Delep Goswami, FCS
Advocate
Supreme Court of India
New Delhi 

 










​​Anirrud Goswami
Advocate, Goswami & Goswami


May 20, 2019 [2019] 105 taxmann.com 244 (Article)

Supreme Court's Judgment affirms that fee under RTI Rules shall apply for an RTI Application

In a significant judgment on the interpretation of the provisions of the Right to Information Act, 2005 (RTI Act), the Hon'ble Supreme Court of India in its judgment dated 11th April, 2019 in the Civil Appeal No. 5665 of 2014 : Institute of Company Secretaries of India (ICSI) v. Paras Jain (hereinafter, "ICSI case") has upheld the order dated 22nd April, 2014 passed by the Hon'ble Delhi High Court which set aside Guideline No. 3 notified by the Statutory Council of the Appellant-Institute (ICSI) and directed it to charge fee prescribed as per Rule 4 of the Right to Information (Regulation of Fees and Cost) Rules, 2015 (in short "RTI Rules, 2005").

ICSI Case - Brief Facts

The factual matrix of the case is that the Respondent appeared in the final examination of the ICSI held in December, 2012. On being unsuccessful in qualifying the examination, the Respondent made an application under the RTI for inspection of his answer sheets and subsequently sought for certified copies of the same from the Appellant. The Appellant thereafter demanded Rs. 500/- per answer sheet payable for supply of certified copy(ies) of answer books and Rs. 450/- per answer book for providing inspection thereof respectively as per Guideline No. 3 notified by the Statutory Council of the ICSI. The Respondent made the aforesaid application for obtaining the said information under the RTI Act.
Being aggrieved by the demand made by the ICSI, the Respondent preferred a Writ Petition before the Delhi High Court wherein the learned Single Judge dismissed the petition. A Letters Patent Appeal was thereafter preferred by the Respondent wherein the Division Bench of the High Court quashed Guideline No. 3 notified by the Appellant - ICSI and held that the Appellant could charge only the prescribed fee under Rule 4 of the RTI Rules, 2005.
On appeal, the short issue before the Hon'ble Supreme Court was that when the answer scripts of the Respondent-candidate is sought, whether the fee prescribed under Rule 4 of the RTI Rules, 2005 is payable or that fee prescribed under the prescribed Guideline No. 3 of the ICSI Rules?.

Arguments Of Examinee and the Institute Before the Supreme Court

During the course of argument of the Civil Appeal in the Supreme Court, on behalf of the ICSI, it was argued that it was undisputed that the RTI Act was applicable to the case of the Appellant. However, in light of the fact that specific guidelines were formulated under The Company Secretaries Act, 1980 which govern the Appellant, the same should be applicable and not that which was provided under the RTI Act. It was further contended by the Appellant - ICSI that owing to the Division Bench of the Delhi High Court quashing the Guideline No. 3 prescribed by the ICSI, the Appellant-Institute could not collect any amount of fee except the one prescribed under Rule 4 of the RTI Rules, 2005, which added to financial strain on the Appellant.
On the other hand, the Respondent's counsel contended that any candidate who sought his answer scripts under the RTI Act, 2005 could only be charged fee under Rule 4 of the RTI Rules, 2005. On behalf of the Respondent, it was further contended that the candidates must have a choice to seek the answer scripts either via the avenue under the RTI Act or under the Guidelines of the Appellant Institute under the Company Secretaries Act, 1980.

SC: If information sought for by examinee was RTI Application under RTI Act, then fee under RTI Rules would apply

​Having heard the learned counsels appearing for both the parties and having meticulously perused the record, the Supreme Court noted that the Appellant was governed by the provisions of the Company Secretaries Act, 1980 and under Sections 15, 15A and 17 thereof, the Examination Committee of the Statutory Counsel of the Appellant had framed Guideline No. 3 providing an avenue to the candidates to either inspect their answer scripts or seek certified copies of the same on payment of the stipulation fees. As per Guideline No. 3 thereof, the prescribed fee was Rs. 500/- for obtaining certified copies of the answer scripts and Rs. 450/- for seeking inspection of the same. On the contrary, Rule 4 of the RTI Rules, 2005 prescribed a fee of Rs. 2/- for each page created or copied; and for inspection of records no fee was to be charged for the first hour and a fee of Rs. 5/- was to be charged for each subsequent hour or fraction thereof. In other words, the fee prescribed under the RTI Rules, 2005 was much cheaper compared the fee levied under the ICSI Rules.

