Corporate Guarantor Can't Be Absolved From Its Liability Only Due To Non-Invocation Of Guarantee: NCLAT Delhi
The National Company Law Appellate Tribunal ('NCLAT') Delhi bench, comprising Mr. Justice Ashok Bhushan (Chairperson) and Mr. Barun Mitra (Technical Member) held that a Corporate Guarantor cannot be absolved from its liability only due to non-invocation of guarantee. Background Facts: Iskon Infra Engineering Private Limited (Corporate Guarantor/Company) initiated voluntary...
The National Company Law Appellate Tribunal ('NCLAT') Delhi bench, comprising Mr. Justice Ashok Bhushan (Chairperson) and Mr. Barun Mitra (Technical Member) held that a Corporate Guarantor cannot be absolved from its liability only due to non-invocation of guarantee.
Background Facts:
Iskon Infra Engineering Private Limited (Corporate Guarantor/Company) initiated voluntary liquidation under Section 59 of the Insolvency and Bankruptcy Code, 2016 ("IBC"). On completion of the liquidation, the Liquidator filed an application under Section 59(7) of the IBC, for the dissolution of the Company.
The NCLT issued a notice to the Registrar of Companies ("RoC"). The RoC's report revealed that the Company had provided corporate guarantees exceeding Rs. 1,257 crores to Abhinav Steels and Power Limited (Principal Borrower), which had obtained term loans from a consortium of banks, including Punjab National Bank, Oriental Bank of Commerce, and Central Bank of India. The guarantees dated back to 2010, and there were 23 charges against the Corporate Guarantor with no satisfaction of charge by either the Corporate Guarantor or the liquidator.
In response, NCLT Delhi issued notices to the said banks. Central Bank of India filed an objection providing details of the working capital term loan secured by the Corporate Guarantor. NCLT Delhi via its Order dated 21.11.2023 based on objections filed by Central Bank of India dismissed the liquidator's petition filed under Section 59(7) of IBC.
The Corporate Guarantor filed the appeal against NCLT's decision dated 21.11.2023 arguing that none of the financial creditors had invoked the corporate guarantee and no claims had been filed with the liquidator. It also contended that a corporate guarantor's liability shall only arise upon the invocation of the guarantee.
NCLAT Verdict:
The NCLAT Delhi bench dismissed the appeal and held that a Corporate Guarantor cannot be absolved from its liability only due to non-invocation of guarantee.
The Appellate Tribunal relied upon the Guarantee Deed between the Principal Borrower and the Corporate Guarantor under which it had undertaken to pay the debt. Clause 10 of the Guarantee Deed stated as follows:
“Lenders shall be at liberty to require the performance by the Guarantor of its obligations hereunder to the same extent in all respects as if the Guarantor had at all times been solely liable to perform the said obligations.”
It noted that the liability of a Corporate Guarantor is coextensive with the Principal Borrower and the Lenders are at liberty to require the performance by the Guarantor of its obligation.
Further, after consideration of RoC's observations and Central Bank of India's objections, NCLAT ruled that NCLT New Delhi is correct in its opinion that the company cannot proceed with the process of voluntary liquidation.
In conclusion, the Appellate Tribunal ruled that the guarantee continues to bind the Corporate Guarantor to discharge its liability, and the fact that as of date, the guarantee has not been invoked, cannot be a ground for the Company to be liquidated under Section 59 of the IBC.
Case Title: Iskon Infra Engineering Private Limited vs. Central Bank of India
Case No.: Company Appeal (AT) (Insolvency) No. 323 of 2024 & I.A. No. 1080 of 2024
Counsel for Appellant: Mr. Mrinal Harsh Vardhan, Mr. S.S. Bhati, Mr. Kailash Ram, Mr. Anurag P., Mr. Rohit Sharma, Advocates.
Date of Judgement: 01st April, 2024