The NCLAT bench of Chairperson Justice SJ Mukhopadhyaya, Member (Judicial) Justice A.I.S Cheema and Member (Technical) Balvinder Singh has held that Corporate Insolvency Resolution Process or CIRP can be initiated against the corporate guarantors even though the corporate debtor may not be a part of the CIRP itself.

The case in question arose when the principal borrower i.e. FACOR Power Limited secured a loan from the financial creditor i.e. Rural Electrification Corporation Limited for an amount of Rs.517.90 Crores. For the said loan extended, a Corporate Guarantee Agreement was signed and executed in favour of the financial creditor. Due to the account of the financial debtor becoming a Non-Performing Asset, the financial creditor recalled the entire loan amount along with interest and other such amounts due. As the default continued, the financial creditor invoked the corporate guarantee to which the corporate guarantor i.e. Ferro Alloys Corporate Ltd failed to pay. As a result, the financial creditor filed a petition under Section 7 of the Insolvency Code against the corporate guarantor, which was admitted on the acceptance of a ‘debt’ and ‘default’. The said admission of the insolvency petition was challenged by the corporate guarantor before the NCLAT.

Senior Advocate Abhishek Manu Singhvi, appearing for the corporate guarantor, argued that the concept of corporate guarantor is not mentioned in the IBC and therefore such action under Section 7 cannot be initiated. Furthermore it was argued that the proper manner for initiating insolvency proceedings was to firstly proceed against the corporate debtor and only after such action fails can one proceed against the corporate guarantor. Furthermore the argument of Section 31 of the IBC was made which mandated that a resolution plan would be binding on the guarantors, after the same has already been made for a ‘principal debtor’.

The Bench rejected the arguments of the corporate debtor and stated that IBC can be initiated against the corporate guarantor who is a corporate person as the corporate guarantor becomes a corporate debtor as it satisfies the ingredients of the terms defined under Section 3(8) of the IBC. The Bench made the following observations as well:

“32. Admittedly, the guarantee was invoked by ‘Rural Electrification Corporation Limited’ against ‘Ferro Alloys Corporation Ltd.’ and demand was raised on 27th October, 2015 calling upon ‘Ferro Alloys Corporation Ltd.’ to pay the amount due within 21 days. Since then, Ferro Alloys Corporation Ltd. (Corporate Guarantor) became a ‘corporate debtor’ of ‘Rural Electrification Corporation Limited’ (Financial Creditor).

33. In its Annual Report for the year ending 2016-17, ‘Ferro Alloys Corporation Ltd.’ has shown a sum of Rs. 517.90 crores payable to the ‘financial creditor’. Therefore, it is clear that ‘Ferro Alloys Corporation Ltd.’ admitted the ‘debt’ and in absence of payment, we hold that there is a ‘default’.

34. The provision of the I&B Code do not bar a ‘financial creditor’ from initiating ‘corporate insolvency resolution process’ against the ‘guarantor’, who comes within the meaning of ‘corporate debtor’. The aforesaid matter can be noticed from the statutory inter-se rights, obligations and liabilities of : (i) A surety qua the creditor (the relationship as defined under the Indian Contract Act); or (ii) Guarantor qua financial creditor.

35. The I&B Code does not exclusively delineates and/or prescribes any inter-se rights, obligation and liabilities of a guarantor qua ‘financial creditor’. Thus, in absence of any express provision providing for inter-se rights, obligation and liabilities of guarantor qua ‘financial creditor’ under the Code, the same will have to be noticed from the provisions of the Indian Contract Act, which exclusively and elaborately deals with the same.”

The Bench relied on the judgments of State Bank of India v. Indexport Registered and Ors.− (1992) 3 SCC 159 and Bank of Bihar v. Damodar Prasad and Anr.− (1969) 1 SCR 620 to support its reasoning and thereby dismissed the appeal.

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