The Supreme Court noted that it was clear that the avenue for seeking certified copies as well as inspection was provided both in the RTI Act, as well as in the Statutory Guidelines of the Appellant-Institute. The Supreme Court also noted that the guidelines of the Appellant framed by its Statutory Council were to govern the modalities of its day-to-day concerns and to effectuate smooth functioning of its responsibilities under the Company Secretaries Act, 1980. The said guidelines of the Appellant might provide for much more than what was provided for under the RTI Act, such as re-evaluation, re-totalling of answer scripts. The Supreme Court went on to hold that the Guideline No.3 of the Appellant would not take away from Rule 4 of the RTI Rules, 2005 which also entitled the candidates to seek inspection and certified copies of their answer scripts and that in its opinion, the existence of those two avenues was not mutually exclusive and it was up to the candidate to choose either of the routes. Thus, if a candidate sought information under the provisions of the RTI Act, then payment had to be sought under the Rules framed under the said Act. However, if the information was sought under the Guidelines framed by the Appellant Institute, then the appellant was at liberty to charge the candidate as per its Guidelines.

With regard to the issue about the Division Bench of the Delhi High Court quashing of the Guideline No.3 framed by the Appellant-Institute, the Supreme Court noted that such quashing of the Guideline was affecting the Appellant and also other candidates and that the quashing was done despite no prayer being made to that effect on behalf of the Respondent and, hence, the Supreme Court held that such quashing of Guideline No. 3 of the Appellant Institute was unwarranted. It was to that limited to extent that the Supreme Court allowed the Appeal and set aside the impugned order of the Division Bench of the Delhi High Court whereby it quashed the Guideline No.3 of the Appellant Institute. With regard to the contention of the Appellant that owing to the nominal fee fixed under the RTI Act, the dissemination of information by the Appellant had become financially burdensome and, thus, the Appellant wanted to make a representation to the Government for enhancing the fee prescribed under the RTI Act, the Supreme Court left it open to the Appellant to make such a representation.

Supreme Court's landmark judgment in the CBSE case

No discussion on the right of the students/candidates/examinees to have access to the information relating to their answer papers/evaluation and to obtain copies thereof, would be complete without reference to a very important judgment dated 9th August, 2011 of the Hon'ble Supreme Court of India in the case of Central Board of Secondary Education (CBSE) v. Aditya Bandopadhyay [2011] 8 SCC 497 (henceforth, "the CBSE case") in the context of the provisions of the Right to Information Act, 2005. In the said CBSE case, the main issue was whether a party who was an examinee was eligible to access his/her answer book for the purpose of revaluation and inspection under the RTI, wherein the Hon'ble Supreme Court held that the examinee had right to access those scripts provided that the request was made during a reasonable time in which the authorities were expected to retain the answer scripts.

Object and scope of the provisions of the RTI Act

The Supreme Court observed that the Statement of Object to the RTI Act, 2005 states that "right of a citizen to secure the access to information under the control of public authorities in order to promote transparency and accountability in the working of every public authority." Section 3 of the RTI Act states that subject to the provision of this Act all citizens shall have a right to information. Section 4 of the RTI Act relates to maintaining the record and publishing and disseminating the information in a manner provided for under the Act. Further, Section 6 of the said RTI Act empowers common citizens to "request for providing information and there is no need to provide any reason for that" and Section 2(f) of the RTI Act defines the term "information", which means any material in any form, including records, documents, memos, e-mails, opinions, advice, press release, circulars, orders, logbooks, contracts, reports, papers, samples, models, data material held in any electronic form and information relating to any private body which can be accessed by a public authority under any other law for the time being in force. Further, Section 2(h) of the RTI Act defines the term "Public Authority" which means any authority or body or institution of self-government established or constituted by or under the Constitution; by any other law made by the Parliament; by any other law made by the State Legislature; and by notification issued or order made by the appropriate Government and includes any (i) body owned, controlled or substantially financed; and (ii) non-Governmental organisation substantially financed, directly or indirectly by funds provided by the appropriate Government. Again, Section 2(i) of the RTI Act defines "Record" and includes any document, manuscript and file, any micro-film, micro-fiche and facsimile copy of a document; any reproduction of image or images embodied in such micro-film (whether enlarged or not) and any other material produced by a computer or any other device. Most importantly, Section 2(j) of the RTI Act defines what is "right to information" and it means the right to information accessible under the RTI Act which is held by or under the control of any public authority and includes the right to -

(i) Inspection of work, documents, records;

(ii) Taking notes, extracts or certified copies of documents or records;

(iii) Taking certified samples of material;

(iv) Obtaining information in term of diskettes, floppies, tapes, video cassettes or in any other electronic mode or through printouts.

