Personal Guarantor Who Settled Company Debt Cannot Claim Financial Creditor Status: NCLAT

The National Company Law Appellate Tribunal (NCLAT), Chennai, has held that a personal guarantor who settled a corporate debtor's dues with its financial creditor, did not become a financial creditor in the liquidation proceedings.

A bench of Judicial Member Justice Sharad Kumar Sharma and Technical Member Jatindranath Swain found that there was no assignment of the debt in S.V. Ramasamy's favour. He had also not sought substitution of Tamil Nadu Mercantile Bank (TMB) in the liquidation proceedings.

“It is seen that Mr. S.V. Ramaswamy has settled the dues of the Corporate Debtor to the bank TMB, but there is no assignment of debt. It is inconceivable how he becomes a financial creditor to the Corporate Debtor, when he has not sought substitution of TMB by himself in the liquidation proceedings. At the most, he can be described as the buyer of the assets of the Corporate Debtor in a private sale apart from being the promoter.”

The court was hearing four appeals arising from the liquidation of Swastik Spinners (India) Pvt. Ltd. Three were filed by TMB and one by Ramasamy, the company's promoter and personal guarantor.

Swastik Spinners entered corporate insolvency resolution proceedings (CIRP) on March 22, 2018, with TMB as its sole financial creditor. A resolution plan submitted by Ramasamy was rejected, following which the company was ordered to be liquidated in February 2019.

During liquidation, an auction purchaser deposited an earnest money deposit (EMD) of ₹54.31 lakh but failed to pay the balance consideration. The EMD was forfeited, with ₹52.27 lakh distributed to TMB after deduction of the liquidator's fees.

Ramasamy subsequently settled the company's dues with TMB for ₹9.50 crore under a one-time settlement (OTS). TMB accepted the settlement and issued an account closure certificate.

Ramasamy later sought to take the company out of liquidation. The National Company Law Tribunal (NCLT) rejected his plea in May 2023, holding that liquidation could not be withdrawn merely because the bank's dues had been settled.

The NCLT noted that revival during liquidation could take place through a scheme under Section 230 of the Companies Act or through a sale as a going concern. The order was not challenged and attained finality.

The new liquidator subsequently obtained NCLT permission to transfer the company's assets to Ramasamy under the OTS. The dispute before the NCLAT was mainly over the forfeited EMD, liquidation expenses and the claim of operational creditor TCP Limited.

Ramasamy argued that after paying TMB's dues, he had stepped into the bank's shoes and was entitled to the forfeited amount after liquidation expenses. He also challenged the ₹20 lakh payment allowed to erstwhile liquidator S. Muthuraju and disputed TCP Limited's claim.

TMB argued that it had received the ₹52.27 lakh before the OTS and was entitled to retain it. It also contended that Ramasamy had agreed under the settlement to bear liquidation expenses and surviving liabilities.

The NCLAT rejected TMB's claim over the forfeited amount. It noted that the amount had been distributed to TMB before the OTS and that, after receiving ₹9.50 crore under the settlement and issuing the account closure certificate, the bank's dues stood satisfied.

The amount therefore had to return to the liquidation estate for distribution among stakeholders in accordance with law. The NCLAT also noted that TMB had earlier agreed to the return and distribution of the amount as per law.

The appellate tribunal upheld the ₹20 lakh payment to Muthuraju. It noted that his fee had been fixed at ₹50,000 per month during CIRP and continued during liquidation pursuant to an earlier NCLAT order.

Muthuraju had worked for 64 months, conducted four e-auctions, and dealt with proceedings before the NCLT and Madras High Court. He had also reduced his claim to ₹20 lakh.

The NCLAT also rejected the challenge to TCP Limited's claim. The operational creditor had filed its claim during CIRP and later updated it during liquidation. The claim had been reported to the NCLT and the Insolvency and Bankruptcy Board of India.

The tribunal then considered whether Ramasamy could claim the status and rights of TMB after settling its dues.

It found that there was no assignment of TMB's debt to Ramasamy. He had also not sought substitution of the bank in the liquidation proceedings.

The tribunal observed that, at most, Ramasamy could be described as the buyer of the company's assets in a private sale, apart from being its promoter. As a buyer, he had no locus to claim any amount from the liquidation estate.

As promoter, he would be the last person in the queue for distribution of the liquidation proceeds. He could receive the forfeited amount only after the claims were satisfied in accordance with Section 53 of the Insolvency and Bankruptcy Code.

Section 53 lays down the statutory order for distributing money from a liquidation estate. The NCLAT's finding meant that Ramasamy's payment of TMB's dues did not give him priority over the other stakeholders.

The NCLAT also rejected TMB's argument that Ramasamy should personally bear the liquidation expenses and the operational creditor's claim. It held that the OTS was not entered into in line with the IBC and its regulations, while TMB had already declared its claim fully satisfied.

Finding no reason to interfere with the NCLT's order, the NCLAT dismissed all four appeals.

For Appellants: Advocate Rajendran Raghavan

For Respondent: Advocate S. Umamaheswari for R1; Advocate P. Prashanth for R2