Whether the borrower can initiate an insolvency proceeding against the corporate person who is a guarantor regarding the loan account given to the partnership firm?

To get over this position, much reliance was placed on

Section 5(5A) of the Code, which defines the expression

“corporate guarantor” to mean a corporate person, who is the

surety in a contract of guarantee to a Corporate debtor. {Para 23}

24. Accepting the aforementioned argument of the appellant

would result in diluting or constricting the expression “corporate

debtor” occurring in Section 7 of the Code, which means a

corporate person, who owes a debt to any person. The “debt” of a corporate person would mean a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt. The expression “debt” in Section 3(11) is wide enough to include liability of a corporate person on account of guarantee given by it in relation to a loan account of any person including not being a corporate person in the event of  default committed by the latter. It would still be a “financial debt” of the corporate person, arising from the guarantee given by  it, within the meaning of Section 5(8) of the Code.

25. Notably, the expression “corporate guarantee” is not defined

in the Code. Whereas, expression “corporate guarantor” is

defined in Section 5(5A) of the Code. If the legislature intended to exclude a corporate person offering guarantee in respect of a loan secured by a person not being a corporate person, from the

expression “corporate debtor” occurring in Section 7, it would

have so provided in the Code (at least when Section 5(5A) came to be inserted defining expression “corporate guarantor”). It was

also open to the legislature to amend Section 7 of the Code and

replace the expression “corporate debtor” by a suitable

expression. It could have even amended Section 3(8) to exclude

liability arising from a guarantee given for the loan account of an

entity not being a corporate person. Similarly, it could have also

amended expression “financial debt” in Section 5(8) of the Code,

“claim” in Section 3(6), “debt” in Section 3(11) and “default” in

Section 3(12). There is no indication to that effect in the

contemporaneous legislative changes brought about.

26. The expression “corporate debtor” is defined in Section 3(8)

which applies to the Code as a whole. Whereas, expression

“corporate guarantor” in Section 5(5A), applies only to Part II of

the Code. Upon harmonious and purposive construction of the

governing provisions, it is not possible to extricate the corporate

person from the liability (of being a corporate debtor) arising on

account of the guarantee given by it in respect of loan given to a

person other than corporate person. The liability of the

guarantor is coextensive with that of the principal borrower. 

27. In law, the status of the guarantor, who is a corporate

person, metamorphoses into corporate debtor, the moment

principal borrower (regardless of not being a corporate person)

commits default in payment of debt which had become due and

payable. Thus, action under Section 7 of the Code could be

legitimately invoked even against a (corporate) guarantor being a corporate debtor. The definition of “corporate guarantor” in

Section 5(5A) of the Code needs to be so understood.

28. A priori, we find no substance in the argument advanced

before us that since the loan was offered to a proprietary firm

(not a corporate person), action under Section 7 of the Code

cannot be initiated against the corporate person even though it

had offered guarantee in respect of that transaction. Whereas,

upon default committed by the principal borrower, the liability of the company (corporate person), being the guarantor, instantly triggers the right of the financial creditor to proceed against the corporate person (being a corporate debtor). Hence, the first question stands answered against the appellant. 

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 2734 OF 2020

LAXMI PAT SURANA  Vs  UNION BANK OF INDIA 

Author: A.M. Khanwilkar, J.

Bench: A.M. Khanwilkar, Dinesh Maheshwari,B R Gawai JJ

Dated: March 26, 2021.

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When parties can approach court even in presence of arbitration agreement?

Arbitration is increasing method of dispute resolution. With increasing number of cross border transactions and international trade contracts, arbitrability of arbitration agreements now holds a prominent place in resolution of international and domestic arbitrations.