In the aforesaid CBSE case (supra), an examinee who appeared in the examination conducted by the CBSE, was denied his request for revaluation and inspection of his answer sheets. In a writ petition, the examinee approached the Calcutta High Court which allowed his petition for inspection only and not of revaluation. In the appeal filed by the CBSE before the Supreme Court of India, the issues involved were:-

(a) Whether an examinee's right to information under the RTI Act includes the right to inspect his evaluated answer books in a public examination or taking certified copies thereof?

(b) Whether the examining body holds the evaluated answer books in a "fiduciary relationship" and, consequently, has no obligation to give an inspection of the evaluated answer books under section 8(1)(e) of the RTI Act ?

(c) If the examinee is entitled to inspection of evaluated answer books or seek certified copies thereof, whether such right is subject to limitation, condition and safeguard ?

SC: Examination answer-sheets are 'Information' that can be sought for under the RTI Act

After hearing the arguments of both sides, the Supreme Court held that the answer book written by a candidate and submitted to examining body for evaluation is a "document of Record" and the evaluated answer book by the examiner appointed by the examining body is the "opinion" of the examiner. Thus, the evaluated answer book is an "information" under the RTI Act and this answer book also does not fall under any of the exemptions provided under clauses (a) to (j) of sub-section (1) of Section 8 of the RTI Act. Thus, every examinee has a right to inspect the evaluated answer book and if needed, can take certified copies thereof under the RTI Act. The said Supreme Court judgment in the CBSE case (supra) has paved the way for students who are aggrieved by the evaluation of any examining bodies, such as a University; State Education Board; State Public Service Commission and such a student can claim his evaluated answer book for the purpose of inspection and can take certified copy of it under the RTI Act, but only during the time those authorities are expected to maintain and retain the answer book of all examinees under its control.

Conclusion

The right to information is a cherished right of every citizen of India and information and right to information are intended to be formidable tools in the hands of responsible citizens to fight corruption and to bring in transparency and accountability. This is the genesis of the RTI Act. The judgments referred to in this article make it abundantly clear that an examinee need not silently suffer on account of the inaccuracies in the evaluation process of the answer sheets of the examinee and such an examinee has even the right to have certified copies of the evaluated answer sheets, which may help him in seeking re-evaluation of his answer sheets. The high-handed, whimsical and fanciful decisions of some of the examining bodies adversely affects the career of a students and this can no longer be tolerated and even the inadvertent mistakes can be corrected, if the examinee seeks to resort to the provisions of the RTI Act and its Rules. The ambiguity surrounding the issue as to what fee would be applicable in case an examinee-candidate seeks information from the examining body, has been laid to rest by the aforesaid ICSI judgment of the Supreme Court. It is thus clear that in the event such information sought for is under the provisions of the RTI Act, then the fee prescribed under the RTI Rules would apply whereas if the examinee resorts to seeking such information under the provisions of the special enactments under which the concerned examining institute/body has been set-up, the examinee has to pay the fee prescribed under the specific Act governing such an institute/body and not as per the RTI Act.
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Delep Goswami, FCS
Advocate
​Supreme Court of India

​Anirrud Goswami
Advocate,
Goswami & Goswami,
New Delhi

​
Published by Taxmann.com on March 20, 2019


Supreme Court's Ruling on what constitutes 'Basic Wage' and what constitutes 'Special Allowance' (published by Taxmann)
​
In a landmark judgment dated 28th February, 2019 in the case of Regional Provident Fund Commissioner (II) West Bengal v. Vivekananda Vidyamandir [2019] 103 taxmann.com 18, the Hon'ble Supreme Court of India has held that where allowances paid by an establishment to its employees were essentially a part of the basic wage "camouflaged as an allowance" so as to avoid deduction and contribution to provident fund (PF) amount of employees, the order of the authority under the Employees Provident Fund and Miscellaneous Provisions Act, 1952 (in short "EPF Act") that special allowancewas to be included in "basic wage" under section 2(b)(ii), read with section 6 of the EPF Act for computation of deduction towards provident fund was upheld.

In the aforesaid judgment, the Supreme Court was hearing several civil appeals/transferred cases on the aforesaid important question of law and disposed them of by a common order dated 28th February, 2019 as aforesaid.

