Guarantor Cannot Become Financial Creditor Without Making Any Payment In Discharge Of Guarantee: NCLAT

Brief Facts

This appeal has been filed against an order dated 01.07.2024 passed by the Adjudicating Authority by which the reconstitution of the CoC was allowed by excluding the appellant.

The corporate debtor was admitted into the insolvency on an application filed by the operational creditor under section 9 of the IBC on 14.02.2020. The Interim Resolution Professional was appointed who constituted the CoC comprising only of unsecured creditors. Thereafter, the Central Bank of India filed its claim before the IRP as a secured creditor.

The bank asked several information from the IRP regarding admission of the claims of the unsecured creditors. The IRP sent a report in which two more unsecured financial creditors, the appellants herein, were included in the CoC on the ground that they had given personal guarantee to the applicant bank for securing the loan advanced to the corporate debtor. Their claims were admitted on the basis of the recovery certificate issued against them by the DRT on the basis of an recovery application filed by the bank.

An intervention Application was filed by the applicant in which direction for reconstituting the CoC was sought. The Adjudicating Authority allowed the said IA and held that since the appellants have not paid anything to the creditor, they cannot be member of the CoC. This order has been challenged in the present appeal.

Contentions

The appellants submitted that the Adjudicating Authority has committed an error by misinterpreting section 140 of the Indian Contract Act. As per this provision, surety can step into the shoes of the creditor either repaying the loan amount or performing the act for which the principle debtor is liable. Based on this, it was contended that however no payment was made in this case but in case the bank proceeded to dispose of the mortgaged property of the appellants, it would tantamount to fulfilling of performance in repayment of the loan.

Per contra, the respondent submitted that appellant who had given Personal Guarantee to the loan obtained by the Corporate Debtor from the Central Bank of India, have not paid any amount, even though Decree has been issued by the DRT, hence they cannot claim to become Financial Creditor of the Corporate Debtor.

That because of their inclusion in the CoC, voting shares of the respondent was reduced by 26 percent which is illegal.

NCLAT's Analysis

Section 5 (8) of the IBC provides that the amount of any liability in respect of any of the guarantee or indemnity is also a Financial Debt.

The tribunal noted that the plain language of this provision makes it clear that plain and simple guarantee given by the guarantor cannot be a basis for a financial debt unless there is an amount of liability in respect of such guarantee.

It was further observed that a Guarantor shall have right of payment against the principal borrower only when it has made payment in discharge of the Guarantee which is a Statutory Scheme under Section 140 of the Contract Act. The expression used in Section 140 is “the surety upon payment or performance of all that is liable for”. The Personal Guarantor while giving the Guarantee has guaranteed for repayment of the loan, in event, principal failed to make a payment to the Guarantor. Thus, Guarantor in the present case has to make payment and performance of all that is liable for is payment to the Bank none-else.

The tribunal concluded that guarantor cannot become the creditor just because a guarantee has been given against the loan advanced to the corporate debtor. It has to be shown that the loan was paid by the guarantor when the corporate debtor failed to discharge its liability then only they can step into the shoes of the creditor and file claim as financial creditor in the insolvency of the corporate debtor.

Since no payment was made by the appellants in the present case, they cannot be treated as financial creditor therefore it was observed that no error was committed by the Adjudicating Authority. Accordingly, the present appeal was dismissed.

Case Title: Mr. Suresh Kumar and Anr. Versus Central Bank of India

Case Reference: Company Appeal (AT) (Insolvency) No. 1592 of 2024

Judgment Date: 27/11/2024

For Appellant : Mr. Mrinal Harsh Vardhan, Mr. Iswar Mohapatra, Mr. Markandy Singh, Mr. Kailash Ram and Mr. Sanket Ranjan, Advocates.

For Respondents : Mr. Brijesh Kumar Tamber, Mr. Prateek Kushwaha, Mr. Vinay Singh Bist, Arani Mukherjee, Ms. Sahas Bhasin and Mr. Yashu Rustagi, Advocates.

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