In India, traditionally the parties move to court when the the dispute relating to an arbitration agreement arises

The Golden Rule is that if the dispute is covered by an Arbitration agreement, the said dispute should be resolved by Arbitration. However, there are following exceptions to this Rule. 
 1. If a party institute an action in the Court in respect of a dispute, which is covered by an arbitration agreement, the Court may continue with the said action if the other party doesn't object to the Court's jurisdiction.
2. If there is an immediate urgency, the Court may hear the case. (Textile v Hydro Industries)
3. If the dispute is in respect of Oppression and Mismanagement under the Company law, the Court may hear the action.
4. The Court may hear disputes in respect of unjust enrichment and compensation for improvements.
5. The Court may also hear disputes which are not covered under the Agreement and the Arbitration Clause.
6. The Court may hear disputes if non parties to arbitration agreement are involved.
7. The Court should hear dispute if dispute arising out of arbitration agreement in criminal in nature.
8. The Court should hear if dispute is relating to status such as divorce, judicial separation, restitution of conjugal rights, child custody etc.
9. The Court should hear dispute if it is relating to competition law, insolvency, winding up, bribery, corruption
10. The Court should hear dispute if it is relating to   guardianship matters.
11. The Court should hear dispute if it is relating to testamentary matters.
12. The Court should hear dispute if it is disputes relating to trust.

Points 1-5 have been contributed by Mr. Yasith Hirimburegama, Lawyer based in Sri Lanka. 

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Whether joint hindu family firm can be adjudicated as insolvent?

As the above rulings throw little light on the question whether a Hindu joint family firm can be adjudged insolvent under Section 99, Presidency Towns Insolvency Act, it is necessary to look to the words of the section itself. It is no doubt true that a Hindu joint family firm is somewhat different from an ordinary partnership business; as pointed out in Mulla's Hindu Law, p. 250, a joint Hindu family firm is not dissolved by the death of a coparcener whereas an ordinary partnership is dissolved when a partner dies. Ordinarily however there is not much difference between the members of a Hindu joint family who carry on business together and the partners of an ordinary partnership firm. In common parlance members of the family who transact the business are partners and in this case they have so described themselves in the application to the Imperial Bank of India Ex. 14. In that they refer to the firm of Kala Gella as a firm and inform the bank that they are partners of the said firm. This being so, it would seem to be that the wording of Section 99, Presidency Towns Insolvency Act is wide enough to include a Hindu joint family business and that under that section it was open to the learned Additional Judicial Commissioner to adjudicate the firm insolvent.

 Citation : AIR 1931 Sindh 179

IN THE HIGH COURT OF SIND

Decided On: 07.11.1930

 Chaturbhuj and Ors.

Vs.

 F.O. Kewalram and Ors.

Milne, A.J.C.

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Whether son is liable to pay father's debt if father is discharged insolvent?

  As regards the first contention, there can be no doubt that if the decree was against Nandji alone, the effect of the order of discharge was to extinguish the debt. Section 44(2), Provincial Insolvency Act, is decisive on the point. It lays down that "save as otherwise provided by Sub-section (1) an order of discharge shall release the insolvent from debts provable under the Act." For the present purpose the provisions of Sub-section (1) are not relevant and need not be referred to. Mr. Mukherji on behalf of the respondent suggests that though by virtue of the provisions of Section 44(2), Provincial Insolvency Act, the debt payable by Nandji might be extinguished, the sons' pious obligation nevertheless remained. This is a proposition which it is difficult to understand.

6. The sons' pious obligation arises on account of the existence of the father's debt. If the debt itself is extinguished, the very foundation of the pious obligation is gone.

Citation : AIR 1940 Pat 149

IN THE HIGH COURT OF PATNA

Decided On: 29.08.1939

Nathuni Prasad and Ors.
Vs.
Firm Radha Kishun Dutt Rai

Coram:
Chatterji and Rowland, JJ.

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What will be effect of insolvency of party in civil suit and in execution of decree?

Order XXII of the Code of Civil Procedure deals with the consequences of death, marriage or insolvency of parties to the proceedings before Court. I do not know whether it was the intention of the law makers to place death, marriage and insolvency on the same footing and whether the placement of all of them under one Order was actually a reflection of such an intention.

