IBC UPDATE | LIABILITY OF CORPORATE GUARANTORS 

The Supreme Court of India in the recent case of Laxmi Pat Surana v. Union Bank of India has observed that proceedings under the Insolvency and Bankruptcy Code 2016 (IBC) can be initiated against a corporate guarantor who has given a guarantee on behalf of a sole proprietorship. This update briefly summaries this said judgment.

Background: In the present case, the financial creditor being Union Bank of India (Bank) extended a loan facility to the principal borrower, Mahaveer Construction (Principal Borrower), a proprietary firm. Surana Metals Limited stood as the guarantor (Corporate Guarantor) for the loan availed by the Principal Borrower. The loan was eventually declared as a non-performing asset in 2010 and the Bank issued recall notices against the Principal Borrower and the Corporate Guarantor. The Bank initiated proceedings before the Debt Recovery Tribunal, Kolkata against the Principal Borrower and during the pendency of the proceedings, the Bank also addressed a demand notice to the Corporate Guarantor under the IBC.

NCLT : The Bank initiated proceedings against the Corporate Guarantor for a default of a sole proprietorship firm, in its capacity as the corporate guarantor of the loan. NCLT admitted the application and held that the action had been initiated against the corporate guarantor, who was co-extensively liable to repay the debt of the Principal Borrower. As the Corporate Guarantor failed to do so despite the recall notice, the Corporate Guarantor in this scenario, became the corporate debtor liable to be proceeded against under the provisions of the IBC. An appeal was preferred from this decision before the National Company Law Appellate Tribunal (NCLAT).

NCLAT Before the NCLAT, the main contention raised on behalf of the Corporate Guarantor was that since no insolvency proceedings at present can be initiated against a sole proprietorship firm under IBC, as such, no insolvency proceedings can also be initiated against the Corporate Guarantor.

NCLAT upheld the observation of the NCLT that the definition of ‘Corporate Guarantor’ under IBC is merely explanatory and such definition could not be the basis of applicability or non-applicability of the provisions of IBC to those liable under the provisions thereof. NCLAT observed that a ‘Financial Debt' includes a debt owed to a creditor by a principal borrower and a guarantor. Thus, proceedings under Section 7 of the IBC may be initiated against a guarantor in the same manner as it would for a principal borrower, as their liability is coterminous and coextensive.

Supreme Court: The order of the NCLAT was then challenged in appeal before the Supreme Court. The Supreme Court held that a guarantor cannot escape from the lawful liability of the principal debtor under the contours of the IBC, in case of default in repayment by the principal debtor, despite being a sole proprietorship firm. Accordingly, the Supreme Court upheld the order and reasoning mentioned by the NCLT.

MHCO COMMENTS:

Supreme Court and NCLAT in this landmark decision have expanded the scope of the definition of ‘Corporate Guarantor' and have brought under its ambit firms acting as guarantors to loans of sole proprietorship firms. Thus, even though insolvency proceedings cannot be initiated against a firm in its capacity of a principal borrower in default, such action can be initiated against firms acting as guarantors. This provides an efficacious remedy to creditors who had to suffer at the hands of vagrant borrowers and guarantors trying to circumvent their liability.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.

INDIAN ARBITRATION UPDATE | SUPREME COURT`S LATEST TAKE ON VENUE/PLACE/SEAT 

The Supreme Court of India (SC) in a recent case of Inox Renewables Ltd v Jayesh Electricals Limited has held that when parties to an arbitration agreement mutually agree to change the venue/place of arbitration, the new venue/place will become the 'seat’ of arbitration and the courts of the changed venue will be vested with the exclusive jurisdiction qua disputes and the courts at the earlier venue will cease to be vested with the jurisdiction.

This update briefly analyses the said judgement of the Supreme Court.

Facts:

• One Gujarat Fluorochemicals Limited (GFL) entered into a purchase order dated 28 January 2012 with the Respondent i.e. Jayesh Electricals Limited (Jayesh) for the manufacture and supply of power transformers at wind farms PO).