Brief Facts of some of the civil appeals before the Apex Court

In titled as Regional PF Commissioner (II) (supra), the Respondent was an unaided school which was giving special allowance by way of incentive to teaching and non-teaching staff pursuant to an agreement between the staff and the management. The incentive was reviewed from time-to-time upon enhancement of the tuition fees of the students. The authority under the EPF Act held that the special allowance was to be included in "basic wage" for deduction of provident fund. The Single Judge set aside the said order. The Division Bench, after examining the salary structure allowed the appeal on 13.01.2005 holding that the special allowance as a part of the dearness allowance was liable to deduction. However, the order was recalled on 16.01.2007 at the behest of the Respondent as none had appeared on its behalf. The subsequent Division Bench dismissed the appeal holding that the special allowance was not linked to the consumer price index, and, therefore, would not fall within the definition of "basic wage" and, thus, was not liable to deduction.

In Civil Appeal Nos. 3965-66 of 2013, the Appellant was paying basic wage plus variable dearness allowance (VDA) plus house rent allowance (HRA) plus travel allowance plus washing allowance plus canteen allowance plus lunch incentive. The special allowances were not included in the "basic wage" and, hence, deduction for provident fund was not made from the same. The authority under the EPF Act held that only washing allowance was to be excluded from the basic wage. The High Court partially allowed the writ petition by excluding lunch incentive from basic wage. A review petition against the same by the Appellant was dismissed, resulting in filing of appeal in the Supreme Court of India.

In Civil Appeal Nos.3969-70 of 2013, it was stated that the appellant was not deducting provident fund contribution on house rent allowance, special allowance, management allowance and conveyance allowance by excluding it from "basic wage". The authority under the EPF Act held that the allowances had to be taken into account as basic wages for deduction. The High Court dismissed the writ petition and the review petition filed by the Appellant, resulting in filing of appeal in the Supreme Court of India.

What are the parameters of 'Basic Wage' vis-à-vis the object of the EPF Act?

During the course of arguments, it was stressed upon that the EPF Act is a social beneficial welfare legislation meant for protection of the weaker sections of the society, i.e., the workmen, and is, therefore, required to be interpreted in a manner to sub-serve and advance the purpose of the legislation. As per section 6 of the EPF Act, the employer is liable to pay contribution to the provident fund on basic wages, dearness allowance and retaining allowance (if any). To exclude any incentive wage from basic wage, it should have a direct nexus and linkage with the amount of extra output. On behalf of the Appellant-Regional PF Commissioner (supra), it was submitted that the special allowance paid to the teaching and non-teaching staff of the Respondent-school was nothing but camouflaged dearness allowance liable to deduction as part of basic wage. Section 2(b)(ii) defined dearness allowance as all cash payment by whatever name called paid to an employee on account of a rise in the cost of living. The allowance shall, therefore, fall within the term dearness allowance, irrespective of the nomenclature, it being paid to all employees on account of rise in the cost of living. The special allowance had all the indices of a dearness allowance. A bare perusal of the breakup of the different ingredients of the salary noticed in the order of the Division Bench of the High Court made it apparent that it formed part of the component of pay falling within dearness allowance. The special allowance was also subject to increment on a time scale. Reliance was placed on an earlier decision of the Supreme Court in re: Bridge and Roof Co. (India) Ltd. v. Union of India [1963] 3 SCR 978 and it was submitted that whatever is payable by all concerns or earned by all permanent employees had to be included in basic wage for the purpose of deduction u/s. 6 of the EPF Act. It is only such allowances not payable by all concerns or may not be earned by all employees of the concern, that would stand excluded from deduction. It is only when a worker produces beyond the base standard, what he earns would not be a basic wage, but a production bonus or incentive wage which would then fall outside the purview of basic wage u/s. 2(b) of the Act. Since the special allowance was earned by all teaching and non-teaching staff of the Respondent-school, it had to be included for the purpose of deduction u/s. 6 of the Act, as the special allowance was, in the present case, part of the salary breakup payable to all employees and did not have any nexus with extra output produced by the employees and, thus, it fell within the definition of "basic wage".

On behalf of other appellants it was submitted that the basic wages defined u/s. 2(b) of the Act contains exceptions and will not include what would ordinarily not be earned in accordance with the terms of the contract of employment. It is only those emoluments earned by an employee in accordance with the terms of employment which would qualify as basic wages and discretionary allowance not earned in accordance with the terms of employment would not be covered by basic wage. The statute itself excludes certain allowances from the term basic wages. The exclusion of dearness allowance in section 2(b)(ii) is an exception, but that exception has been corrected by including dearness allowance in section 6 for the purpose of contribution. For example, "attendance incentive" was not paid in terms of the contract of employment and was not legally enforceable by an employee. It would, therefore, not fall within "basic wage" as it was not paid to all employees of the concern. Likewise, transport/conveyance allowance was in the nature of reimbursement to an employee and such payments are not made universally, ordinarily and necessarily to all employees and, therefore, will not fall within the definition of "basic wage". But, to hold that conveyance allowance paid to all employees of the establishment without any proof in respect thereof, was unsustainable.