21. Be that as it may, the effect of Rules 1 to 12 of Order XXII, can be summarised as under:

(a) The death of a plaintiff or a defendant will not cause the suit to abate if the right to sue survives.

(b) If there are more plaintiffs than one or more defendants than one and one of them dies, with the right to sue surviving upon the other plaintiffs or defendants, the Court has to simply make an entry to that effect and proceed with the suit.

(c) If one of the several plaintiffs dies and the right to sue does not survive on the surviving plaintiffs alone, then, the legal representatives of the deceased plaintiff have to be brought on record, on an application made in that behalf. The same procedure applies where a sole plaintiff dies and the right to sue survives.

(d) If an application to bring on record the legal representatives of the deceased plaintiff is not made within the time prescribed by the law of limitation, then the suit will abate so far as the deceased plaintiff is concerned.

(e) If one of the several defendants dies and the right to sue does not survive against the surviving defendants alone, then, the legal representatives of the deceased defendant have to be brought on record, on an application made in that behalf. The same procedure applies where a sole defendant dies and the right to sue survives.

(f) If an application to bring on record the legal representatives of the deceased defendant is not made within the time prescribed by the law of limitation, then the suit will abate as against the deceased defendant.

(g) However, the Court has a discretion to exempt the plaintiff from the necessity of substituting the legal representatives of a deceased defendant, if such defendant had failed to file a written statement or if he had failed to appear and contest the suit at the time of hearing.

(h) The Court has the power under Section 5 of the Limitation Act, 1963 to condone the delay in seeking to set aside the abatement caused due to the death of the defendant, if the plaintiff shows that he was ignorant of the death of the defendant and that as a consequence, he had sufficient cause for not making an application for substitution of the legal representatives, within the time prescribed.

(i) If a party who died during the pendency of the suit, had not left behind any legal representative, the Court may proceed further without any one representing the estate of the deceased. Alternatively, the Court may appoint the Administrator General or an Officer of the Court to represent the estate of the deceased.

(j) The Court has the power to decide the question whether any person is or is not the legal representative of a deceased plaintiff or defendant. If such question arises before an appellate Court, the appellate Court may direct the subordinate Court to try the question and record a finding and send it to the appellate Court.

(k) If the death of either party to the suit occurs, after the conclusion of the hearing, but before the pronouncement of the judgment, there will be no abatement, irrespective of whether the cause of action survives or not. Consequently, the Court can proceed to pronounce the judgment.

(l) A suit shall not abate, merely on account of the marriage of a female plaintiff or defendant. A decree in favour of the wife can be executed on an application filed by the husband, if he is by law entitled to the subject matter of the decree. Similarly, if the husband is liable by law, for the debts of his wife, the decree against the wife can also be executed against the husband, with the permission of the Court.

(m) A suit which is maintainable by an assignee or receiver, for the benefit of the creditors of a plaintiff, will not abate on account of the insolvency of the plaintiff, unless the assignee or receiver declines to continue.

(n) If a suit abates or is dismissed under Order XXII, no fresh suit shall be brought on the same cause of action.

(o) The plaintiff or the person claiming to be his legal representative can seek to set aside the abatement or dismissal, by showing sufficient cause. The Court has the power to condone the delay in filing such applications.

(p) If there is assignment or creation of devolution of any interest, during the pendency of a suit, the suit may be continued by or against the person to or upon whom such interest has devolved. But, it shall be done with the leave of the Court.

(q) A pleader appearing for a party to the suit, has a duty to inform the Court about the death of his client, if he comes to know about the death. Thereafter, the Court is obliged to give notice of such death to the other party.

(r) The provisions of Order XXII are applicable to appeals. While so applying, the words "plaintiff", "defendant" and "suit" shall be taken to include the words "appellant", "respondent" and "appeal".

(s) The provisions of Rules 3, 4 and 8 of Order XXII, are not applicable to proceedings in execution of a decree or order. In other words, (i) the obligation under Rule 3 to bring on record the legal representatives of the deceased plaintiff; (ii) the obligation under Rule 4 to bring on record the legal representatives of the deceased defendant; and (iii) the consequences of the insolvency of a plaintiff indicated in Rule 8, are not applicable to the proceedings in execution of a decree.

