NCLAT Rules, Petition U/S Section 7 Of IBC Cannot Be Entertained Based On Guarantee Invoked During Prohibited Period U/S 10A Of IBC
Pranav B Prem
In a significant judgment, the National Company Law Appellate Tribunal (NCLAT), New Delhi Bench, has held that where the guarantee is invoked during the bar period prescribed under Section 10A of the Insolvency and Bankruptcy Code, 2016 (IBC), the application under Section 7 of the Code filed on the basis of such invocation is not maintainable. The bench comprising Justice Ashok Bhushan (Judicial Member) and Mr. Barun Mitra (Technical Member) dismissed the appeal filed by IDBI Bank and upheld the Adjudicating Authority’s order rejecting the Section 7 petition as barred under Section 10A.
Background
IDBI Bank had sanctioned working capital–cash credit facilities to Siti Networks Limited (the borrower), initially up to ₹25 crore through a sanction letter dated 24.11.2008. This facility was enhanced to ₹150 crore on 29.05.2012, consisting of fund-based and non-fund-based limits. A loan agreement was executed with the borrower on 17.07.2012.
ZEE Entertainment Enterprises Ltd. (ZEEL), the respondent corporate debtor, executed a limited guarantee dated 03.08.2012 in favour of IDBI Bank, guaranteeing the borrower’s obligation to maintain a Debt Service Reserve Account (DSRA).
On 19.06.2021, IDBI Bank issued a notice under Section 13(2) of the SARFAESI Act. Subsequently, a letter dated 05.03.2021 was issued by the Bank invoking the guarantee and demanding payment from the corporate guarantor. IDBI Bank filed an application under Section 7 of the IBC on 13.12.2023, claiming a default amount of ₹149.6 crore.
The corporate debtor filed I.A. No. 581/2023 before the Adjudicating Authority seeking rejection of the application on the ground that the invocation of the guarantee occurred during the prohibited period under Section 10A of the IBC. The Adjudicating Authority accepted this contention and dismissed the Section 7 application. Aggrieved, the appellant filed the present appeal before the NCLAT.
Appellant’s Submissions
IDBI Bank contended that the borrower had been in default since 30.09.2019 and that the DSRA account had remained unreplenished since then. A letter dated 02.03.2020 was addressed to the borrower and also marked to the corporate debtor, highlighting the overdue amount.
It was argued that the default by the corporate debtor commenced prior to the 10A period and continued thereafter, and that Section 10A would not apply where the default continues post the bar period. The bank further asserted that the failure to replenish the DSRA account constituted an ongoing breach, making the Section 7 petition maintainable.
Respondent’s Contentions
The corporate debtor submitted that the guarantee was in the nature of a demand guarantee, and as per clauses 7, 9, 10, 11, and 27 of the guarantee deed, liability would only arise upon invocation. It was submitted that the invocation occurred through the notice dated 05.03.2021, which falls squarely within the bar period under Section 10A (i.e., 25.03.2020 to 24.03.2021), rendering the Section 7 application not maintainable. It was also pointed out that the email dated 02.03.2020, which was relied upon by the appellant, was not a notice invoking the guarantee or demanding payment from the corporate debtor.
NCLAT’s Observations
The Appellate Tribunal referred to the clauses of the guarantee deed and noted that the obligation of the guarantor to maintain the DSRA arises upon invocation of the guarantee. The Tribunal observed that clauses 7 through 11 of the guarantee clearly require the lender to issue a notice invoking the guarantee and calling upon the guarantor to make the payment.
Referring to the judgments in Pooja Ramesh Singh v. State Bank of India, [Comp. App. (AT) (Ins.) No.329/2023] and Mudhit Madanlal Gupta v. Supreme Constructions & Developers Pvt. Ltd.[Comp. App. (AT) (Ins.) No.920/2023], the NCLAT reiterated that the liability of a guarantor arises only upon invocation, and the date of default in respect of the guarantor is the date of such invocation, not the date of the borrower’s default.
The Tribunal held that the email dated 02.03.2020 was merely informational and did not constitute a formal invocation of the guarantee. It noted: “The e-mail dated 02.03.2020 cannot be treated as invocation of the Guarantee Deed dated 03.08.2012. It does not direct the Guarantor to deposit the outstanding amount.”
It was further noted that the appellant itself had taken the position in the Section 7 application that the guarantee was invoked only on 05.03.2021. The NCLAT held that this invocation date fell within the prohibited period under Section 10A.
The Tribunal rejected the argument that the default continued beyond the 10A period and held that the application was based specifically on the invocation dated 05.03.2021. Since no default occurring after 24.03.2021 was pleaded in the application, the bar under Section 10A squarely applied.
Verdict
The National Company Law Appellate Tribunal upheld the order passed by the Adjudicating Authority dated 19.05.2023, dismissing the application filed by IDBI Bank under Section 7 of the Insolvency and Bankruptcy Code, 2016 as barred by Section 10A. The Tribunal concluded that the invocation of the corporate guarantee by the financial creditor occurred on 05.03.2021, which falls within the prohibited period under Section 10A. The Tribunal rejected the appellant’s contention that default occurred prior to the 10A period or continued beyond it, noting that the application itself was based on the invocation of the guarantee during the 10A window and did not plead any post-10A default. Consequently, the appeal was dismissed. However, the Tribunal granted liberty to IDBI Bank to file a fresh Section 7 application for any default by the corporate debtor that may have occurred after the expiry of the Section 10A period, i.e., after 24.03.2021.
Appearance
For Appellant: Mr.R. Ventakraman (ASG), Mr. Diwakar Maheshwari, Ms. Pratiksha Mishra, Mr. Vishnu Sriram and Mr. Karan Bhootra, Advocates.
For Respondent: Mr. Arun Kathpalia & Mr. Abhijeet Sinha, Sr. Advocates with Mr. Aman Raj Gandhi, Mr. Vardaan Bajaj and Mr. Ojasni Sharma, Advocates.
Cause Title: IDBI Bank Limited V. Zee Entertainment Enterprises Limited
Case No: Company Appeal (AT) (Insolvency) No. 939 of 2023
Coram: Justice Ashok Bhushan [Chairperson], Barun Mitra [Member (Technical)]
[Read/Download order]