Observations Made by the Supreme Court of India

The Court noted that basic wage would not ipso-facto take within its ambit the salary breakup structure to hold it liable for provident fund deductions when it was paid as special incentive or production bonus to more meritorious workmen who put in extra output, which had a direct nexus and linkage with the output by the eligible workmen. When a worker produces beyond the base or stand, what he earns is not "basic wage" and thus, this incentive wage will fall outside the purview of "basic wage".

Reference was also made to an earlier decision of the Supreme Court in the case of Muir Mills Col.Ltd. Kanpur v. Its Workmen AIR 1960-SC-985 wherein it was observed that "basic wage" never includes the additional emoluments which some workmen may earn, on the basis of a system of bonuses related to the production. The quantum of earning in such bonuses varies from individual to individual according to their efficiency and diligence: it will vary sometimes from season-to-season with the variations of working conditions in the factory or other place where the work is done; it will vary also with variations in the rate of supplies of raw materials or in the assistance obtainable from machinery. This very element of variation excludes this part of workmen's emoluments from the connotation of "basic wage".

In Manipal Academy of Higher Education v. PF Commissioner [2008] 5 SCC 428, relying upon Bridge Roof"s case (supra), the Supreme Court had observed that:

"10. The basic principles as laid down in Bridge Roof's case (supra) on a combined reading of sections 2(b) and 6 are as follows :-

(a) Where the wage is universally, necessarily and ordinarily paid to all across the broad, such emoluments are basic wages.

(b) Where the payment is available to be specially paid to those who avail of the opportunity is not basic wages. By way of example, it was held that overtime allowance, though it is generally in force in all concerns is not earned by all employees of a concern. It is also earned in accordance with the terms of the contract of employment, but because it may not be earned by all employees of a concern, it is excluded from basic wages.

(c) Conversely, any payment by way of a special incentive or work is not basic wages."

For 'Extra Allowances' to be excluded from 'Basic Wage', they must be linked to extra output produced by concerned employees

The Court noted that the term "basic wage" has not been defined under the EPF Act and when an expression is not defined, one can take into account the definition given to such an expression in a Statute, as also the dictionary meaning. In the aforesaid judgment dated 28.2.2019, the Supreme Court was of the opinion that those wages which are universally, necessarily and ordinary paid to all employees across the board are "basic wages". Where the payment is available to those who avail of the opportunity more than others, the amount paid for that cannot be included in the basic wage. For example, overtime allowance, though it is generally enforced across the board, but not earned by all employees equally. Overtime wages or for that matter, leave encashment may be available to each workman, but it may vary from one workman to other. The extra bonus depends upon the extra hour of work done by the workman, whereas leave encashment shall depend upon the number of days of leave available to workman. Both are variable. In view of what was observed above, the Supreme Court was of the opinion that the amounts received as leave encashment and overtime wages are not fit to be included for calculating basic wage.

Supreme Court clarifies what are permissible deductions

Applying the aforesaid tests to the facts of the present appeals, the Supreme Court observed that no material had been placed by the establishments to demonstrate that the allowances in question being paid to its employees were either variable or were linked to any incentive for production resulting in greater output by an employee and that the allowances in question were not paid across the board to all employees in a particular category or were being paid especially to those who availed the opportunity. In order that the amount goes beyond the basic wages, it has to be shown that the workman concerned had become eligible to get this extra amount beyond the normal work which he is otherwise required to put in.
The Court also observed that there was no data available on record to show the norms of work prescribed for those workmen during the relevant period and, therefore,due to this it was not possible to ascertain whether extra amounts paid to the workmen were in-fact-paid for the extra work which had exceeded the normal output prescribed for them. The Supreme Court noted that the wage structure and components of salary had been examined on facts, both by the authority and the appellate authority under the Act, who had arrived at a factual conclusion that the allowances in question were essentially a part of the basic wage camouflaged as part of an allowance so as to avoid deduction and contribution accordingly to the provident fund account of the employees. The Supreme Court, therefore, held that there was no occasion to interfere with the concurrent conclusions of facts and, therefore, the appeals preferred by the establishments did not merit any interference and conversely, the Court allowed the appeals preferred by the Regional PF Commissioner.