22. A reading of Rules 1 to 12 of Order XXII would show that the provisions of Order XXII, primarily concern suits. Rule 11 gives a positive indication that all these provisions are also applicable to appeals. Rule 12 gives an indication, though in a negative form, that all the provisions of Order XXII, except those under Rules 3, 4 and 8, are applicable to proceedings in execution of a decree or order.

Madras High Court

Ayisha Beevi vs Sheik Mydeen on 23 December, 2011

Coram
The Honourable Mr.Justice V.RAMASUBRAMANIAN

Civil Revision Petition (NPD)(MD) No.1123 of 2006

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Whether banking company is exempt from insolvency proceeding?

 In IV (2001) CLT 284(cited Supra) the question, whether the bank can claim exception from Insolvency proceedings under Section 8 of the Provincial Insolvency Act 1920 came up for consideration before the Allahabad High Court. The Allahabad High Court after consideringSection 8 of the Provincial Insolvency Act 1920, Section 5(c) of the Banking Regulation Act 1949 and Section 2(d) of the Banking Companies (Regulation and transfer of Undertakings) Act 1970, held that Punjab National Bank is a Govt. Company under Section 617 of the Companies Act 1956 and therefore it is exempted from Insolvency proceedings.

Madras High Court

Tmt. Lalitha vs State Bank Of Hydrabad on 9 March, 2007

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Whether Insolvency Court can investigate question of title?

On the question as to whether the Insolvency Court could investigate the question of title, Mr. Doctor has placed reliance on the decision of the learned Single Judge of the Madras High Court in the matter of A Narayan Nair, an Insolvent, The Official Assignee, Madras v. Kochamma Amma & others reported in 1980 Madras Law Journal Reports page 455. Reliance was placed on the observations in paragraph 11 of the judgment which appear on page 462 of the Report, to contend that the Insolvency Court cannot decide the validity of the transfers which had taken place more than two years before the date of adjudication on the ground that it has been made with a view to defeat or delay the creditors having regard to the provisions of section 53 of the Provincial Insolvency Act or section 55 of the Presidency Town Insolvency Act. As we have indicated earlier, the Full Bench of this Court in Padamsi Premchand's case reported in A.I.R. (36) 1949 Bom. 129 (supra) has laid down that nominal and fictitious transfers do not fall undersection 53 of the Provincial Insolvency Act corresponding to section 55 of the Presidency Act. Where, therefore, the Official Assignee alleges that certain transfers were made by the insolvent, though beyond two years prior to the relevant date, but the same were nominal and fictitious transfers, the Insolvency Court would have jurisdiction under section 4 of the Provincial Insolvency Act and section 7 of the Presidency Act to decide the validity of the said transactions as was done by the Full Bench where the adjudication of insolvency was of 24th August, 1940 and the transactions questioned were of 25th January, 1935, 30th January, 1935 and 30th March, 1932. We are bound by the Full Bench decision of this Court. We are also in respectful agreement with the view expressed by Mrs. Justice Sujata Manohor (as the learned Judge then was) in Babubhai's case (supra). The view expressed in Babubhai's case makes it clear that the powers under section 7 of the Presidency Act are wide enough to decide all questions of priorities and all other questions whatsoever whether of law or fact, which may arise in the case of Insolvency coming within the cognizance of the Court or which the Court may think it expedient or necessary to decide for the purpose of doing complete justice or making complete distribution of the property in an Insolvency matter. We have indicated earlier that the claims of the creditors, on the date of the order of adjudication, were over Rs. 3 Crores. The transfers, made by the husband in the name of his wife, in our view, were nominal transfers; were sham and bogus and were made clearly with a view to defeating the claims of the genuine creditors. The said transfers being fraudulent, the validity of the same could be investigated by the Insolvency Court by virtue of the powers under section 7 of the Presidency Act. The bar contained in section 55 of the Presidency Act would, therefore, not come in the way.

