Corporate guarantee liability is “financial debt” under IBC: Supreme Court

The Supreme Court on Tuesday held that liabilities arising from corporate guarantees fall within the definition of “financial debt” under the Insolvency and Bankruptcy Code (IBC), 2016 and lenders enforcing such guarantees are entitled to be treated as financial creditors. [State Bank of India v. Doha Bank].A Bench of Justices PS Narasimha and Alok Aradhe held, "A liability arising from the corporate guarantee squarely falls within the ambit of financial debt as defined under Section 5(8) of the Code. The amount of any liability in respect of any of the guarantees for money borrowed against the payment of interest is a “financial debt” within Section 5(8) of the Code.".The case arose from a consortium lending structure led by State Bank of India, along with Bank of India, UCO Bank, Syndicate Bank, Oriental Bank of Commerce and Indian Overseas Bank. These banks extended large rupee loans - over ₹6,000 crore to Reliance Communications and ₹735 crore to Reliance Telecom. To secure these loans, Reliance Infratel (the corporate debtor) executed corporate guarantees in favour of the consortium through a security trustee. This made SBI and the other consortium lenders beneficiaries of the guarantees, entitling them to invoke the guarantees upon default.When defaults occurred and the corporate insolvency resolution process (CIRP) was initiated, the SBI-led consortium filed claims as financial creditors based on these guarantees. However, Doha Bank challenged their status, arguing that the guarantees were invalid and unenforceable..The National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) accepted these objections and excluded the consortium from the Committee of Creditors (CoC)..The Court rejected the tribunals’ approach as “perverse” and made three key findings:Corporate guarantees as financial debt: The Court clarified that guarantees securing loans carry the element of time value of money and therefore qualify as financial debt under Section 5(8).Non-disclosure not fatal: Even if guarantees were not reflected in financial statements, that alone cannot defeat a creditor’s claim. At best, it may constitute a default by the corporate debtor.Stamping defects curable: Insufficient stamping does not render a document void or unenforceable. Such defects are curable and cannot be used to defeat substantive rights..The Court also held that documents could be produced at the appellate stage if relevant to deciding the dispute and that the resolution professional had duly verified the guarantees..Allowing the appeal, the Court set aside the NCLT and NCLAT orders, recognised the SBI-led consortium as financial creditors and directed reconstitution of the CoC..The consortium of banks was represented by Additional Solicitor General N Venkataraman with Advocates Sanjay Kapur, Surya Prakash, Shubhra Kapur, Santha Smruthi and Anuraj Mishra..The respondents were represented by Senior Advocates Abhishek Manu Singhvi and Prashanto Chandra Sen with Advocates Jayesh H, Jinal Shah, Dhruv Malik, Palak Nenwani, Ronit Chopra, Sayantan Chandra, Rajlakshmi Singh and Vanisha Mehta, Advocates.They were also represented by Senior Advocate Gopal Jain with Advocates Vaijayant Paliwal, Charu Bansal and Shruti Poddar.Senior Advocate Neeraj Kishan Kaul appeared with Advocates Rajendra Barot, Nilang Desai, Abhijnan Jha , Saloni Thakker, Nafisa Khandeparkar, Bharat Makkar, Pranav Tomar and Harshil Goda.Senior Advocate Narender Hooda appeared with Advocates Naman Saraswat, Tavinder Sidhu, Vikas Soni, Kanav Singhal and Kamini Sharma, instructed by MV Kini & Associates..[Read Judgment]