Insolvency and Bankruptcy Code, 2016 – ss.7, 31 – Contract Act, 1872 – ss.126, 128, 133-139 – 1st respondent-financial creditor granted a loan of Rs.100 crores to the 2nd respondentcorporate debtor – Corporate guarantee furnished by ACIL-Corporate Guarantor – Corporate debtor defaulted payment of the loan – s.7 application filed against Corporate Guarantor – Corporate Insolvency Resolution Process (CIRP) against the Corporate Guarantor commenced, Rs.38.87 crores paid to the financial creditor under the resolution plan – Corporate debtor, if liable to pay the entire amount payable under the loan transaction after deducting the aforesaid amount paid on behalf of the corporate guarantor: Held: Yes – Payment of Rs.38.87 crores to the financial creditor under the resolution plan of the corporate guarantor will not extinguish the liability of the corporate debtor to pay the entire amount payable under the loan transaction after deducting the amount paid on behalf of the corporate guarantor in terms of its resolution plan – As far as the guarantee is concerned, the liability of the surety and the principal debtor is co-extensive – The creditor has remedies available to recover the amount payable by the principal borrower by proceeding against both or any of them – The creditor can proceed against the guarantor first without exhausting its remedies against the principal borrower – 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 and the creditor can proceed against the principal borrower to recover the balance amount – 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 – View taken by NCLAT cannot be faulted. [Paras 14, 15, 17, 28] Insolvency and Bankruptcy Code, 2016 – ss.7, 60 – Contract Act, 1872 – Simultaneous proceedings against the Corporate Debtor and the Guarantor – Permissibility:
Held: Is permissible – Consistent with the basic principles of the Contract Act that the liability of the principal borrower and surety is co-extensive, the IBC permits separate or simultaneous proceedings to be initiated u/s.7 by a financial creditor against the corporate debtor and the corporate guarantor. [Para 19] Insolvency and Bankruptcy Code, 2016 – ss.18(1) Explanation (b), 36(4)(d) – Whether a holding company is the owner of the assets of its subsidiary – Can the assets of the subsidiaries be included in the resolution plan of the holding company – Whether the assets of the 2nd respondent-corporate debtor were a part of the CIRP in respect of ACIL-Corporate Guarantor (holding company of the corporate debtor):
Held: No – NCLAT rightly held that the resolution plan took care only of the investments of ACIL in the subsidiaries and not the assets of subsidiaries – Assets of a subsidiary company cannot be part of the resolution plan of the holding company – A holding company and its subsidiary are always distinct legal entities – The holding company would own shares of the subsidiary company, but this does not make the holding company the owner of the subsidiary’s assets – By virtue of the CIRP process of ACIL, the 2nd respondent-corporate debtor does not get a discharge, and its liability to repay the loan amount to the extent to which it is not recovered from the corporate guarantor did not extinguish. [Paras 20, 21]
Insolvency and Bankruptcy Code, 2016 – Contract Act, 1872 – s.140 – Rights of surety on payment or performance – “upon payment or performance of all that he is liable for”; ‘all that he is liable’ – Liability of ACIL-Corporate Guarantor was to the extent of the entire amount repayable by the 2nd respondentcorporate debtor – In the CIRP of ACIL, the appellantResolution Applicant of ACIL paid Rs.38.87 crores only to the 1st respondent-financial creditor on behalf of ACIL – Plea of the appellant that it has the right of subrogation over the right of the financial creditor over the corporate debtor in respect of its dues as well as the security provided to the financial creditor of the mortgage in respect of SEZ land: Held: Rejected – Only the liability of ACIL under the corporate guarantee to repay the loan to the financial creditor was extinguished on the payment of Rs.38.87 crores – By the involuntary act of the creditor of accepting part of the amount from the surety in the discharge of the entire liability of the surety, even if s.140 is attracted, it will confer on the guarantor or the appellant the right to recover only the aforesaid amount from the corporate debtor – 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. [Para 25]
As published in the Supreme Court Reports, Supreme Court of India. Headnotes prepared by: Divya Pandey. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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