Conclusion
The aforesaid Supreme Court's judgment has tremendous significance both for the employers as well as for employees. Though there has been lot of litigation and ambiguity surrounding what constitutes 'basic wage' for deduction of provident fund (which, at this point in time, is 12% for establishments having 20 or more employees and 10% for establishments with less than 10 employees), it is hoped that when the employers keep in mind the welfare of employees and the goodwill associated with taking good care of its employees, the reputation of such establishments would enhance in society. The basic objective of the EPF Act will get fulfilled only when the provisions of the Act are harmoniously considered, keeping in view the social welfare objective in mind.
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taxmann.com

​Significant NCLAT Judgment under IBC

In a recent judgment pronounced on 8th January, 2019 in the case of Ferro Alloys Corpn. Ltd. v. Rural Electrification Corpn Ltd. [2019] 101 taxmann.com 283 (NCLT - New Delhi) (in short "Ferro Alloys" judgment), a 3 Judge bench of the National Company Law Appellate Tribunal (NCLAT) upheld the decision dated 6th July, 2017 passed by the NCLT, Kolkata which allowed the "financial creditor" under Section 7 of the Insolvency & Bankruptcy Code 2016 ("IBC") to proceed directly against the "corporate guarantor" to recover outstanding debt dues payable by the "corporate debtor", without proceeding against the defaulting "corporate debtor". The Appellant before the NCLAT argued that the IBC does not use the concept or phrase "Corporate Guarantor" and that without exhausting remedies against the borrower company/corporate debtor, the provisions of IBC cannot be invoked against the "Corporate Guarantor" who guarantees the loan repayment by the corporate debtor. These arguments were rejected by the NCLAT. The NCLAT judgment is indeed very significant and augurs well for the Banks and Financial Institutions who are burdened with huge loan defaults (running into lakhs of crores of rupees) from the borrower "debtor company", despite such "Financial Creditor" being protected by "corporate guarantees" to cover up recovery of such loans.

Brief Facts of the case

Brief facts leading to the filing of the aforementioned appeal are that the Respondent – Rural Electrification Corporation Limited (Financial Creditor) sanctioned loan aggregating Rs. 517.90 crores to FACOR Power Limited ("Principal Borrower" described herein in short as "FACOR") and disbursed an amount aggregating to Rs. 510.97 crores on various dates. For securing the above mentioned loan facility extended by the 'financial creditor' to 'FACOR ('Corporate Debtor') a 'Corporate Guarantee Agreement' was signed and executed by "Ferro Alloys Corporation Limited" (in short "Ferro Alloys"/'Corporate Guarantor") and guarantee documents in favour of the 'financial creditor' were executed on 24th August, 2009, as revised on 29th October, 2010, 21st June, 2013 and again on 22nd January, 2015. 'Ferro Alloys' (i.e. 'corporate guarantor' of the 'corporate debtor'), as also borrower pledged 15,10,74,299 physical shares and 4,69,85,631 Dmat shares of 'FACOR Power Limited' totalling to 19,80,59,930 shares through various deeds in favour of the 'Financial Creditor'.

The case of the 'financial creditor' was that M/s. FACOR Power Limited (Principal Borrower) defaulted in making repayment of dues and the account of M/s. FACOR Power Limited was classified as Non-Performing Asset (NPA). In view of the defaults committed in the repayment of loan, as per the terms and conditions of the 'Loan Agreement' and other financing documents, the 'Financial Creditor' recalled the facilities on 1st October, 2015 and demanded the entire amount of loan, interest and all other amounts due in respect thereof. Despite receipt of the same, no payment was made to the 'financial creditor'. The Corporate Debtor M/s. FACOR Power Limited as the principal borrower had admitted its liability to the extent of Rs. 604,99,91,539/- as on 31st March, 2016 in the audited balance-sheet for the financial year 2015-16. Also, the 'corporate guarantor' – Ferro Alloys Corporation Limited in its audited balance-sheet for the financial year 2015-16 had acknowledged the debt to the tune of Rs. 517.90 crores. The copy of the audited balance-sheet of the 'Ferro Alloys Corporation Limited' was also enclosed along with the application under Section 7 of the I&B Code (Form-1).

Invoking Guarantee on Failure of the Defaulting Corporate Debtor

On default in payment of the debt amount payable by the 'Principal Borrower', the 'Financial Creditor' invoked the corporate guarantee of the 'Ferro Allows Corporation Limited' and called upon the 'Ferro Alloys Corporation Limited' ('corporate guarantor') to pay forthwith the amount due and payable by the 'M/s. FACOR Power Limited' (principal borrower') amounting to Rs. 564,63,50,544/- as on 30th September, 2015 along with future interest within a period of 21 days. M/s. Ferro Alloys Corporation ('corporate guarantor') issued a reply dated 26th November, 2015 but failed and neglected to pay the above sum.

