Main Provisions-During ongoing CIRP of Corporate Guarantor

Discharge of Principal Borrower when Resolution Plan is approved in CIRP of Surety? | Guarantee extinguished after approval of Resolution Plan? | Simultaneous IBC Proceedings against Corporate Debtor and Guarantor | Subrogation in Insolvency | Assets of Subsidiary Company in Resolution Plan of Holding Company – BRS Ventures Investments Ltd. Vs. SREI Infrastructure Finance Ltd. and Anr. – Supreme Court

In this important judgment, Hon’ble Supreme Court clarifies following issues:

A. Liability of Guarantor / Surety
B. Discharge of Principal Borrower when Resolution Plan is approved in CIRP of Surety/ Guarantor vs. Discharge of Surety/ Guarantor when Resolution Plan is approved in CIRP of Principal Borrower?
C. Simultaneous Proceedings under the IBC against Corporate Debtor and Guarantor
D. Subrogation under Section 140 of the Indian Contract Act, 1872.
E. Whether the assets of the Corporate Debtor were part of CIRP in respect of Corporate Guarantor.

Discharge of Principal Borrower when Resolution Plan is approved in CIRP of Surety? | Guarantee extinguished after approval of Resolution Plan? | Simultaneous IBC Proceedings against Corporate Debtor and Guarantor | Subrogation in Insolvency | Assets of Subsidiary Company in Resolution Plan of Holding Company – BRS Ventures Investments Ltd. Vs. SREI Infrastructure Finance Ltd. and Anr. – Supreme Court Read Post »

CIRP can be initiated against Principal Borrower even during ongoing CIRP of Corporate Guarantor where Section 7 application filed by different financial creditors for different projects and filing of claim in the ongoing CIRP against Corporate Guarantor does not preclude the Financial Creditor from filing a CIRP application u/s 7 of IBC against Principal Borrower – Assets Care and Reconstruction Enterprise Ltd. Vs. Supertech ORB Project Pvt. Ltd. – NCLT Allahabad Bench

In this important case of Section 7 application, the issue is that whether the application filed by the Financial Creditor against Principal Borrower(Supertech Orb Project Pvt. Ltd., Corporate Debtor herein) is admissible in the light of the fact that CIRP has already been initiated against the Corporate Guarantor i.e. M/s Supertech Ltd.

NCLT Allahabad Bench held that:

(i) The CIRP initiated against M/s. Supertech Ltd. is by different financial creditors for different projects under the separate agreement.

(ii) The judgement in Dr. Vishnu Kumar Agarwal Vs. M/s. Piramal Enterprises Ltd. [2019] ibclaw.in 16 NCLAT does not apply here.

(iii) Filing of claim in the ongoing CIRP of Corporate Guarantor does not preclude the Financial Creditor from filing a CIRP application u/s 7 of IBC against Principal Borrower (Corporate Debtor).

(iv) The application under Section 7, has been admitted.

CIRP can be initiated against Principal Borrower even during ongoing CIRP of Corporate Guarantor where Section 7 application filed by different financial creditors for different projects and filing of claim in the ongoing CIRP against Corporate Guarantor does not preclude the Financial Creditor from filing a CIRP application u/s 7 of IBC against Principal Borrower – Assets Care and Reconstruction Enterprise Ltd. Vs. Supertech ORB Project Pvt. Ltd. – NCLT Allahabad Bench Read Post »

Whether when an application is filed against a Personal Guarantor whether another Lender of same transaction can proceed against the Personal Guarantor by filing another application under Section 95 of IBC – Bhavesh Gandhi Vs. Central Bank of India – NCLAT New Delhi

NCLAT held that when an insolvency resolution process commences against the Personal Guarantor all creditors of the Personal Guarantor are taken care of in the proceedings under Chapter-III. The scheme of Code does not contemplate manifold applications against same Personal Guarantor by different lenders. Multiplicity of applications against same Personal Guarantor is not contemplated under Chapter III. When the insolvency resolution process commences against a Personal Guarantor, claims of all creditors are taken care of under the scheme of the Code. Further, it is held that creditors of the Personal Guarantors who are unable to file an application due to enforcement of moratorium under Section 96 can very well avail the benefit of period during which moratorium continues, hence, due to interim moratorium enforced by Section 96, the creditors like Central Bank of India and other creditors are in no manner prejudiced. If they have not filed any application during moratorium period, they have every right to file application and for computation of the period of limitation, period during which moratorium is in place is to be excluded.

