Case Note & Summary
The plaintiff, a non-banking financial institution, filed a summary suit under Order XXXVII of the Code of Civil Procedure, 1908 against two guarantors for recovery of a short-term loan of Rs. 4 Crores advanced to Today's Writing Products Limited. The principal borrower defaulted, cheques were dishonoured, and the plaintiff invoked the deeds of guarantee executed by the defendants. After filing of the suit, the principal borrower was admitted into insolvency by the NCLT, Ahmedabad Bench on 5 October 2017, triggering a moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016. The defendants resisted the summons for judgment on four grounds: that the plaintiff, being a 100% subsidiary of SICOM Ltd., should have filed the suit before the Debts Recovery Tribunal; that the summary suit was not maintainable because the plaintiff held security of pledged shares; that the deeds of guarantee were insufficiently stamped; and that the moratorium under the IBC protected them as guarantors. The plaintiff countered that the DRT lacks jurisdiction over non-notified financial institutions, the security was insufficient, the stamping defense was not pleaded, and the IBC moratorium does not cover guarantors. The court, after analyzing Sections 17 and 18 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (now renamed Recovery of Debts and Bankruptcy Act, 1993) and the relevant definitions, held that the plaintiff did not qualify as a bank or financial institution, thus the DRT had no exclusive jurisdiction. It also held that the existence of insufficient security does not bar a summary suit, and the defense of insufficient stamping was not pleaded and therefore not entertainable. On the IBC moratorium, the court ruled that Section 14 applies only to the corporate debtor, not to guarantors, as a guarantee is an independent contract. Consequently, the court found that the defendants had no substantial defense and directed them to deposit Rs. 2 Crores within eight weeks as a condition for leave to defend; in default, the plaintiff would be entitled to judgment and decree for the full claim with interest and costs. The bank guarantee earlier furnished by the defendants was ordered to be kept alive.
Headnote
A) Debt Recovery - Jurisdiction of DRT - Recovery of Debts and Bankruptcy Act, 1993, Sections 17, 18 - The plaintiff, a non-banking financial institution and subsidiary of SICOM, did not fall within the definition of 'bank' or 'financial institution' under the Act, thus the DRT lacked exclusive jurisdiction over the claim. Held that the suit was maintainable before the High Court (Paras 12-13). B) Civil Procedure - Summary Suit Maintainability - Order XXXVII, Code of Civil Procedure, 1908 - The fact that the plaintiff held pledged shares as security did not render the suit non-maintainable as a summary suit if that security was insufficient to cover the debt. Held that the defense of adequate security was not a valid ground for unconditional leave (Paras 14). C) Evidence - Pleading - Insufficient Stamping - The defendants failed to plead the defense of insufficient stamping of the guarantees in their affidavits, and such a defense cannot be entertained without specific pleadings. Held that the defense was not entertainable (Paras 15). D) Insolvency - Moratorium under IBC - Section 14, Insolvency and Bankruptcy Code, 2016 - The moratorium imposed on the principal borrower under Section 14 of the Code did not bar suits against guarantors, as the guarantee is an independent contract separate from the principal debtor's obligations. Held that the suit against the guarantors could proceed despite the moratorium (Paras 16).
Issue of Consideration
Whether the Debts Recovery Tribunal had exclusive jurisdiction; whether the summary suit was maintainable given held security; whether the guarantees were insufficiently stamped; whether the IBC moratorium extends to guarantors
Final Decision
The court held that defendants had no substantial defense and directed deposit of Rs. 2 Crores as condition for leave to defend under Order XXXVII Rule 3(4) CPC; in default, plaintiff entitled to judgment. The bank guarantee previously furnished by defendants to be kept alive.
Law Points
- DRT jurisdiction limited to notified banks and financial institutions
- Summary suit maintainable despite security if insufficient
- Defense of insufficient stamping must be specifically pleaded
- Moratorium under IBC Section 14 does not protect guarantors
