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Can you proceed against the Corporate Guarantor before proceeding against the Corporate Debtor? NCLAT answers in this Judgment

Aditi Singh

An NCLAT Bench comprising Chairperson Justice SJ Mukhopadhyaya, Member (Judicial) Justice A.I.S. Cheema and Member (Technical) Balvinder Singh has held that Corporate Insolvency Resolution Process (CIRP) can be triggered against the corporate guarantor even if the corporate debtor is not in CIRP by itself.

Without initiating any ‘Corporate Insolvency Resolution Process’ against the ‘Principal Borrower’, it is always open to the ‘Financial Creditor’ to initiate ‘Corporate Insolvency Resolution Process’ under Section 7 against the ‘Corporate Guarantors’, as the creditor is also the ‘Financial Creditor’ qua ‘Corporate Guarantor’”, the Appellate Tribunal has held.

The judgment was passed in an appeal against the order of the NCLT which initiated CIRP against the Corporate Guarantor-Corporate Debtor at the behest of the Financial Creditor.

Facts:

Rural Electrification Corporation Limited (financial creditor) sanctioned loan aggregating Rs.517.90 crores to FACOR Power Limited (principal borrower). For securing the loan facility extended by the ‘financial creditor’ to ‘FACOR Power Limited’ (‘corporate debtor’ – ‘corporate guarantor’) a ‘Corporate Guarantee Agreement’ was signed and executed guarantee documents in favour of the ‘financial creditor’.

The case of the ‘financial creditor’ was that M/s. FACOR Power Limited (principal borrower) defaulted in making repayment of dues and the account of M/s. FACOR Power Limited has since been classified as Non-Performing Asset (NPA). In view of the defaults committed in the repayment of loan, as per the terms and conditions of the ‘Loan Agreement’ and other financing documents, the ‘financial creditor’ recalled the facilities on 1st October, 2015 and demanded the entire amount of loan, interest and all other amounts due in respect thereof. Despite receipt of the same, no payment was made to the ‘financial creditor’. M/s. FACOR Power Limited (principal borrower) has admitted its liability to the extent of Rs. 604,99,91,539/- as on 31st March, 2016 in the audited balance-sheet for the financial year 2015-16. The ‘corporate guarantor’ – Ferro Alloys Corporation Limited in its audited balance-sheet for the financial year 2015-16 has acknowledged the debt to the tune of Rs.517.90 crores.

After default in making the payment of the debt amount by the ‘principal borrower’, FACOR Power Limited, REC invoked the corporate guarantee. It then called upon Ferro Alloys Corporation Limited to pay the amount due and payable by the principal borrower, which the latter failed to pay. Subsequently, REC moved the NCLT against Ferro Alloys Corporation under the Insolvency and Bankruptcy Code (IBC).

Taking into consideration the fact that there is a ‘debt’ and ‘default’, the NCLT admitted the application under Section 7. Aggrieved by the order, Ferro Alloys Corporation moved an appeal before NCLAT.

Senior Advocate Abhishek Manu Singhvi who appeared for the Appellant Alloy company argued:

  1. The IBC does not use the concept or the phrase ‘corporate guarantor’. This is in contradiction to specific inclusion of ‘personal guarantor’ in multiple provisions. ‘Corporate Guarantor’ is, therefore, conspicuous by its absence in the I&B Code.
  2. The correct sequence to initiate a CIRP would be to first proceed against the ‘principal debtor’. Once that avenue fails, the creditor may proceed against the ‘corporate guarantor’. The Appellant also submitted that the IBC did not use the concept or the phrase ‘corporate guarantor’, and the same is not defined in Sections 3 or 5.  Section 5(22) which defines ‘personal guarantor’ as an individual who is a surety to a ‘corporate debtor’, would preclude any corporate person or entity. They further asserted that the usage of the word ‘guarantor’ in Section 31, mandated that a resolution plan would be binding on the guarantors, after the same has already been made for a ‘principal debtor’.
  3. Simulataneous proceedings under Section 7 cannot be filed against both the Principal Debtor and the Corporate Debtor
(Left to right) Justice SJ Mukhopadhyaya (Chairperson), Balvinder Singh (Member Technical) and Justice A.I.S. Cheema (Member Judicial)
(Left to right) Justice SJ Mukhopadhyaya (Chairperson), Balvinder Singh (Member Technical) and Justice A.I.S. Cheema (Member Judicial)

Rejecting all assertions made by the Appellant, the NCLAT held that CIRP under Section 7 can be initiated against the guarantor.

NCLAT in its order reasoned that:

  1. Section 3(7) defines a corporate person and Section 3(8) defines a corporate debtor. IBC can be initiated against a guarantor who is a ‘corporate person’ and who by operation of law ipso facto becomes a ‘corporate debtor’ by satisfying the ingredients of the terms as defined under Section 3(8).
  2. ‘Default under Section 3(1) encompasses both the principal borrower and principal guarantor. Guarantee becomes debt when invoked. Post that Corporate Guarantor becomes a Corporate Debtor. NCLAT quoting the judgment in Bank of Bihar v. Damodar Prasad reaffirmed that “the very object of the guarantee is defeated if the creditor is asked to postpone his remedies against the surety. In the present case the creditor is a banking company. A guarantee is a collateral security usually taken by a banker. The security will become useless if his rights against the surety can be so easily cut down“.

The NCLAT thus decreed,

For the reasons as discussed above, the appeals fail. It is accordingly dismissed. No costs.

The Appellants were represented by Senior Advocate Dr. Abhishek Manu Singhvi assisted by Advocates Anish Dayal, Sumesh Dhawan, N. S. Ahluwalia, Ashutosh Khaitan, Navpreet Ahluwalia, Vatsala Kak, Deepak Chawla, Tannya Baranwal, A. Sharma, Avishkar Singhvi and Salil Seth.

REC was represented by Solicitor General Tushar Mehta with Khaitan & Co Advocates Vanita Bhargava, Ajay Bhargava, Aseem Chaturvaedi, Wamika Trehan and Shweta Kabra.

Read the judgement:

Ferro-Alloys-Corporation-vs-REC.pdf
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