Whether when an application is filed against a Personal Guarantor whether another Lender of same transaction can proceed against the Personal Guarantor by filing another application under Section 95 of IBC – Bhavesh Gandhi Vs. Central Bank of India – NCLAT New Delhi Read Post »

Approval of a Resolution Plan in respect of one Borrower cannot certainly discharge a Co-Borrower – Maitreya Doshi Vs. Anand Rathi Global Finance Ltd. and Anr. – Supreme Court

Hon’ble Supreme Court held that in Lalit Kumar Jain v. Union of India (2021) ibclaw.in 61 SC, this Court held that the approval of a resolution plan in relation to a Corporate Debtor does not discharge the guarantor of the Corporate Debtor. On a parity of reasoning, the approval of a resolution in respect of one borrower cannot certainly discharge a co-borrower.
If there are two borrowers or if two corporate bodies fall within the ambit of corporate debtors, there is no reason why proceedings under Section 7 of the IBC cannot be initiated against both the Corporate Debtors. Needless to mention, the same amount cannot be realised from both the Corporate Debtors. If the dues are realised in part from one Corporate Debtor, the balance may be realised from the other Corporate Debtor being the co-borrower. However, once the claim of the Financial Creditor is discharged, there can be no question of recovery of the claim twice over.

Approval of a Resolution Plan in respect of one Borrower cannot certainly discharge a Co-Borrower – Maitreya Doshi Vs. Anand Rathi Global Finance Ltd. and Anr. – Supreme Court Read Post »

The law of guarantee is very clear that the liability of the Principal Borrower and the Guarantor is joint, several and co-extensive. The Financial Creditor is free to proceed against either of them or both of them as per its own choice – Dena Bank Vs. M/s Aryavrat Trading Pvt. Ltd. – NCLT Kolkata Bench

Since the Corporate Debtor in the petition has failed to make the payment in spite of notice dated 25th September, 2018 followed by notice dated 11th February,2019issuedtothe Principal Borrower and also to the Guarantors including the present Corporate Debtor, the Corporate Debtor does not have any plausible defence in the present matter.

The law of guarantee is very clear that the liability of the Principal Borrower and the Guarantor is joint, several and co-extensive. The Financial Creditor is free to proceed against either of them or both of them as per its own choice – Dena Bank Vs. M/s Aryavrat Trading Pvt. Ltd. – NCLT Kolkata Bench Read Post »

Claim against Corporate Guarantee without invoking it – M/s Edelweiss Asset Reconstruction Company Ltd. Vs. V Mahesh IRP M/s. Vasan Health Care Pvt. Ltd. – NCLAT Chennai

NCLAT held that the claim defined in Section 3(6) means ‘a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured.’ In this regard, a beneficial reference is drawn from the decision of this Tribunal in the matter of Export Import Bank of India v RP of JEKPL Pvt. Ltd. [2018] ibclaw.in 52 NCLAT. We are in-agreement with the above decision. The Resolution Professional is required to maintain an updated list of all claims. The maturity of a claim or default of debt, are not the guiding factors to be noticed for collating or updating the claims. After analyzed the points as discussed above, in (a) (b) and (c), this Tribunal comes to a resultant conclusion that the Corporate Guarantee was made available with IRP and Adjudicating Authority. Thus, the IRP and the Adjudicating Authority cannot take the unsustainable and unsound technical stand as discussed in Point ‘b and ‘c’ above while rejecting the claim.

Claim against Corporate Guarantee without invoking it – M/s Edelweiss Asset Reconstruction Company Ltd. Vs. V Mahesh IRP M/s. Vasan Health Care Pvt. Ltd. – NCLAT Chennai Read Post »

Section 60 of the IBC speaks for itself that the parallel proceedings against borrower and guarantor are maintainable – Emerald Realtors Pvt. Ltd. (Shareholder of Sapphire Land Development Pvt. Ltd.) Vs. Suraksha Asset Reconstruction Ltd. – NCLAT New Delhi

The issue involved in this Appeal is with regard to parallel proceeding filed against the Principal Borrower when already CIRP had been initiated against the Corporate Guarantor and the claim of the Financial Creditor had already been accepted in the CIRP for the whole amount.
NCLAT having gone through the judgment in the matter of “State Bank of India v. Athena Energy Ventures Pvt. Ltd. (2020) ibclaw.in 344 NCLAT” which distinguished judgment in the matter of “Dr. Vishnu Kumar Agarwal v. M/s. Piramal Enterprises Ltd. [2019] ibclaw.in 16 NCLAT” so as to not follow the same, held that it must be said that the Appeal does not have any substance with regard to the legal issue. Judgment in the matter of Athena Energy was not per incuriam. The judgment interpreted the law consciously not following M/s. Piramal Enterprises Ltd.. In fact, one need not look at both the judgments and simply reproduce Section 60(2) of the Code as it now exists.

