Adjudicating Authority has to ascertain the existence of a default from the records or evidence : NCLT

Adjudicating Authority has to ascertain the existence of a default from the records or evidence : NCLT

The National Company Law Tribunal (NCLT), Kolkata by its two-member bench comprising of Rohit Kapoor (Judicial Member) and Balraj Joshi (Technical Member) admitted an application for initiating a Corporate Insolvency Resolution Process (CIRP) against McLeod Russel India, the country's largest bulk tea producer and part of the Brij Mohan Khaitan group.

The Company Petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (Code) was filed by IL & FS Infrastructure Debt Fund (Financial Creditor) seeking to initiate CIRP against McLeod Russel India Limited (Corporate Debtor) for default in payment of Rs. 347,47,18,043 as on 12 November 2019 (Principal amount is of Rs. 252,66,48,735 and Pending Normal and Penal Interest is of Rs. 94,80,69,308 along with further interest from 12 November 2019 till date of payment and/or realization). The date of default has been stated as 9 July 2019.

The Financial Creditor had subscribed to debentures of two group companies of the Corporate Debtor, being Babcock Borsig Limited (BBL) amounting to a sum of Rs.150Crore (BBL Facility) and Williamson Magor & Company Limited (WMCL) amounting to a sum of Rs. 99.5 crore (WMCL Facility) (hereinafter collectively referred to as 'Facilities').

The Corporate Debtor had executed a shortfall undertaking in favor of the Financial Creditor (Shortfall Undertaking). Clause 3.2 (a) of the Shortfall Undertaking provided that on a breach by WMCL/BBL (Borrowers) of its obligation to maintain the required amounts in the debt service reserve account (DSRA) under the respective debenture trust deeds, the Corporate Debtor would have an irrevocable and unconditional obligation towards the Financial Creditor to meet any shortfall in the said DSRA.

The Financial Creditor contended that the Corporate Debtor, by executing the Shortfall Undertaking, promised to discharge the liability of the Borrowers in case of their default, thereby falling squarely within the definition of a "Contract of Guarantee" as provided under Section 126 of the Indian Contract Act, 1872.

Furthermore, the Financial Creditors asserted that the Corporate Debtor had also undertaken to indemnify the Financial Creditor under Clause 7 of the Shortfall Undertaking against any losses, expenses, claims, and liabilities incurred or suffered by it in relation to the Shortfall Undertaking.

In the present case, the Corporate Debtor had given both guarantee and an indemnity to secure the Facilities (which are in the form of debentures) by executing the Shortfall Undertaking. Therefore, the Financial Creditor argued that the sums owed by the Corporate Debtor to the Financial Creditor under the Shortfall Undertaking constitutes a financial debt under the Section 5(8)(c) Code.

The NCLT noted that in addition to the shortfall undertaking agreement the Corporate Debtor had also given a letter of comfort to the debenture trustee which confined to making good the losses only as an assurance and not in the tangible terms.

Furthermore, the bench noted that the letter of credit was not mentioned in any of the headings brought out above like security documents and addition security documents and therefore, can be construed to be not material for the purpose of considering this to be considered in the spirit of a guarantee instrument.

The bench rejected the contention of the ld. Senior Counsel appearing on behalf of Corporate Debtor that since no liability in the shape of a guarantee was incumbent upon his client, therefore, in terms of Section 5(8) no financial debt could said to be existing against his client.

The Tribunal emphasized that the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in subclauses A to H of Section 5(8) of the Code shall constitute financial debt.

The issue before the NCLT was whether the following documents could be construed to be constituting a guarantee or not:

i. Letter of comfort

ii. ii. Indemnity bond

iii. iii. Shortfall undertaking

The NCLT observed that, "Section 7 of the Code envisages that the Adjudicating Authority has to ascertain the existence of a default from the records of an information utility or on the basis of other evidence furnished by the Financial Creditor. On the basis of the Post-Dated Cheques issued by the Corporate Debtor herein to the Financial Creditor herein, the debt is established and the fact that the borrower failed to respond to the notices sent by the Financial Creditor who had issued two default notices dated May 6, 2019, and May 24, 2019 to the borrowers, the Facilities were recalled pursuant to the recall letters dated 10 June 2019."

"In regard to the issued outlined above viz. Letter of comfort, Indemnity bond and the shortfall undertaking, suffice it to say that whether or not these can be construed as guarantees would depend on the intention of the parties, which in the instant case, without drawing technical inferences, clearly reflect the intentions of the parties that they are meant to be acting as securities protecting the interest of the financial creditor," added the bench.

Therefore, the NCLT was satisfied that a default had occurred and thus, the petition deserved to be admitted for initiating CIRP against McLeod Russel India Limited, the Corporate Debtor.