Status as on- 21/03/2023
CIRP proceedings under section 7 can be initiated against corporate debtors who are co-borrowers but there can be no double recovery of the same amount from both.
The financial creditor provided the corporate debtor with a loan, and company “D” was referred to in the Loan Agreement as both a borrower and pledgor, having pledged its shares in the corporate debtor in favour of the financial creditor. Accordingly, “D” was ostensibly a party to the Loan-cum-Pledge Agreement in both capacities, making a section 7 petition against “D” maintainable in the event that the corporate debtor failed to make repayments.
Facts of the Case
In the instant case, an appeal for review of the Supreme Court’s decision against the NCLAT’s ruling authorising the initiation of CIRP proceedings under Section 7 against both corporate co-borrowers were filed.
Premier Ltd (“Premier”) received a loan from the respondent, an NBFC (a Financial Creditor), under three different Loan-cum-Pledge Agreements. Doshi Holdings reportedly pledged shares of Premier that it owned in favour of the Financial Creditor as collateral for the loan, according to the appellant (a director of Premier & Doshi Holdings).
According to the Loan-cum-Pledge Agreements, the Premier didn’t make the required payments. In order to start CIRP against Premier for failing to return the debt, the Financial Creditor filed a petition under Section 7 of the IBC. Under Section 7 of the IBC, the Financial Creditor likewise petitioned Doshi Holdings for the start of the CIRP with regard to the identical claim based on the identical loan papers.
Both CIRP applications were allowed by the NCLT. The NCLT ruling allowing the CIRP application filed against the Doshi holdings was the subject of an appeal. The NCLAT rejected the appeal and upheld the decision to accept the petition filed in accordance with Section 7 of the IBC. After then, the appellant appealed the NCLAT’s decision to the Supreme Court.
The appellant submitted that no amount under the Loan-cum-Pledge Agreements was disbursed by the Financial Creditor to Doshi Holdings. The loans were disbursed to Premier, and Doshi Holdings did not utilise any part of the money disbursed. Doshi holding did not fit in the definition of a corporate debtor; therefore, no CIRP can be initiated against Doshi holdings, as the definition of ‘financial debt’ in Section 5(8) of the IBC does not include a pledge.
The counsel appearing on behalf of the respondent submitted as follows:
(a) Doshi Holdings was party to the Loan-cum-Pledge Agreements in its dual capacity as co-borrower and pledgor, which had pledged its shares in Premier in favour of the Financial Creditor.
(b) The appellant had signed documents on behalf of Doshi Holdings in its capacity as co-borrower. The Appellant was the Director of both, Premier and Doshi Holdings.
(c) The Premier and Doshi Holdings have been described as borrowers in the Loan-cum-Pledge Agreements.
(d) The definition of Corporate Debtor does not require as a pre-condition that monies should have been disbursed to the Corporate Debtor. The sine qua non for an entity to be considered a Corporate Debtor is that such person/entity should owe a debt to any person and not that a disbursal has to be made to such a person/entity.
Supreme Court Held
During a hearing with both parties, the Supreme Court rejected the appellant’s argument and upheld the NCLAT’s ruling. The Court ruled that CIRP can be started against both corporate debtors if two borrowers or two corporate bodies fall under the definition of corporate debtors. The same amount, though, cannot be recovered from both Corporate Debtors. If one corporate debtor only realises a portion of the debt, the remaining amount may be realised by the other corporate debtor, who is the co-borrower.
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