Insolvency Resolution Of Corporate Guarantor Won't Bar Creditor From Filing CIRP Against Corporate Debtor For Balance Debt : Supreme Court

In a notable decision relating to the Insolvency & Bankruptcy Code of 2016, the Supreme Court held when that the insolvency resolution of a corporate guarantor will not prevent the creditor from initiating another insolvency process against the corporate debtor for the balance debt.

The Court clarified that the insolvency resolution of the corporate guarantor will not result in the discharge of the corporate debtor towards the remaining debt.

In the present case, respondent no.1 (Financial Creditor) had initiated the Corporate Insolvency Resolution Process (CIRP) against respondent no.2 (Corporate Debtor) after default was committed by the Corporate Debtor in repayment of the debt amount of Rs. 100 crores. The corporate debtor is a subsidiary of M/s. Assam Company India Limited (ACIL), which acted as a corporate guarantor of the corporate debtor.

The financial creditor had initiated a CIRP against the Corporate Guarantor, wherein the Appellant (Resolution Applicant) had submitted a resolution plan amounting to Rs. Rs.38.87 crores for the resolution of the Corporate Guarantor. The resolution was accepted by the creditor as the full and final settlement of the liability that the guarantor owes to the financial creditor on behalf of the corporate debtor.

After the completion of CIRP against the corporate guarantor, the financial creditor initiated CIRP against the Corporate Debtor for the remaining amount of debt. The question was whether the CIRP could be initiated against the corporate debtor when the creditor had accepted the corporate guarantor's resolution plan in full and final settlement of all its debt.

Approving the decision of the NCLT to admit the insolvency petition against the debtor, the bench comprising Justices Abhay S Oka and Pankaj Mithal held :

“where a company furnishes a corporate guarantee for securing a loan taken by another company and if the CIRP of the corporate guarantor ends in a resolution plan, it will bind the creditor of the corporate guarantor. The corporate guarantor's liability may end in such a case by operation of law. However, such a resolution plan of the corporate guarantor will not affect the liability of the principal borrower to repay the loan amount to the creditor after deducting the amount recovered from the corporate guarantor or the amount paid by the resolution applicant on behalf of the corporate guarantor as per the resolution plan."

The question that appeared before the Supreme Court was “Whether the second Application under Section 7 of IBC is not maintainable against the Corporate Debtor as for the same debt and default, CIRP has already been taken place against the Corporate Guarantor and the Financial Creditor has accepted the amount in full and final settlement of all its dues?”

Answering in the negative, the court held that the creditor can initiate a Corporate Insolvency Resolution Process (“CIRP”) against the corporate debtor even after the CIRP has already taken place against the Corporate Guarantor.

"If the creditor recovers a part of the amount guaranteed by the surety from the surety and agrees not to proceed against the surety for the balance amount, that will not extinguish the remaining debt payable by the principal borrower. In such a case, the creditor can proceed against the principal borrower to recover the balance amount. Similarly, if there is a compromise or settlement between the creditor and the surety to which the principal borrower is not a consenting party, the liability of the borrower qua the creditor will remain unaffected. The provisions regarding the discharge of the surety discussed above show that involuntary acts of the principal borrower or creditor do not result in the discharge of surety," the Court stated.

Corporate Guarantor Would Be Entitled To Step Into Shoes Of Creditor To Recover Loan Amount From Corporate Debtor

The Court held that under Section 140 of the Indian Contract Act of 1872, the corporate guarantor can step into the shoes of the creditor to recover the loan amount paid by him against the corporate debtor's liability towards the creditor.

“If the surety pays the entirety of the amount payable under guarantee to the creditor, Section 140 provides a remedy to the surety to recover the entire amount paid by him in the discharge of his obligations. Therefore, the surety gets invested with the rights of the creditor to recover from the principal debtor the amount which was paid as per the guarantee.”, the judgment authored by Justice Oka said.

The aforesaid observation is based on the doctrine of subrogation which means that the surety can recover the amount from the corporate debtor for the amount it paid towards the debt owed by the corporate debtor to the creditor.

Further, the court clarified that the surety would get an equitable right to claim only a part of the amount that he paid to the creditor.

“If the surety pays only a part of the amount payable to the creditor, the equitable right the surety gets under Section 140 will be confined to the debt he cleared.”, the court added.

The Court clarified that the subrogation will be only to the extent of the amount recovered by the creditor from the surety.

"Notwithstanding the subrogation to the extent of the amount paid on behalf of the corporate guarantor by the resolution applicant, the right of the financial creditor to recover the balance debt payable by the corporate debtor is in no way extinguished," the judgment stated.

Assets Of Subsidiary Company Of Corporate Debtor Cannot Become Part Of Resolution Plan Of Holding Company

“A holding company and its subsidiary are always distinct legal entities. The holding company would own shares of the subsidiary company. That does not make the holding company the owner of the subsidiary's assets. In the case of Vodafone International Holdings BV [reported in (2012) 6 SCC 613], this Court took the view that if a subsidiary company is wound up, its assets do not belong to the holding company but to the liquidator. As mentioned in the decision, the reason is that a company is a separate legal persona and the fact that the parent company owns all its share has nothing to do with its separate legal existence. Therefore, the assets of the subsidiary company of the corporate debtor cannot be part of the resolution plan of the corporate debtor.”, the court said.

For Appellant(s) Mr. Jaideep Gupta, Sr. Adv. Mr. Ajay Gaggar, Adv. Mr. Amarjit Singh Bedi, AOR Mr. Yashwant Gaggar, Adv. Ms. Racheeta Chawla, Adv. Ms. Riddhi Bose, Adv. Ms. Anindita Mitra, Adv.

For Respondent(s) No.1 Mr. Abhimanyu Bhandari, Adv. Mr. Arav Pandit, Adv. Mr. Thakur Ankit Singh, Adv. Ms. Rooh-e-hina Dua, AOR

For Respondent(s) No.2 Mr. Navin Pawa, Sr. Adv. Mr. Shamik Shirishbhai Sanjanwala, AOR Mr. Raheel Patel, Adv. Mr. Shantanu Parmar, Adv.

For Intervenor(s) Mr. Darius Khambata,Sr.Adv. Mr. Ritin Rai,Adv. Mr. Rishabh Parikh,Adv. Mr. Tirth Nayak,Adv. Mr. Vinam Gupta, AOR

Case Title: BRS Ventures Investments Ltd. Versus SREI Infrastructure Finance Ltd. & Anr.

Citation : 2024 LiveLaw (SC) 508

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