In the matter of KSL and Industries Ltd.

The case is fixed for pronouncement of order. The order is pronounced in open Court, vide separate sheet. -sd- -sd- DR. V. G. VENKATA CHALAPATHY CHITRA HANKARE MEMBER (TECHNICAL) MEMBER (JUDICIAL)

IA 54 of 2022 In CP (IB) 397 of 2018 IN THE NATIONAL COMPANY LAW TRIBUNAL AHMEDABAD (COURT - II)

IA No. 54 / NCLT / AHM / 2022 IN CP(IB) No. 397 / NCLT / AHM / 2018 (Under Section 60(5) of the Insolvency and Bankruptcy Code, 2016)

IN THE MATTER BETWEEN

Union Bank of India …. Applicant Versus Kiran Shah, RP of KSL & Industries Ltd. …. Respondent

AND IN THE MATTER OF Abhinandan Multitrade Pvt. Ltd.& Anr. … Financial Creditor Versus KSL & Industries … Corporate Debtor

Order pronounced on 10.11.2023

Coram: MRS. CHITRA HANKARE HON’BLE MEMBER (JUDICIAL) MR. VELAMUR G VENKATA CHALAPATHY HON’BLE MEMBER (TECHNICAL)

IA 54 of 2022 In CP (IB) 397 of 2018

MEMO OF PARTIES

Union Bank of India (Erstwhile Andhra Bank) Stressed Asset Management Branch 14, Ground Floor, Bharat House, M.S Marg, Fort, Mumbai-400 023 … Applicant Versus Kiran Shah, RP of KSL & Industries Ltd. 608, Sakar-1, Nr. Gandhi gram Railway Station, Opp: Nehru Bridge, Ashram Road, Ahmedabad-380009 … Respondent

Present: For the Applicant : Ms. Rathina Maravarman, Adv. a.w Mr. Karan Sanghani, Adv. For the Liquidator : Mr. Arjun Sheth, Adv.

ORDER

1. Present Application is filed being aggrieved by the decision of the Respondent i.e., the Resolution Professional, rejecting the claim of the Applicant and not including the Applicant as member of Committee of IA 54 of 2022 In CP (IB) 397 of 2018 Creditors ("COC"). A Resolution Plan was approved by COC members keeping the Applicant outside the process thereby causing injustice to Applicant. Further, assets mortgaged to the Applicant are dealt in the Resolution Plan without the Applicant being member and part of the COC. Therefore, the Resolution Plan approved itself is in contravention of Law and reliefs are sought for rejection of resolution plan, if approved. 2. The Applicant has extended loan to Krishna Knitwear Technology Ltd. (Krishna Knitwear") and Eskay Knit India ("Eskay Knit") Ltd. In order to secure these facilities Corporate Debtor extended guarantee to secure the claim of the Applicant. In addition to the same, the Corporate Debtor also created mortgage of its asset as per Exhibit „A‟ in favour of the Applicant. 3. The Applicant submits that, at the time of the admission of the captioned Company Petition by this Hon‟ble Tribunal on 06th September 2019, the principal borrowers owed a sum of Rs. 76,25,34,655.55/- (Rupees Seventy-Six Crores Twenty-Five Lakhs Six Hundred Fifty- Five and Paise Fifty-Five only) to the Applicant. The Applicant submits that the principal borrowers committed default in repayment of liability of the Applicant. Accordingly, the accounts of principal Borrowers (Krishna Knitwear & Eskay Knit) became NPA on 13.11.2015 and 23.12.2015. As the repayment obligation of all the Guarantors to the Principal Borrower

IA 54 of 2022 In CP (IB) 397 of 2018 is co-extensive with that of the Borrower the Corporate Debtor having extended Corporate Guarantee in the said accounts is liable to pay the said amount. 4. The Applicant submits that the Interim Resolution Professional ("IRP"), pursuant to order of initiation of CIRP against Corporate Debtor dated 06.09.2019 invited claims of the creditors of the Corporate Debtor on 19.09.2019. The Applicant (erstwhile Andhra Bank) accordingly submitted their claim against the Corporate Debtor for Rs. 76,25,34,655.55/- Rupees Seventy-Six Crores Twenty-Five Lakhs Six Hundred Fifty-Five and Paise Fifty-Five only) by way of Form C on 29th November 2019. The Applicant submits that the Resolution Professional (RP) vide is e-mail dated 7th September 2021 (belatedly at the conclusive phase of CIRP process) refused to accept the claim of the Applicant on the basis that the Applicant have not invoked the guarantee furnished by the Corporate Debtor to it. The RP thereafter addressed an e-mail dated 12.10.2021 to the Applicant stating that the Applicant was no more a part of the reconstituted COC of the Corporate Debtor. 5. Pursuant to the Applicant sanctioning and granting various credit facilities to Krishna Knitwear, the Corporate Debtor along with other entities executed an undertaking dated 25th March 2011 and a general form of guarantee dated 25th March 2011 for Rs.16 crores.