Bombay High Court

Smt. Yogini Chandrakant Mehta vs The Official Assignee, High ... on 24 February, 1999

Equivalent citations: 1999 (2) BomCR 719, (1999) 2 BOMLR 428, 1999 (2) MhLj 263

Bench: A Agarwal, A Savant

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Procedure to be followed by court when insolvency petition is filed

(i) It is not obligatory for the Insolvency Court, to hear a debtor while admitting the insolvency petition filed by creditor and directing notices under Section 19 to be issued;

(ii) The Insolvency Court may in its discretion issue a notice to the debtor and postpone the issuance of public notice and / or personal notice to other creditors, in a petition filed by creditor, if the insolvency Court in its discretion feels the necessity of doing so or where the debtor has entered a Caveat under Section 148A, C.P.C.;

(iii) At the stage of admitting the insolvency petition and directing notices to be issued underSection 19(2) no inquiry, summary or detailed, by recording evidence, is contemplated; all that is contemplated is forming of a prima facie opinion by the Insolvency Court on preliminary questions such as whether the petition has been properly drawn up, signed and verified, whether it is within limitation, whether the Court has jurisdiction, whether the petition discloses entitlement of the petitioner to file a petition & C;

(iv) Section 19(2) of the Act applies both to the petition by debtor and by creditor.

Madhya Pradesh High Court

Radheshyam Agrawal vs Hariom Trading Co. And Ors. on 12 August, 1991

Bench: R Lahoti

Citation:AIR 1992 MP168

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When directors can be personally liable on company insolvency?

http://www.icaew.com/en/archive/library/subject-gateways/law/insolvency/legal-alert/when-directors-can-be-personally-liable-on-company-

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Whether creditor of father can claim priority in payment of his debt in case of insolvency of son?

It is in this sense of obligation that the word 'charge' is used in the passage in Mayne's Hindu Law and not in the sense of the properties being hypothecated for the debt. It is one thing to say that before partition the debts of the father shall be provided for and it is another thing to say that when the son becomes the sole owner on the father's death entitled to dispose of the property as his own, there is any restriction imposed on his powers for disposing it for his own debts though he is equally under an obligation to satisfy the demand of his father's creditors. Again the obligation imposed by the Hindu Law being incidental to the property so long as the property remains in the hands of the son the property cannot escape liability, whether there is a charge or No. But once the property has been alienated to a bona fide alienee, the obligation cannot be pursued against the property. It seems to us that the same principle would apply where the son is divested of his ownership therein by operation of law. Bankruptcy is an involuntary alienation and by the provisions of the insolvency law there is a statutory conveyance or alienation of the said property in favour of the Official Assignee in trust for the creditors for distribution among them according to the provisions of the said law. Having regard to these principles the question of priority has to be viewed. Under Section 52(2) of the Presidency Towns Insolvency Act all property as may belong to or be vested in the insolvent at the commencement of the insolvency will vest in the Official Assignee. The principle is the same under the Provincial Insolvency Act and under the English Law. It cannot be denied that the separate property of the father devolving on the son and the joint family property owned by the son at the date of the insolvency, which has been augmented by the father's share devolving upon the son by survivorship on account of the father's death before the date of the insolvency, will be property which belonged to the insolvent. But once that property vests in the Official Assignee, "it would have to be governed by the provisions of the Insolvency law. One of the provisions of that law is Section 49(5) which provides that subject to the provisions of the Act all debts proved in insolvency shall be paid rateably according to the mounts of such debts respectively and without any preference. Of course under Section 49 certain unsecured debts have to be paid in priority and it is in respect of them that a preference is accorded by the Act. The insolvency law is a special law having for its object the distribution of the insolvent's available assets among his creditors pro rata. The father's debt is not one to which a right of priority is given by the Act. The Official Assignee can only administer the assets and distribute them in accordance with the provisions of the Act. If a father's creditor chooses to prove in the insolvency of the, son as a provable debt of the son, he must submit himself to the provisions of the Act which does not recognise any priority in his favour. In a recent decision reported in Thimmiah v. Official Receiver, Bellary (1939) 1 M.L.J. 158, our learned brother Abdur Rahman, J,, took this view and held that the unrealised debts of the father and the debts of the son stood on the same footing and that a father's creditor would not got priority over the son's creditor. In the course of the judgment the learned Judge observed thus: If one looks to the provisions contained in Section 61 of the Provincial Insolvency Act, it would be found to provide in Sub-clause 5 that all debts entered in the schedule have to be paid rateably according to the an fount of such debts without any preference except to those which have been otherwise specified by the Provinc Insolvency Act...The learned counsel for the petitioner has not been able to point to any provision in the Provincial Insolvency Act under which he could claim priority for the debt in question and so far as proceedings in insolvency are concerned, the petitioner, as provided in Sub- 5, share rateably without any preference. It is obviously the policy of the insolvency law to distribute the estate among the creditors fairly and unless a preference was given by the Act to any particular debt, it must necessarily be held to fall within the sub-and no priority can legitimately be claimed in regard to the same. Viewed in the light of this section the unrealised simple debts of the father and that of the son would stand on the same footing.