The 'Financial Creditor' pleaded before the Adjudicating Authority and in the Appellate Authority (NCLAT) under the IBC that the 'corporate guarantee' furnished by 'Ferro Alloys Corporation Limited' is an unconditional, continuing and irrevocable guarantee. As per the terms of the guarantee, the obligation of guarantor is separate, independent and is that of primary obligor and not merely as surety, on a full indemnity basis to indemnify the 'financial creditor'. The 'corporate guarantee' provided by the 'Ferro Alloys Corporation Limited' is joint and several and co-extensive with that of the principal debtor and can be invoked even without exhausting the remedies against the principal debtor. The Adjudicating Authority taking into consideration the fact that there is a 'debt' and 'default' and the application under Section 7 of the IBC being complete, admitted the application by the impugned order dated 6th July, 2017.

Harmonious and purposeful construction of IBC provisions by NCLAT

The NCLAT heard the appeal against the decision of the Adjudicating Authority (NCLT, Kolkata Bench) and on a harmonious and purposeful reading and reasoning, noted that as per the definition of "Corporate Person" under Section 3(7) of the IBC, insolvency resolution process under section 7 of the IBC can be initiated against the "Guarantor", who is a "Corporate Person" and who, by operation of law, ipso-facto, becomes a "Corporate Debtor" by satisfying the ingredients of the terms as defined under Section 3(8) of IBC, which means a "Corporate Person" who owes a debt to any person. The term "debt" under Section 3(11) of the IBC stipulates that "debt" means a liability or obligation in respect of a claim, which is due from any person and includes a financial and operational debt. It was argued that the term "Corporate Debtor" under Section 3(8) may also be any person. Further, as per section 3(23) of the IBC, "person" includes a company. Thus, a "Corporate Debtor" must be a "Corporate Person" who owes a "debt" to "any person". The "debt" as used in Section 3(8) has to be a "debt" as defined under Section 3(11) of IBC. It must be the "liability" or "obligation" in respect of a "claim"(section 3(6)) which is due from any person – which means even a corporate entity and shall include "financial debt" and "operational debt" as defined under Sections 5(8) and 5(21) of the IBC.

NCLAT noted that under section 3(6) of the IBC, the term "claim" means--

(a) a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured;

(b) right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, un-matured, disputed, undisputed, secured or unsecured;

Also, as per section 3(8) of the IBC, a "financial debt" means a "debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes--
(a) money borrowed against the payment of interest;
 
…(h) any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution; and

(i) the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clauses (a) to (h) of this clause."
 
It was also contended that as per Section 3(12) of the IBC, "default" means non-payment of debt when whole or any part of instalment of the amount of debt has become due and payable and is not repaid by the debtor or the corporate debtor, as the case may be. Thus, a "guarantee" becomes a "debt" or as soon as the "guarantee" is invoked against it wherein after a guarantor (corporate guarantor) becomes a "Corporate Debtor" in terms of the IBC Code.

SC decisions relied on in support of the claim by Financial Creditor

In the NCLAT, reference was invited to the decision of the Hon'ble Supreme Court of India in re: 'Bank of Bihar Ltd. v. Dr. Damodar Prasad AIR 1969 SC 297', wherein it was held that:

"3. The demand for payment of the liability of the principal debtor was the only condition for the enforcement of the bond. That condition was fulfilled. Neither the principal debtor nor the surety discharged the admitted liability of the principal debtor in spite of demands. Under Section 128 of the Indian Contract Act, save as provided in the contract, the liability of the surety is coextensive with that of the principal debtor. The surety became thus liable to pay the entire amount. His liability was immediate. It was not deferred until the creditor exhausted his remedies against the principal debtor." (emphasis supplied)

In the NCLAT, it was further argued that in re: Ram Bahadur Thakur v. Sabu Jain Ltd. [1981] 51 Comp Cas 301 (Delhi), the Hon'ble High Court of Delhi relying on the decision of Hon'ble Supreme Court in Kesoram Industries Cotton Mills Ltd. v. CWT [1966] 59 ITR 767, held that under the 'deed of guarantee' the liability of the company to pay debt arose when the borrower defaulted in making payments and the creditor sent a demand/notice invoking the guarantee.