IA 54 of 2022 In CP (IB) 397 of 2018 The Corporate Debtor also deposited with the Dadar branch of the Applicant the original documents of the title deeds of the said Property on 28th March 2011 with an intent to secure the repayment to the Applicant of the monies that may become due including interest, commission and other banking charges and costs. 6. The respondent had vide Board Resolution dated 12th March 2021(exhibit G) consented to provide a corporate guarantee of Rs 16 crores in favour of Andhra Bank on behalf of M/s. Krishna Knitwear Technology Ltd, Silvasa an associate company. They also resolved further for creation of mortgage of industrial and non-agricultural property at Survey No.82/7 Village Amli, UT of Dadra and Nagar Haveli, admeasuring 1700 sq mt in favour of the said bank for securing working capital facility aggregating to Rs 16 crores sanctioned to M/s Krishna Knitwear Tech Ltd sanctioned a loan facility vide Lr no. 1128/01/1648 dated 12.03.2011. The Chairman of the company as authorised signed a general form of guarantee vide letter dated 26 March 2011for an amount of liability under the guarantee for an amount not exceeding Rs 16 crores apart from and in addition to all interest, banking, law and other costs, charges and expenses referred to. The guarantee was stated to be of continuing nature and shall cease only on payment of the amount guaranteed. It was also authorised to create the requisite charge with the ROC. The company also

IA 54 of 2022 In CP (IB) 397 of 2018 deposited a list of documents of the stated property as mortgage on the same date. The Applicant further submits that inspite of repeated requests, Krishna Knitwear as well as the guarantors including the Corporate Debtor failed and neglected to honour the commitments and liabilities. The Applicant accordingly filed an Original Application bearing OA Number 150/2016 under Section 19 of Recovery of Debts due to Banks and Financial Institutions ("RDDBI") Act, 1993 before the Hon'ble Debt Recovery Tribunal - II, Ahmedabad seeking recovery of the amount due from Krishna Knitwear along with the guarantors including the Corporate Debtor herein and the said O.A. is still pending adjudication. 7. The Applicant had addressed a notice dated 19th May 2016 under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 to Krishna Knitwear along with the guarantors including the Corporate Debtor. The account whose default triggered the guarantee clause is stated in the letter as an NPA since 29.6.2012 for an amount of Rs 196.91 crores as on 30.4.2016.

8. The respondent RP has brought to the notice of the Tribunal that the Applicant was duty bound to furnish the proofs to substantiate claims; the Applicant had chosen to and had remained reluctant to submit the IA 54 of 2022 In CP (IB) 397 of 2018 proofs to substantiate its claims) even after frequent reminders by the Respondent sent through emails (letter dated 24.4.2021, 9.6.2021, 21.7.2021) which are suppressed by the Applicant. The RP has stated that the Applicant has lodged claim for an amount of Rs. 76,25,34,655.55 (Rupees Seventy Six Crores Twenty Five Lakhs Thirty Four Thousands Six Hundred Fifty Five and Paisa Fifty Five Only) towards liability of the Corporate Debtor arising from the claim against the Corporate Guarantee and Collateral Mortgage given to secure credit facilities granted to a company, namely, M/s. Krishna Knitwear Technology Limited and to other company, namely, M/s. Eskay Knit (India) Limited. It is the case of the Respondent that since no debt is due by the Corporate Debtor to the Applicant, the question of admitting the claim of the Applicant even to that extent does not arise can be best to the extent of Rs. 26 Crores considering to the extent to which the Corporate Debtor had agreed to give guarantee and not beyond that.