Section 60 of the IBC speaks for itself that the parallel proceedings against borrower and guarantor are maintainable – Emerald Realtors Pvt. Ltd. (Shareholder of Sapphire Land Development Pvt. Ltd.) Vs. Suraksha Asset Reconstruction Ltd. – NCLAT New Delhi Read Post »

Approval of a Resolution Plan does not ipso facto discharge a Personal Guarantor (of a Corporate Debtor) of her/his liabilities under the Contract of Guarantee – Lalit Kumar Jain Vs. Union of India & Ors. – Supreme Court

The Hon’ble Supreme Court upheld validity of notification dated 15.11.2019 and held that the impugned notification enforcing provisions of the Code, only in so far as they relate to Personal Guarantors was issued within the power granted by Parliament and it is legal and valid. The Court also held that the sanction of a resolution plan and finality imparted to it by Section 31 does not per se operate as a discharge of the guarantor’s liability. The Court referred Maharashtra State Electricity Board [2017] ibclaw.in 19 SC judgment alongwith other judgments and clarified that approval of a resolution plan does not ipso facto discharge a personal guarantor (of a corporate debtor) of her or his liabilities under the contract of guarantee. As held by this court, the release or discharge of a principal borrower from the debt owed by it to its creditor, by an involuntary process, i.e. by operation of law, or due to liquidation or insolvency proceeding, does not absolve the surety/guarantor of his or her liability, which arises out of an independent contract. It was also held that approval of a resolution plan relating to a corporate debtor does not operate so as to discharge the liabilities of personal guarantors (to corporate debtors).

Approval of a Resolution Plan does not ipso facto discharge a Personal Guarantor (of a Corporate Debtor) of her/his liabilities under the Contract of Guarantee – Lalit Kumar Jain Vs. Union of India & Ors. – Supreme Court Read Post »

Whether an action under Section 7 of the Code can be initiated by the Bank against a Corporate Person (being a Corporate Debtor) concerning Guarantee offered by it in respect of a loan account of the Principal Borrower, who had committed default and is not a “Corporate Person” within the meaning of the Code? – Laxmi Pat Surana Vs. Union Bank Of India & Anr. – Supreme Court

Hon’ble Supreme Court held that if the guarantor is a corporate person (as defined in Section 3(7) of the Code), it would come within the purview of expression “corporate debtor”, within the meaning of Section 3(8) of the Code. There is no reason to limit the width of Section 7 of the Code despite law permitting initiation of CIRP against the corporate debtor, if and when default is committed by the principal borrower. For, the liability and obligation of the guarantor to pay the outstanding dues would get triggered coextensively.
The expression “debt” in Section 3(11) is wide enough to include liability of a corporate person on account of guarantee given by it in relation to a loan account of any person including not being a corporate person in the event of default committed by the latter. It would still be a “financial debt” of the corporate person, arising from the guarantee given by it, within the meaning of Section 5(8) of the Code. The remedy under Section 7 is not for recovery of the amount, but is for reorganisation and insolvency resolution of the corporate debtor who is not in a position to pay its debt and commits default in that regard.
In law, the status of the guarantor, who is a corporate person, metamorphoses into corporate debtor, the moment principal borrower (regardless of not being a corporate person) commits default in payment of debt which had become due and payable. Thus, action under Section 7 of the Code could be legitimately invoked even against a (corporate) guarantor being a corporate debtor. The definition of “corporate guarantor” in Section 5(5A) of the Code needs to be so understood.

Whether an action under Section 7 of the Code can be initiated by the Bank against a Corporate Person (being a Corporate Debtor) concerning Guarantee offered by it in respect of a loan account of the Principal Borrower, who had committed default and is not a “Corporate Person” within the meaning of the Code? – Laxmi Pat Surana Vs. Union Bank Of India & Anr. – Supreme Court Read Post »

If CIRP has been initiated against the Principal Borrower, could the Creditor have filed claim in CIRP initiated against the Corporate Guarantor – Edelweiss Asset Reconstruction Company Ltd. Vs. Gwalior Bypass Projects Ltd. – NCLAT New Delhi

NCLAT referred judgments Dr. Vishnu Kumar Agarwal Vs M/s. Piramal Enterprises Ltd.” [2019] ibclaw.in 16 NCLAT and State Bank of India vs. Athena Energy Ventures Pvt. Ltd. (2020) ibclaw.in 344 NCLAT and held that we do not find that there is bar for the Financial Creditor to proceed against the principal borrower as well as Corporate Guarantor at the same time, either in CIRPs or file claims in both CIRPs. Impugned Order is quashed and set aside. We find that the claim submitted by the Appellant was required to be considered by the IRP/RP in the CIRP proceedings. The matter is remitted back to the Adjudicating Authority and the Adjudicating Authority is requested to pass further Orders with regard to the claim made by the Appellant which was required to be considered by the IRP/RP. The Resolution Plan pending for approval before the Adjudicating Authority may be sent back to COC for reconsideration in view of the present Orders in Appeal.

If CIRP has been initiated against the Principal Borrower, could the Creditor have filed claim in CIRP initiated against the Corporate Guarantor – Edelweiss Asset Reconstruction Company Ltd. Vs. Gwalior Bypass Projects Ltd. – NCLAT New Delhi Read Post »

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