Pranav B Prem

The National Company Law Tribunal (NCLT), Mumbai Bench, comprising Ms. Lakshmi Gurung (Judicial Member) and Mr. Hariharan Neelakanta Iyer (Technical Member), has held that once the claim of a creditor has been admitted by a Resolution Professional (RP), the same cannot later be rejected on a suo moto basis under the guise of re-verification. The Bench was dealing with an application filed by L&T Finance Limited under Section 60(5) of the Insolvency and Bankruptcy Code, 2016, challenging the RP’s decision to reject its admitted claim of ₹209.96 crores in the corporate insolvency resolution process (CIRP) of Rajesh Estates and Nirman Private Limited.

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Background

L&T Finance Limited had advanced a term loan facility of ₹212 crores to Odeon Constructions and Developers Private Limited, secured by a corporate guarantee and a registered deed of mortgage executed by Rajesh Estates and Nirman Pvt. Ltd. in favour of the applicant. Following the admission of the corporate debtor into CIRP on March 24, 2023, a public announcement inviting claims was made on March 31, 2023. The applicant submitted its claim on February 13, 2024, as a financial creditor based on the corporate guarantee. The RP, after seeking clarifications regarding delay and invocation of the guarantee, initially admitted the claim via email dated April 23, 2024, but subsequently rejected it on April 26, 2024, citing that the corporate guarantee had not been invoked prior to commencement of CIRP.

The RP relied upon the judgments in Ghanashyam Mishra and Sons Private Limited v. Edelweiss Asset Reconstruction Company Limited [(2021) 9 SCC 657] and IDBI Trusteeship Services Limited v. Abhinav Mukherji & Ors. [2022 SCC OnLine NCLAT 267] to conclude that a claim based on an uninvoked guarantee could not be treated as a matured claim. Aggrieved by this decision, L&T Finance filed the present application, contending that the RP’s act of revising and rejecting an already admitted claim was beyond his powers under the Code.

Contentions of the Parties

The applicant argued that the corporate debtor had expressly waived its right to demand prior invocation of the guarantee and that the financial obligation under the guarantee was absolute. It further contended that unlike in Ghanashyam Mishra and IDBI Trusteeship, there was no default by the borrower before initiation of CIRP, and therefore, the applicant had no occasion to invoke the guarantee. The default, it was argued, arose only upon the commencement of CIRP against the corporate guarantor. It was further argued that once a claim has been admitted by the RP, the same cannot be unilaterally rejected. The applicant relied on Union Bank of India v. Rajdeep Clothing Advisory Pvt. Ltd. [2022 SCC OnLine NCLAT 4699] and Avil Menezes, RP of AMW Auto Components Ltd. v. Shah Coal Pvt. Ltd. [CA (AT) (Ins) No. 63/2021], to emphasize that the RP’s role is administrative in nature and does not extend to adjudication or review of claims.

In response, the RP maintained that the Code does not prohibit the rejection of a claim after admission if such claim is found contrary to law. It argued that since the borrower’s loan account remained standard, no default had occurred, and therefore, the uninvoked guarantee could not give rise to a “right to payment.” The RP also contended that the applicant’s alternative plea seeking exclusion of mortgaged assets from CIRP was barred under Sections 14(1)(c) and 238 of the IBC.

Tribunal’s Findings

The NCLT examined whether (i) the RP could re-verify and reject an already admitted claim, and (ii) whether a claim based on an uninvoked corporate guarantee could be admitted. On the first issue, the Bench observed that the RP’s powers are limited to verification and collation of claims and not adjudication or review. Referring to the NCLAT’s ruling in Union Bank of India v. Rajdeep Clothing Advisory Pvt. Ltd., the Bench noted: “We have found no provision in the Code or Regulations which permits review of the status of a creditor... Thus, an IRP/RP cannot, on its own, review and reverse his earlier decision without approval of the Adjudicating Authority.” The Tribunal held that once a claim is admitted, it cannot be unilaterally withdrawn or rejected by the RP in the name of re-verification. The RP’s action amounted to adjudication, which falls outside the scope of his administrative authority. Consequently, the rejection email dated April 26, 2024, was held liable to be set aside on this ground alone.

On the second issue, the Bench examined the applicability of the judgments relied upon by both sides. While the RP invoked Ghanashyam Mishra and IDBI Trusteeship to support its rejection, the Tribunal noted that the Supreme Court in Ghanashyam Mishra had not laid down any concrete legal principle regarding admission or rejection of uninvoked guarantees. Conversely, in China Development Bank v. Doha Bank Q.P.S.C. [2024 SCC OnLine SC 3829], the Supreme Court had comprehensively analyzed the definition of “claim” and “financial debt,” observing that:“Whether the cause of action for invoking the guarantee has arisen or not is not relevant for considering the definition of ‘claim’.”  The Tribunal highlighted that this observation settled the question surrounding the admissibility of claims based on uninvoked guarantees. It also took note of the NCLAT’s decision in Nilesh Sharma, RP of Today Homes and Infrastructure Pvt. Ltd. v. Indian Renewable Energy Development Agency Ltd. [Company Appeal (AT) (Ins) No. 1039/2024], which had followed the China Development Bank ruling to admit such claims. Accordingly, the NCLT concluded that the claim based on the uninvoked corporate guarantee was admissible and that the RP’s reliance on earlier judgments was misplaced.

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The Bench held that the Resolution Professional had no authority to suo moto reject a claim once admitted. It ruled that the applicant’s claim arising from the uninvoked guarantee was valid and directed the RP to verify the same in accordance with law. The Tribunal clarified that the admission of the claim would be subject to the outcome of a pending application (IA No. 2506 of 2024) filed by the RP seeking reversal of preferential transactions, which might have a bearing on the applicant’s rights. With these observations, the application was disposed of, and the RP’s rejection order dated April 26, 2024, was set aside.

Appearance

For Appellant: Adv. Shyam Kapadia a/w Adv. Jyotika Raichandani, Adv. Shruti Mania, Adv. Kashmita Belwalkar i/b Solomon and Co.

For Respondent: Mr. Pulkit Sharma a/w Adv. Neel Mehta, Adv. Rishab Chandra i/b Vaish Associates

Cause Title: L & T Finance Limited v. Divyesh Desai

Case No: I.A. 4404 of 2024 In C.P. No. (IB) 560/MB/C-III/2022

Coram: Ms. Lakshmi Gurung (Judicial Member), Mr. Hariharan Neelakanta Iyer (Technical Member)