RP has also stated that Demand Notice under section 13(2) of the SARFAESI Act, 2002 not served to the Corporate Debtor in its capacity as guarantor and he has been included as Mortgagor. 9. The RP had issued various letters further to the bank about the documents needed for verification dated 24.4.2021, 9.6.2021, 17.07.2021 and 21.7.2021. The bank then issued a letter to RP vide letter dated

IA 54 of 2022 In CP (IB) 397 of 2018 26.7.2021 that already OA No.329 of 2016 and OA No.150 of 2016 has been filed in DRT against CD in their capacity as Guarantor by bank and claim already admitted. The RP further vide letter dated 27.7.2021, 7.8.2021 and 13.08.2021 sought copies of OA, Guarantee invocation Notice from the bank. The Bank only submitted the OA copy on 18.8.2021 and the RP vide letter dated 1.9.2021 rejected the claim of the bank. The reason stated by RP was that the guarantee was not invoked by serving a notice. 10. The Applicant had given two references of OA No.329 of 2016 filed before DRT Ahmedabad against Eskay Knit Wear on behalf of all consortium banks and CD(respondent) is added as Defendant No..8 and in OA No.150 of 2016 filed against Krishna Knit Wear in which the CD is included as Defendant No.7 in the OA. The applicant along with the other banks had stated in the Para 5.9 of the petition before the DRT that the defendant as per sanction letter dated 14.3.2011 had laid down that defendant No. 6 to 8 do stand as corporate guarantors for the working capital credit facilities up to the limits of Rs 10 crore and also mortgage in favour of applicant No.5 their respective immovable properties described in the second schedule.

The same has been mentioned in OA No.150 of 2016 (filed against Krishna Knit wear) in which CD is added as IA 54 of 2022 In CP (IB) 397 of 2018 Defendant No.7 in the OA (Page 171, 174, 220, 238, 257, 281 and 320). 11. Reference is made by applicant to following excerpts from the decision of the Apex Court in the case of Laxmi Pat Surana v. Union Bank of India reported in [2021] 125 taxmann.com 394 (SC): "19. Indubitably, a right or cause of action would ensure to the lender (financial creditor) to proceed against the principal borrower, as well as the Guarantor in equal measure in case they commit default in repayment of the amount of debt acting jointly and severally. It would still be a case of default committed by the Guarantor itself, if and when the principal borrower fails to discharge his obligation in respect of amount of debt. For, the obligation of the Guarantor is coextensive and coterminous with that of the principal borrower to defray the debt, as predicated in section 128 of the Contract Act. As a consequence of such default, the status of the Guarantor metamorphoses into a Debtor or a Corporate Debtor if it happens to be a corporate person, within the meaning of section 3(8) of the Code.” 12. As per its eligibility to submit the claim the applicant herein had filed “Form-C” on 29.11.2019 with the IRP for the Corporate Guarantees given by the CD qua two companies being Krishna Knitwear Technology Limited and Eskay Knit India Limited for a principal amount of IA 54 of 2022 In CP (IB) 397 of 2018 Rs.16 crores and Rs.10 crores respectively (pg.no.37, Exhibit C of the IA).

However, contrary to the above, the Applicant has claimed an exorbitant amount of Rs. 76,25,34,655.55 from the CD even though the guarantees were given/authorised by the CD for amounts of Rs.16 Crores and Rs.10 Crores only as per board resolution. 13. That RP had also filed an application being IA No. 682 of 2021 in CP (IB) No. 397 of 2018 dated 15.09.2021 seeking direction to update claims of the CD and reconstitute the COC in view of the complexity of the claims (Para 6.2 and 6.3, Pg no. 88 of the RP's Reply). The Tribunal vide order dated 05.10.2021 clarified that the RP does not need direction to conduct CIRP and RP is competent to take the decisions on updating the list of creditors and reconstitute the COC. The said order dt. 05.10.2021 has never been challenged by any person, including the applicant herein, and the same was also discussed in the CoC meeting dated 14.10.2021. Clause 10 of the deed of guarantees categorically provides for the demand notice in writing required to be issued for right to payment to accrue against the guarantor for a demand in writing made by the Bank.

The Section 13(2) notice under SARFAESI Act dt. 19.05.2016 which the applicant purportedly claims as demand notice under the deed of guarantee in question qua borrowings of Krishna Knitwear Technology Ltd. does not reflect the name of the IA 54 of 2022 In CP (IB) 397 of 2018 CD does not reflect under the name of guarantors but reflects under the name of mortgagors. (Pg 56 of the IA). There is absolutely no reference to the CD having issued guarantee of any kind whatsoever in the said Section 13(2) notice. 14. At this juncture it is important to understand the right being enforced by a secured creditor under the provisions of the SARFAESI Act and so Section 13(2) is reproduced herein below: "13(2) - Where any borrower, who is under a liability to a secured creditor under a security agreement, makes any default in repayment of secured debt or any instalment thereof, and his account in respect of such debt is classified by the secured creditor as non-performing asset, then, the secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditor within sixty days from the date of notice failing which the secured creditor shall be entitled to exercise all or any of the rights under sub-section (4)."

