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Maitreya Doshi vs Anand Rathi Global Finance Ltd. and Anr.

Civil Appeal · 2022 INSC 1004Decided 22 Sept 2022
Civil Appeal No. 6613 of 2021
Indira Banerjee · J.K. Maheshwari

Background

A non-banking financial company (the Financial Creditor) had disbursed a Rs. 6 crore loan to M/s Premier Limited under three Loan-cum-Pledge Agreements, under which M/s Doshi Holdings Pvt. Ltd. also pledged shares it held in Premier as security. When Premier defaulted, the Financial Creditor initiated insolvency proceedings (CIRP) under Section 7 of the IBC against both Premier and separately against Doshi Holdings, treating Doshi Holdings as a co-borrower, not merely a pledgor. The NCLT admitted the insolvency petition against Doshi Holdings, and the NCLAT upheld this on appeal. The appellant, a suspended director of Doshi Holdings, challenged this before the Supreme Court, arguing that no loan money was ever actually disbursed to Doshi Holdings itself, so it owed no "financial debt" and could not be treated as a corporate debtor.

Decision Breakdown

The Supreme Court held that the NCLAT's factual finding: that Doshi Holdings was a party to the loan agreements in the dual capacity of both co-borrower and pledgor, based on loan receipts it had signed acknowledging receipt of the funds and a demand promissory note it had executed: was a plausible interpretation of the documents that should not be disturbed on an IBC appeal, which is limited to questions of law. While accepting that a pledgor alone would not qualify as a financial debtor, the Court held that the definition of "financial debt" does not require the money to have been disbursed directly to the entity said to owe the debt, and that once Doshi Holdings was found to be a co-borrower (not just a pledgor), insolvency proceedings could validly be initiated against it too, alongside Premier. The Court clarified, however, that the same debt cannot be recovered twice over from both co-borrowers. The appeal was dismissed.

Lesson Learnt

Signing loan documents and receipts as a "co-borrower", even if the loan money physically went to a related company, can expose an entity to insolvency proceedings in its own right; simply being a security-provider (pledgor) is not the same as being a co-borrower, so companies must be careful about the capacity in which they sign group-lending documents.

Official source (sci.gov.in)View Judgment (PDF)

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