Madras High Court

Pr. N. Sm. Chokkalingam Chettiar vs The Official Assignee Of Madras on 16 October, 1939

Equivalent citations: (1940) 2 MLJ 621

Venkataramana Rao, J.

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Whether insolvency proceeding can be started on basis of Foreign decree without following procedure laid down in Law?

The   law   is   settled.
Based upon these settled principles itself I am inclined to observe that
there is no question   of enlarging and or extending  the definition   of
the word “order” and “court” if it is not specifically provided under the
Insolvency Act.    The governing law i.e. the CPC also no where permit
or   provide   to   initiate     such   insolvency     proceedings.     There   is   no
question  of  permitting    the    party  to   invoke     insolvency    provisions
when the CPC   and or insolvency     Act no where permits   to initiate
insolvency   proceedings   based   upon   the   foreign   judgment   and   or
decree.  The concept of foreign court and or judgment is defined and
prescribed  under  the  CPC.    This   itself  means  that  the  concept  and
term “court” as provided under the insolvency Act means an Indian
Court only.   I am declined to accept that the court and or order and
or decree so contemplated under the  insolvency Act means  a foreign
court, foreign judgment or foreign decree.   Such drastic proceedings
just cannot be initiated which have presumption or assumption value
and  or  by  enlarging  definitions    as  sought  to  be contended    by  the
learned   counsel   appearing   for   the   judgment   creditor   in   support   of
initiation   of   such   insolvency   proceedings.     In   my   view   it   is
impermissible     and   it   is   without   jurisdiction.      We   have   to   read
intention   of the legislature   by reading the plain language   used in
the  statute, considering the scheme   and purports of the C.P.C. and
the insolvency Act, apart from the concept of intra­border or national
or international treaties and convention and aspects of   territorial as
well  as  courts'   jurisdiction.      If  the  Act   is  silent  and   if  there   is    no
provision,   there   is  no   question     to   read   or   go   beyond   the   existing
provisions   of   law.       The   court   cannot   read   anything   beyond   the
statutory provisions which has  plain language.   There is no question
to enlarge the meaning   and or putting   something into the statute,
specifically when the provisions  are clear and specific

IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
IN INSOLVENCY
NOTICE OF MOTION NO.  53  OF    2011 
IN 
INSOLOVENCY NOTICE NO.   28  OF   2011 
Abraaj Investment Management Ltd.,  
V/s.
Mr. Neville Tuli s/o. Ramjidas Tuli  ..
CORAM    :    ANOOP  V.  MOHTA, J.

           PRONOUNCED ON : 17 DECEMBER, 2012
Citation;AIR 2013 (NOC)91 bombay

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