15. The points brought before Tribunal by the counsels during submissions are: a) The Corporate Guarantee was not invoked on or before the Initiation of CIRP and not till date but recovery action initiated.

IA 54 of 2022 In CP (IB) 397 of 2018 b) The Counsel for Applicant stated that it was not necessary as action has been taken under SARFESI and RDB. Recovery suit is still not decided and the status of the mortgaged property (individual) whether realised has not been brought out clearly in arguments. The Guarantor has been made only as a defendant. c) Charge has not been observed to be created by the respondent Corporate Debtor who has guaranteed the status loan. d) The Board Resolution authorises giving guarantee up to Rs 16 crores and mortgage of property authorised while the bank has executed documents with interest ad cost costs and filed a claim with interest and other charges amounting to Rs.76,25,34,655. e) The RP has reviewed and rejected the claim on directions of COC. 16. It is observed that on failure to recover under SARFESI Act including the mortgaged properties, or in the absence of orders from the DRT to proceed against the borrower (principal) and the Guarantor, the applicant has preferred the entire amount due from the principal borrower on the guarantor by submitting a claim for Rs.76,25,34,655. The respondent has been named as defendant in the suit filed before DRT and there has been no invocation of the guarantee.

IA 54 of 2022 In CP (IB) 397 of 2018 17. In this regard whether the applicant can proceed against the guarantor without proceeding against the principal guarantor has been answered in Laxmi Pat Surana (supra) rendered by 3 judge bench that it was open to the financial creditor to proceed against the guarantor without suing the principal borrower. The obligation of the guarantor is coextensive and coterminous with that of the principal borrower to defray the debt, as predicated in Sec 128 of the Contract Act. As a consequence of such default, the status of the guarantor metamorphoses into a debtor or a corporate debtor if it happens to be a corporate person, within the meaning of Sec 3(8) of IBC. Reliance is also placed on Sec 5(5-A) of IBC which defines the expression “corporate guarantor” to mean a corporate person, who is the surety in a contract of guarantee to a corporate debtor. The liability of the guarantor is coextensive with that of the principal borrower. The remedy under Sec 7 is not for recovery of the amount, but is for reorganisation and insolvency resolution of the corporate debtor who is not in a position to pay its debt and commits default in that regard. It is open to the corporate debtor to pay off the debt. 18. In this case, it is not that the applicant has brought in an insolvency under the Sec 7 of the IBC but has submitted the claim to the RP who has been appointed on initiation of CIRP against the Corporate Debtor who is also a guarantor to one of the associated entities.

IA 54 of 2022 In CP (IB) 397 of 2018 19. Claims, which are due and payable before the commencement of the CIRP can only be taken into consideration. In case of a guarantee, the debt becomes due only when a creditor invokes a guarantee. The Hon‟ble NCLAT differentiated the difference between the definition of „default‟ and „claim‟ under the IBC. Existence of „default‟ is a condition precedent for admission of insolvency proceeding under IBC. Any person who has right to claim payment, under the IBC, is supposed to file the claim, whether matured or immature. The question as to whether there is a default or not is not relevant. As on date of CIRP and till date, the applicant has not invoked the guarantee, but retain the recovery suit. 20. In a landmark judgment before Hon'ble NCLAT Aashray Social Welfare Society & Ors. Vs. Saha Infratech Pvt. Ltd. & Ors. Company Appeal (AT) (Insolvency) No. 904 of 2021 dismissed a company appeal held that when a corporate debtor as a Guarantor has not invoked the Corporate Guarantee before the initiation of CIRP under the provisions of IBC 2016 then the „right to payment‟ cannot be accrued by the Corporate Debtor. Further the bench placed reliance on the judgment of the Hon‟ble Supreme Court in Ghanshyam Mishra and Sons Pvt Ltd V Edelweiss Asset Reconstruction Co Ltd (2021) 9 SCC 657 and held that when the “Corporate Debtor” is a “Guarantor” and the Corporate Guarantee” was not

IA 54 of 2022 In CP (IB) 397 of 2018 invoked before the commencement of the CIRP, as on the date of filing the claims, the “Right to Payment” cannot be accrued. In view of the above the Tribunal is passing the following order:

ORDERS The Application IA No.54 of 2022 is dismissed.

-sd- -sd- DR. V. G. VENKATA CHALAPATHY CHITRA HANKARE MEMBER (TECHNICAL) MEMBER (JUDICIAL)