NCLT go-ahead to insolvency process against Subhash Chandra firm Essel Infraprojects

The Mumbai Bench of the National Company Law Tribunal (NCLT) has ordered initiation of corporate insolvency resolution process (CIRP) against Essel Infraprojects Ltd on a petition filed by Jammu and Kashmir Bank over a default of Rs 87.43 crore. Essel Infraprojects is one of many Subhash Chandra companies facing insolvency process.

The NCLT’s Court-V, in an order pronounced on August 24, held that the bank had established the existence of debt and default and that its petition was within the limitation period. The tribunal also rejected Essel Infraprojects’ contention that it had been discharged from its corporate guarantee after the transfer of the underlying mortgaged property to other group entities.

The default relates to a Rs 200-crore line of credit facility sanctioned by Jammu and Kashmir Bank in 2013 to Pan India Utilities Distribution Company Ltd (PIUDCL). The bank disbursed Rs 125 crore on December 28, 2013, and the remaining Rs 75 crore two days later. Essel Infraprojects had provided a corporate guarantee for the facility and had also mortgaged 196.16 acres of land at Gorai in Mumbai as security.

According to the petition, the outstanding principal stood at Rs 69.97 crore as of March 1, 2019. With interest, penal interest and other charges, the total claim had risen to Rs 87.43 crore. The date of default relied upon by the bank was October 29, 2019.

Dispute over corporate guarantee

The case centred on whether Essel Infraprojects continued to be liable under the corporate guarantee after the Gorai land was transferred as part of group restructuring.

Essel Infraprojects argued that the land was transferred to Essel Urban Infrastructures Pvt Ltd under a demerger scheme sanctioned by the Bombay High Court in April 2014. Essel Urban was subsequently merged with Pan India Infraprojects Pvt Ltd (PIIPL), resulting in the land being transferred to PIIPL. The company contended that Jammu and Kashmir Bank was aware of these transactions and had subsequently sought a fresh mortgage and guarantee from PIIPL.

The company also argued that the bank’s 2017 renewal-cum-reduction letter amounted to a material alteration of the original security arrangement and discharged Essel Infraprojects from its guarantee under the Indian Contract Act. It further claimed that the bank had already proceeded against PIUDCL and PIIPL, and therefore could not pursue Essel Infraprojects as well.

The tribunal, however, rejected these arguments.

It noted that the original corporate guarantee was an independent and continuing obligation. The guarantee specifically stated that it would remain in force until the loan was fully liquidated and would not be prejudiced by absorption or amalgamation of the guarantor. It also provided that the guarantee would be in addition to any other security held by the bank.

The NCLT said the 2017 sanction letter did not establish that the original guarantee was substituted or extinguished. The bank’s request for an additional guarantee and mortgage from PIIPL did not, by itself, amount to novation or release of Essel Infraprojects from its existing obligation.

The tribunal also held that the demerger scheme did not specifically provide for the transfer or extinguishment of Essel Infraprojects’ independent liability under the corporate guarantee. Mere transfer of liabilities relating to the demerged undertaking was insufficient to establish that the continuing guarantee had moved to the resulting company.

Bank can proceed against multiple guarantors

The NCLT further rejected the argument that the bank could not initiate proceedings against Essel Infraprojects after proceeding against PIUDCL and PIIPL.

It held that a creditor can proceed simultaneously against the principal borrower and multiple guarantors, with the liability of other parties extinguished only to the extent of actual recovery. In this case, there had been no actual recovery of the claimed amount from either PIUDCL or PIIPL.

PIUDCL had itself been admitted into CIRP in September 2019 following its default, while PIIPL had also subsequently undergone insolvency proceedings.

The tribunal also dismissed Essel Infraprojects’ objection concerning the authority of the bank official who filed the petition, holding that the relevant power of attorney was sufficiently wide to cover initiation of insolvency proceedings under Section 7 of the Insolvency and Bankruptcy Code.

With the debt exceeding the Rs 1-crore threshold under the Code, the NCLT admitted the restored petition and ordered CIRP against Essel Infraprojects.

Hemant J Mehta was appointed as the interim resolution professional. The tribunal directed Jammu and Kashmir Bank to deposit Rs 5 lakh towards the initial CIRP cost.

A moratorium under Section 14 of the IBC has also been imposed, restricting suits and recovery proceedings against the company and preventing transfer or disposal of its assets during the insolvency process. The moratorium will remain in force until completion of the CIRP, approval of a resolution plan or an order for liquidation, as applicable.

Also See: NCLT approval to Subhash Chandra’s repayment plan of Rs 6.5 crore against Rs 22,000 crore debt