The Delhi bench of the National Company Law Appellate Tribunal ( NCLAT ) observed that initiation of Corporate Insolvency Resolution Process ( CIRP ) against a co-borrower is allowed under the Insolvency and Bankruptcy Code ( IBC ) and shares equal responsibility under loa agreement. In the present case, an appeal was filed by a suspended director of Narang Developers Pvt. Ltd. (NDPL) against decision of the National Company Law Tribunal ( NCLT ) Mumbai which admitted the NDPL into insolvency on an application filed by Aditya Birla Finance Ltd. (Financial Creditor) under section 7 of the IBC.
The loan amount to the tune of Rs. 11.50 crores was advanced by financial creditor, Aditya Birla Finance Ltd. and Anr. to corporate debtor , Amit Narang with NDPL acting as a co-borrower. The terms and conditions of the loan were enumerated in the letters sanctioned on September 19, 2016, December 4, 2018. Subsequently, a facility agreement and a supplementary facility agreement were also executed on September 29, 2016 and December 7, 2018 respectively.
An indenture of mortgage was executed on October 17, 2016 in which a security interest over its assets was created by the NDPL in favour of the financial creditor. Account of the corporate debtor was classified as Non-Performing Assets (NPA) on June 16, 2019 when it defaulted in paying the loan amount. Thereafter a demand notice under section 13(2) of the SARFAESI Act was sent on July 5, 2019.
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The financial creditor moved an application under section 7 of the IBC before the NCLT and CIRP was initiated against the corporate debtor on March 28, 2024. This decision of the NCLT was challenged by the suspended director of the NDPL before the NCLAT on the ground that the loan was provided directly to Csango Industries Pvt. Ltd and Pacific Link Pvt Ltd. and not to NDPL therefore the NDPL was not responsible for any default.
The NCLAT observed that co-borrower shares equal and same liability under a loan agreement with that of the primary borrower. The Tribunal found the case of State Bank of India vs Athena Energy Venture Pvt. Ltd.in which it was held that CIRP can be initiated against both primary borrower and co-borrower as similar and equal responsibility is shared by them.
The bench held that the obligation of the Co-Borrower is co-extensive and coterminous with that of the Primary Borrower and hence a right or cause of action becomes available to the financial creditor to proceed against the primary borrower, as well as the Co-Borrower in equal measure in case they commit default in repayment of the amount of debt.
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Further observed that declaration of NPA under SARFAESI Act is an independent proceeding which cannot obstruct the financial creditor from initiating CIRP against the corporate debtor under the IBC.
The NCLAT bench comprising Mr. Justice Ashok Bhushan (Chairperson), Mr. Barun Mitra (Technical Member) and Mr. Arun Baroka (Technical Member) concluded that several documents were signed by the corporate debtor in their capacity as co-borrower which also included signing of a demand promissory note in which equal and same responsibility was shared for the loan amount given to them by the financial creditor. Therefore, they cannot now refuse to repay the loan amount.
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