• PO contained an arbitration clause which prescribed Jaipur as the venue of arbitration and vested the jurisdiction over the disputes arising out of the arbitration in the courts of Rajasthan.

• GFL entered into a business transfer agreement dated 30 March 2012 (BTA) with the Appellant i.e. Inox Renewables Limited (Inox). Through this BTA, a slump sale of the entire business of GFL took place in favour of Inox, wherein the PO was also assigned to Inox. However, Jayesh was not a party to the said BTA. The BTA designated Vadodara as the seat of the arbitration between the parties, vesting the courts at Vadodara with exclusive jurisdiction qua disputes arising out of the BTA.

• As disputes arose between the parties, Jayesh filed an application against Inox under Section 11 of the Arbitration and Conciliation Act, 1996(Act) before the Gujarat High Court to appoint an arbitrator under the PO. The Application was allowed and a Sole Arbitrator was appointed. The Sole Arbitrator passed an award dated 28 July 2018 in favour of Jayesh. In the award, the Sole Arbitrator also recorded that the parties had mutually agreed, irrespective of a specific clause as to the venue, that the place of the arbitration would be at Ahmedabad and not at Jaipur.

• Inox challenged this award vide an application under section 34 of the Act, before the civil commercial court at Ahmedabad. The Application was resisted by Jayesh stating that under the BTA, exclusive jurisdiction was vested in the court of Vadodara. The civil commercial Court at Ahmedabad accepted this contention and dismissed the application.

• Aggrieved, Inox filed a Civil Application against this order before the Gujarat High Court. The High Court made a reference to the PO and brought to the notice of the Court that the exclusive jurisdiction under the PO was vested in the courts of Jaipur. However, the High Court found no error in the order of the commercial court of Ahmedabad and dismissed the civil application. An appeal was then preferred to the SC.

Issue:

• Whether the mutual agreement as to the change of venue of arbitration can imply the change of seat and result in exclusive jurisdiction of the courts of the newly agreed seat?.

HELD:

Placing heavy reliance on judgment in the case of BSG SGS SOMA JV v NHPC Limited , the SC allowed the appeal for the following reasons:

• The parties, by mutual consent, entered into an agreement to substitute the venue at Jaipur with Ahmedabad as the place/seat of arbitration under Section 20(1) [and not Section 20(3)] of the Act. The same is also recorded in the award, thus obviating the need for a separate agreement in writing. Thus, Jaipur does not continue to be the seat of arbitration and Ahmedabad is now the seat designated by the parties, and not merely a venue to hold meetings.

• Rejecting the argument of Jayesh, that even if it is admitted that the seat was shifted from Jaipur to Ahmedabad by mutual agreement, the same is independent of the clause vesting exclusive jurisdiction in the courts of Rajasthan; the SC held that “[T]he moment the seat is chosen as Ahmedabad, it is akin to an exclusive jurisdiction clause, thereby vesting the courts at Ahmedabad with exclusive jurisdiction to deal with the arbitration.” It further held that said argument cannot stand as the arbitration clause in the PO ought to be read as a whole.

MHCO Comments :

• Section 20 of the Act provides for the “Place” of arbitration. While the words “venue”, “seat” and “place” continue to be common confusables, this judgment thickens the line between Section 20(1) and 20(3).
  
  a)  Section 20(1) refers to the place of arbitration in the notion of “seat”, i.e. the courts whereof would have exclusive jurisdiction over the arbitration. The section empowers the parties to agree upon any seat of arbitration. If the parties fail to reach such agreement, the tribunal can determine the seat [Section 20(2)].
  
  b)  Section 20(3), independent of Sections 20(1) and 20(2), refers to the place of arbitration in the notion of “venue” for mere logistical convenience.

• The Judgment sets an important precedent in terms of the interpretation of Section 20 of the Act in determining the seat of arbitration and the impact of mutual agreement of parties on it, in a post-dispute scenario.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.