illustrative in nature. But, the factors enumerated in sub-section (2) of Section 29 are indicative of the heads under which the statutory framework should ordinarily be worked out. 

• 43. The submission of Mr. Iyer that there exists a distinction between carrying out the provisions of the Act and the purpose of the Act, is not relevant for our purpose. The power of delegated legislation cannot be exercised for the purpose of framing a new policy. The power can be exercised only to give effect to the provisions of the Act and not dehors the same. While considering the carrying out of the provisions of the Act, the court must see to it that the rule framed therefore is in conformity with the provisions thereof. 

• 46. In Hotel Balaji and Others v. State of A.P. and Others (1993 Supp (4) SCC 536), whereupon Mr. Iyer placed reliance, it is stated: "The necessity and significance of the delegated legislation is well accepted and needs no elaboration at our hands. Even so, it is well to remind ourselves that rules represent subordinate legislation. They cannot travel beyond the purview of the Act. Where the Act says that rules on being made shall be deemed "as if enacted in this Act", the position may be different. (It is not necessary to express any definite opinion on this aspect for the purpose of this case.) But where the Act does not say so, the rules do not become part of the Act."

ii). Hon’ble Supreme Court of India  (2006.03.24) in State of Tamil Nadu & Anr vs P. Krishnamurthy & Ors. [(2006) SCC 517], ruled that any subordinate legislation or part thereof, which does not conform to the object, scheme and provisions of the parent Act under which it is made, is invalid.

• # 12. There is a presumption in favour of constitutionality or validity of a sub-ordinate Legislation and the burden is upon him who attacks it to show that it is invalid. It is also well recognized that a sub-ordinate legislation can be challenged under any of the following grounds :-

• a) Lack of legislative competence to make the sub-ordinate legislation.

• b) Violation of Fundamental Rights guaranteed under the Constitution of India.

• c) Violation of any provision of the Constitution of India.

• d) Failure to conform to the Statute under which it is made or exceeding the limits of authority conferred by the enabling Act.

• e) Repugnancy to the laws of the land, that is, any enactment .

• f) Manifest arbitrariness/unreasonableness (to an extent where court might well say that Legislature never intended to give authority to make such Rules).

 

The same ratio is held in;

• I.T.C Bhadrachalam Paper Boards and another vs Mandal Revenue Officer, AP and others (1996) 6 SCC 634, 

• Gupta Modern Breweries vs State of J&K and Others (2007) 6 SCC 317, and 

• Cellular Operators Association of India and others vs Telecom Regulatory Authority of India and Others (2016) 7 SCC 703. 

• 
  

Disclaimer: The sole purpose of this blog is to create awareness on the subject and must not be used as a guide for taking or recommending any action or decision, commercial or otherwise. One must do his own research and seek professional advice if he intends to take any action or decision in the matters covered in this blog.

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