Treatment of Guarantor’s property during Insolvency & Liquidation of CD.
Lately the Adjudicating Authorities (NCLT) are permitting Resolution Professional / Liquidator to deal with the properties of guarantors, mortgaged with the FC, by either including the same in the Resolution Plan or permitting the Liquidator to auction the same alongwith the properties of the CD.
2. Case Law (Insolvency Resolution Process)
NCLAT (04.03.2021) in Vanguard Credit & Holdings Pvt. Ltd. Vs. Kshitiz Chhawchharia (RP) of Ramsarup Industries Ltd. & Anr. [Company Appeal (AT) (Ins.) No. 1125 of 2019 ] held that;
# 158. By implication of Section 13(4) of The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, a secured creditor can take possession of the secured assets, including the right to transfer by way of lease, assignment or sale for realising the secured asset. Accordingly, the mortgagees will have the right to enforce the mortgage over the land. The Resolution Plan provides the mechanism for the transfer of the land, which is as follows; ARCIL and Axis Bank would assign a portion of the debt to Narantak Dealcom limited (a nominee of the Resolution Applicant). Pursuant to such assignment, Vanguard will be required to take all actions is required to transfer the land to the Resolution Applicant. This obligation to transfer the land will be pursuant to discharging of Vanguard's Corporate Guarantee and mortgage obligations. In case of no consensual transfer of Vanguard, the creditors shall have the right to enforce the mortgage for the transfer of land. In pursuance to the obligations of the Applicant under the guarantee obligations and the mortgage provided, the Resolution Applicant's 1st seeking a direction to allow the transfer of the land from the Applicant to the Corporate Debtor. Failing this, the Resolution Plan suggests that the assignee of the loan and security should be allowed to enforce under SARFAESI Act and transfer the land to the Corporate Debtor. [ Link - Synopsis ]
3. Blogger’s comments;
Mechanism proposed in the resolution plan for transfer of the property (land) of the guarantor, mortgaged with the financial creditor (bank) is as follows;
The guarantor / owner of the property transfers the mortgaged property to the successful resolution applicant.
In case the guarantor/ owner of the land does not agree to transfer the property to the successful resolution applicant, than;
Financial Creditor (Bank) will assign the loan & security interest to the nominee of the resolution applicant.
Assignee of the loan will enforce security interest under SARFAESI Act and transfer the secured asset (land) to the Corporate Debtor.
Now the questions arise;
Whether a non financial institution secured creditor (nominee of the successful resolution applicant in the present case) can enforce security interest under SARFAESI. Secured creditor in SARFAESI has been defined as under;
(zd) “secured creditor” means—
(i) any bank or financial institution or any consortium or group of banks or financial institutions holding any right, title or interest upon any tangible asset or intangible asset as specified in clause (l);
Whether a secured creditor while enforcing security interest can transfer the secured asset without competitive bidding or auction, to a predetermined successful resolution applicant, under the provisions of SARFAESI.
Apparently, the Hon’ble Adjudicating Authority (NCLT) granted waivers for the above provisions of the SARFAESI & the Hon’ble Appellate Authority (NCLAT) upheld the orders of NCLT.
4. Case Law (Liquidation Process)
NCLAT (13.05.2022) in Ayan Mallick Vs. Pratim Bayal, Liquidator & Ors. [Company Appeal (AT) (Insolvency) No. 456 of 2022] held that;
13.05.2022: Heard learned counsel for the Appellant, Shri Ashish Makhija, learned counsel for the Liquidator and learned counsel appearing for the Bank. This Appeal has been field against the order dated 01.02.2022 by which the Adjudicating Authority (National Company Law Tribunal), Kolkata Bench, Kolkata has dismissed the I.A. No. 32/KB/2022 filed by the Applicant/Appellant. In the I.A. the prayer made by the Appellant who is Suspended Director of the Corporate Debtor was that e-auction sale notice dated 16.12.2021 for sale of the assets of the Corporate Debtor under liquidation and assets of the guarantor under SARFAESI Act be stayed until the disposal of the I.A.
# 2. The e-auction notice was issued for sale of factory and land. Apart from the assets of the Corporate Debtor, the land was owned by the Promoter/ Guarantor, hence, e-auction notice was for a joint sale of the assets. It was submitted before the Adjudicating Authority that joint sale will maximize the value of assets of the Corporate Debtor, hence the Court should permit the same. After hearing the learned counsel for the parties, the Adjudicating Authority rejected the application and observed that if there is maximization of the assets, selling it as a combined should not prejudice the applicant in any manner as it is going to get a better value for the corporate guarantor.
