Shortfall Undertaking Executed by Corporate Debtor Proves Existence of Debt

Case Details: IL & FS Infrastructure Debt Fund v. McLeod Russel India Ltd. - [2023] 149 taxmann.com 304 (NCLT-Kolkata)

Judiciary and Counsel Details

• • Rohit Kapoor, Judicial Member & Balraj Joshi, Technical Member
  • Ratnako Banerji, Sr. Adv., Rishad Medora, Ms Ramya Hariharam & Ms Asmita Rakhecha, Advs. for the Applicant.
  • Pranav Kohil, Sr. Adv. Jishnu Choudhury, Rishav Banerjee, Farhan Mirja, Ms Santosh Kumari, Ms Eshna Kumari, Ritoban Sarkar & Srinjoy Bhattacharya for the Respondent.

Facts of the Case

In the instant case, the appellant (i.e. financial creditor) issued a loan facility to the principle borrower, wherein the respondent (i.e. the corporate debtor) stood as a guarantor. The appellant had also subscribed to the debenture of two group companies of the respondent.

In pursuance of the said facilities, the respondent executed a shortfall undertaking in favour of the appellant. If the borrowers failed to maintain the required amounts, as per their respective debenture trust deeds in the debt service reserve account (DSRA) for the purpose of redeeming the debentures or paying interest thereon, the respondent would have an irrevocable and unconditional obligation to meet any shortfall in the DSRA.

The respondent also undertook to indemnify the appellant against any losses, expenses, claims and liabilities incurred or suffered by it in relation to the shortfall undertaking and provided post-dated cheques to the appellant for the principal and interest amounts payable by the borrowers to the appellant within one year.

However, the principle borrower failed to comply with its obligations under the debenture trust deeds including its obligation to maintain the DSRA and, therefore, the appellant issued a funding notice to the respondent.

Since, the respondent failed to fund the said shortfall, the appellant filed an application u/s 7 of the IBC before the Adjudicating Authority (NCLT) seeking initiation of the CIRP against the respondent.

The issue placed before the Adjudicating Authority was whether the documents i.e. Letter of comfort, Indemnity bond, Shortfall undertaking etc. could be construed as constituting a guarantee or not.

NCLT Held

The National Company Law Tribunal (NCLT) observed that the post-dated cheques, Letter of comfort, Indemnity bond and shortfall undertaking were meant to act as securities protecting the interests of the appellant.

The NCLT held that the documents submitted by the appellant clearly established that there existed financial debt that had been defaulted by the respondent and, therefore, the instant petition filed by the appellant was to be admitted.

List of Cases Reviewed

• • Innoventive Industries Ltd. v. ICICI Bank Ltd. [2017] 84 taxmann.com 320/143 SCL 625 (SC) (para 39) followed.

List of Cases Referred to

• • Union Bank of India v. Era Infra Engineering (P.) Ltd. [C.A. No. 997(PB)/2018, dated 6-12-2018] (para 9)
  • Zee Enterprises Entertainment Ltd. v. IndusInd Bank Ltd.[I.A. No. 10556/2020, dated 12-11-2020] (para 12)
  • Vipul Himatlal Shah v. Teco Industries [Company Appeal (AT)(Insolvency) No. 470 of 2022, dated 18-5-2022] (para 18)
  • Yes Bank Ltd. v. Zee Entertainment Enterprises Ltd. [MANU/MH/1009/2020] (para 27)
  • United Breweries (Holding) Ltd. v. Karnataka State Industrial Investment and Development Corporation Ltd. 2011 SCC Online Kar 4012 (para 27)
  • Oriental Bank of Commerce v. Prakash Asphaltings & Tolls Highway (India) Ltd. [MANU/NC/1535/2021)] (para 35)
  • Axis Bank Ltd. v. Nageswara Rao [2022] 144 taxmann.com 73/174 SCL 613 (Mum.) (para 35)
  • Phoenix ARC (P.) Ltd. v. Ketulbhai Ramubhai Patel [2021] 124 taxmann.com 90/164 SCL 468 (SC) (para 38)
  • Innoventive Industries Ltd. v. ICICI Bank Ltd. [2017] 84 taxmann.com 320/143 SCL 625 (SC)
  • Ramchandra B. Loyalka v. Shapoorji N. Bhawnagree AIR 1940 Bom 315/1940 ILR Bom. 552 (para 41)
  • Swiss Ribbons (P.) Ltd. v. Union of India [2019] 101 taxmann.com 389/152 SCL 365 (SC) (para 43)
  • N.C Goel & Maya Goel v. Piyush Infrastructure India (P.) Ltd. [C.P (IB) No. 453 (ALD) of 2019, dated 13-6-2022] (para 44)
  • Vidarbha Industries Power Ltd. v. Axis Bank Ltd. [2022] 140 taxmann.com 252/173 SCL 355 (SC) (para 45)
  • Union Bank of India v. Era Infra Engineering (P.) Ltd. 2018 SCC OnLine NCLT 9130 (para 47)
  • Bharat Bhari Udyog Nigam Ltd. v. Jesso and Co. Ltd. [2003] 4 Comp. LJ 333 (Cal) (para 48)
  • Kotak Mahindra Bank Ltd. v. Kew Precision Parts (P.) Ltd. [2022] 144 taxmann.com 25 (SC) (para 51)
  • Dena Bank v. C. Shivakumar Reddy [2021] 129 taxmann.com 60 (SC) (para 51).