ARC Must Establish Guarantee Was Assigned Before Proceeding Against Personal Guarantor: NCLT Mumbai

An Asset Reconstruction Company cannot proceed against an alleged guarantor merely by establishing the existence of a guarantee and must also show that the guarantee was assigned to it, the National Company Law Tribunal (NCLT), Mumbai, has held.

A bench of Judicial Member Sushil Mahadeorao Kochey and Technical Member Prabhat Kumar rendered the ruling while dismissing an insolvency petition filed by Omkara Assets Reconstruction Pvt Ltd against Agnello Louis D'Souza.

The bench held, “In our considered view, there is no conflict between Sections 5(1) and 5(3) of the SARFAESI Act, 2002. Section 5(3) is a natural consequence and extension of the assignment contemplated under Section 5(1). Once a financial asset is assigned in accordance with Section 5(1), the effect of such assignment is that all contracts, deeds, bonds, guarantees, agreements, powers-of-attorney, permissions, approvals, consents, and related instruments pertaining to the assigned financial asset are to operate in favour of the Asset Reconstruction Company as if the ARC itself were the original lender or beneficiary thereto.”

The tribunal, however, observed that such statutory consequences arise only in respect of contracts, guarantees and other instruments that are actually transferred under the assignment agreement.

The dispute arose from a cash credit hypothecation facility of Rs 2.20 crore granted by Janalaxmi Co-operative Bank Ltd to Marshall Breeders Pvt Ltd on April 2, 2002. The loan account was classified as a non-performing asset on September 30, 2002.

Omkara ARC acquired the debt under a registered assignment agreement dated December 31, 2021. It later issued a demand notice to D'Souza on February 1, 2022 and a statutory demand notice in Form B on May 6, 2024.

Claiming dues of Rs 18.33 crore as of May 31, 2024, the ARC initiated insolvency proceedings against D'Souza as a personal guarantor.

D'Souza denied that he was a guarantor. He contended that the guarantee documents relied upon by the ARC were forged and fabricated. He also pointed out that in earlier proceedings before the Co-operative Court at Nashik and the Maharashtra State Co-operative Appellate Court, he had not been treated as a guarantor.

The tribunal examined the documents relied upon by both sides. It noted that the original lender's proceedings before the Co-operative Court had consistently identified other individuals as guarantors in relation to the loan transaction. It also noted that the respondent's name did not figure as a guarantor in those proceedings.

At the same time, the Tribunal observed that the loan application dated April 2, 2002 specifically recorded Agnello D'Souza and Nancy A. D'Souza as guarantors. It further noted that information filed with the National E-Governance Services Limited (NeSL) also recorded them as guarantors.

The tribunal observed that disputes involving serious allegations of forgery and fabrication ordinarily fall outside the summary jurisdiction exercised under the Insolvency and Bankruptcy Code. It therefore declined to determine whether the guarantee documents were forged.

The bench observed, “Thus, in view of the aforesaid facts and circumstances, we are of the considered opinion that unless the alleged guarantee deed is declared forged, fabricated, or otherwise invalid by a court of competent jurisdiction, the same is required to be proceeded with on a prima facie presumption of having been genuinely and validly executed.”

Having reached that conclusion, the Tribunal turned to the question whether the alleged guarantee had been assigned to Omkara ARC.

The tribunal noted that the assignment agreement defined the financing documents and specifically referred to Schedule 1 for the list of securities, guarantees, and related documents forming part of the assigned financial asset.

It found that Schedule 1 recorded only Elias Marshall D'Souza, the legal heirs of Richard Marshall D'Souza and Rudolph Anthony Lima as guarantors in relation to the assigned financial asset. Agnello Louis D'Souza's name did not appear in the schedule.

The Tribunal observed that the omission was consistent with the stand taken by the original lender before the Co-operative Court and in the appellate proceedings.

The bench observed, “The omission of the Respondent's name in Schedule 1 can not held to be accidental, as the exclusion of Respondent as Guarantor in Schedule 1 is in consonance with stand of the original lender before Co-operative Court and the Appellate Proceedings. In our considered view, Section 5(3), providing that acquisition of a financial asset would also result in acquisition of all underlying securities, cannot be read in isolation and must necessarily be read conjointly with Regulation 5(1)(a).”

The tribunal held that while an ARC steps into the shoes of the original lender upon assignment of a financial asset, the scope of that assignment is governed by the terms agreed between the parties. It observed that the statutory consequences flowing from assignment cannot enlarge the assets and rights that were actually transferred.

The Bench further observed, “Therefore, when the Assignment Agreement expressly records only Mr. Elias Marshall D'Souza, legal heirs of Mr. Richard Marshall D'Souza, and Mr. Rudolph Anthony Lima as guarantors in relation to the financial asset assigned, and does not mention the name of the present Respondent, a prima facie inference arises that no assignment of any alleged guarantee executed by the Respondent was effected in favour of the Petitioner, even assuming that the Respondent had executed such guarantee as alleged.”

The tribunal ultimately held that even assuming the guarantee existed and was enforceable, the material on record did not establish that the alleged guarantee was assigned in favour of Omkara ARC.

Holding that Omkara ARC failed to establish that the alleged guarantee formed part of the financial assets assigned to it under the assignment agreement, the Tribunal concluded that it lacked the locus to invoke or enforce the alleged guarantee against D'Souza.

The insolvency petition was accordingly dismissed.