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# 5. We have considered submissions of learned counsel for the parties and perused the record. When the Adjudicating Authority is satisfied that joint sale shall bring maximization of assets of the Corporate Debtor and the possession of the properties of the Guarantors have already been taken under SARFAESI and both land and factory need to be sold together to maximize the value of the assets, we fail to see that how the Appellant shall be prejudiced in any manner. We do not find any error in the order of the Adjudicating Authority rejecting the I.A. We dismiss the Appeal. We, however, observe that it shall be open to the Appellant to take such remedy under SARFAESI with regard to auction in accordance with law. [ Link - Synopsis ]
5. Blogger’s comments; The following questions needs to be answered;
Whether Liquidator can include the property of guarantor in the Liquidation Estate.
Whether Liquidator can deal/auction any property outside the Liquidation Estate.
Whether Liquidator has powers to take into possession any property under the provisions of SARFAESI.
Whether a bank/financial institution can appoint Liquidator as its authorised officer to deal with the property (secured asset) under the provisions of SARFAESI.
Whether a Liquidator can work as representative of a stakeholder during the liquidation process.
In joint reserve price /joint auction notice how the money will be distributed of the realisation post auction.
Following are the provisions of the Code & regulations’
Quote.
# Section 36. Liquidation estate. -
(1) For the purposes of liquidation, the liquidator shall form an estate of the assets mentioned in sub-section (3), which will be called the liquidation estate in relation to the corporate debtor.
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(3) Subject to sub-section (4), the liquidation estate shall comprise all liquidation estate assets which shall include the following: -
(a) any assets over which the corporate debtor has ownership rights, including all rights and interests therein as evidenced in the balance sheet of the corporate debtor or an information utility or records in the registry or any depository recording securities of the corporate debtor or by any other means as may be specified by the Board, including shares held in any subsidiary of the corporate debtor;
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(4) The following shall not be included in the liquidation estate assets and shall not be used for recovery in the liquidation: -
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(c) personal assets of any shareholder or partner of a corporate debtor as the case may be provided such assets are not held on account of avoidance transactions that may b avoided under this Chapter;
Unquote,
As per the provisions of the Code, personal assets of any shareholder can not be the part of the “Liquidation Estate” and can not be used for recovery in the liquidation process under the Code. However, a bank (SFC) can deal/realise mortgaged properties, other than those owned by CD , held by the bank as collateral security, outside the liquidation process as per existent laws.
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Although, Liquidator, in his personal capacity, can accept assignment for disposal of properties mortgaged to the bank, (owned by shareholders) , as authorised agent/ representative of the bank, but the moment Liquidator, agrees to act as agent/representative of a stakeholder (bank), he renders himself ineligible to work as Liquidator & has to voluntarily vacate the office of Liquidator.
Quote;
Liquidation Regulations
# Regulation 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.
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(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.
Unquote,
In my opinion, the best way forward for the bank, in the present situation, is to enforce its security interest for the property of CD (Factory plant & machinery) under section 52(1)(b) and realise the same, as permitted under section 52(4) read with Liquidation Regulation 37(7) in SARFAESI, along with the guarantor’s property (Land) mortgaged with the bank, under section 13(8) of SARFAESI. This way SFC will be able to maximise the value of assets (Land, building, plant & machinery), without violating the provisions of either the Code (IBC.2016) or SARFAESI.
Lastly, following are some interesting provisions of the regulations for insolvency of Personal Guarantors.
Quote;
Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Personal Guarantors to Corporate Debtor) Regulations, 2019,
# Regulation 4. Eligibility of resolution professional. (1) An insolvency professional shall be eligible to be appointed as a resolution professional for a resolution process, if
(a) he, the insolvency professional entity of which he is a partner or a director, and all the partners and directors of the said insolvency professional entity are independent of the guarantor;
(b) he is not subject to any ongoing disciplinary proceeding or a restraint order of the Board or of the insolvency professional agency of which he is a professional member; and
(c) the insolvency professional entity of which he is a partner or a director, or any other partner or director of such insolvency professional entity does not represent any party in the resolution process.
Explanation.- For the purposes of this sub-regulation, -
(i) a person shall be considered independent of the quarantor, if he
(a) is not an associate of the guarantor;
(b) is not a related party of the corporate debtor; and
(c) has not acted or is not acting as interim resolution professional, resolution professional or liquidator in respect of the corporate debtor;
(ii) the expression "related party" shall have the meaning assigned to it in sub-section (24) of section 5.
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Unquote; Legislative intent of the above provision is clear that interim resolution professional, resolution professional or liquidator in respect of the corporate debtor should not be allowed to deal with the properties of the personal guarantor of the CD. In my opinion all the case laws mentioned in the blog (supra) are "Per Incuriam", being violative of the provisions of the Code & SARFAESI.
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. A reader 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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