Reasoning for upholding the decision of the Adjudicating Authority

The NCLAT further noted that in the present case of "Ferro Alloys", as per clause 1.2 of the 'Deed of Guarantee' dated 22nd January, 2015, there is a clear cut stipulation that "on the failure of principal borrower to pay and/or discharge the obligations, the guarantor shall, forthwith upon demand, pay to Rural Electrification Corporation Limited (Financial Creditor) without demur or protest", the amount stated in the demand made by Rural Electrification Corporation Limited to the guarantor thereby invoking the guarantee.

Admittedly, the guarantee was invoked by 'Rural Electrification Corporation Limited' against 'Ferro Alloys Corporation Ltd.' and demand was raised on 27th October, 2015 calling upon 'Ferro Alloys Corporation Ltd.' to pay the amount due within 21 days. Since then, Ferro Alloys Corporation Ltd. (Corporate Guarantor) became a 'corporate debtor' of 'Rural Electrification Corporation Limited' (Financial Creditor). In its Annual Report for the year ending 2016-17, 'Ferro Alloys Corporation Ltd.' has shown a sum of Rs. 517.90 crores payable to the 'financial creditor'. Therefore, it became clear that 'Ferro Alloys Corporation Ltd.' admitted the 'debt' and in absence of payment, there was no doubt to hold that there is a 'default'. The NCLAT also noted that the provision of the IBC do not bar a 'financial creditor' from initiating 'corporate insolvency resolution process' against the 'guarantor', who comes within the meaning of 'corporate debtor'. The aforesaid matter can be noticed from the statutory inter-se rights, obligations and liabilities of: 

(i) A surety qua the creditor (the relationship as defined under the Indian Contract Act); or

(ii) Guarantor qua financial creditor.

It was argued before the NCLAT that the IBC does not exclusively delineate and/or prescribe any inter-se rights, obligation and liabilities of a guarantor qua 'financial creditor'. Thus, in absence of any express provision providing for inter-se rights, obligation and liabilities of guarantor qua 'financial creditor' under the IBC, the same will have to be noticed from the provisions of the Indian Contract Act, which exclusively and elaborately deals with the same.

In the NCLAT, reference was also made to the decision of the Hon'ble Supreme Court of India in re: Bank of Bihar (supra) where in, the Hon'ble Supreme Court referred to a judgment of Hon'ble Bombay High Court in Lachhman Joharimal v. Bapu Khandu and Tukaram Khandoji [1869] 6 Bom HCR 241, in which the Division Bench of the Hon'ble Bombay High Court held as under:

"The court is of opinion that a creditor is not bound to exhaust his remedy against the principal debtor before suing the surety and that when a decree is obtained against a surety, it may be enforced in the same manner as a decree for any other debt."

The Hon'ble Supreme Court while approving the said judgment, observed that, "The very object of the guarantee is defeated if the creditor is asked to postpone his remedies against the surety. In the present case the creditor is a banking company. A guarantee is a collateral security usually taken by a banker. The security will become useless if his rights against the surety can be so easily cut down."

In the NCLAT, a reference was also made to the decision of the Hon'ble Supreme Court of India in re: State Bank of India v. Indexport Registered [1992] 3 SCC 159, wherein the Hon'ble Supreme Court held that the decree holder bank can execute the decree first against the guarantor without proceeding against the 'Principal Borrower'. Guarantor's liability is co-extensive with that of the principal debtor under the 'Contract Act, 1872' (Section 128).

Therefore, in the aforementioned Ferro Alloys appeal, the NCLAT held that it is not necessary to initiate "Corporate Insolvency Resolution Process" against the "Principal Borrower", before initiating "Corporate Insolvency Resolution Process" against the "Corporate Guarantor". Further, without initiating any "Corporate Insolvency Resolution Process" against the "Principal Borrower", it is always open to the "Financial Creditor" to initiate "Corporate Insolvency Resolution Process" under section 7 of the IBC against the "Corporate Guarantors" as the creditor is also the "Financial Creditor" qua the "Corporate Guarantor". The NCLAT also noted that the Financial Creditor did not initiate two proceedings simultaneously against the "Corporate Debtor" as well as against the "Corporate Guarantor" and such a contention was not raised in the appeal. For the reasons aforesaid, the appeal filed by "Ferro Alloys" failed and accordingly dismissed.

Conclusion

The aforesaid NCLAT judgment will pave the way for the "Financial Creditors" to initiate "Corporate Insolvency Resolution Process" against the "Corporate Guarantors" without initiating CIRP against the "Principal Corporate Debtor" and will prompt faster recovery of outstanding dues and will also discipline the corporate debtors who had been enjoying protection hitherto fore and could afford to delay repayment of outstanding loans. This is a significant and welcome change from the earlier regime and will prevent corporate guarantor from escaping liability.
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