Guarantor's Insolvency: No Free Pass for Corporate Debtors

The Supreme Court in a recent judgment in BRS Ventures Investments Ltd. v. SREI Infrastructure Finance Ltd. Civil Appeal no. 4565 of 2021 has held that the insolvency resolution of a Corporate Guarantor will not prevent the Creditor from initiating another insolvency process against the Corporate Debtor for the balance debt. The Court clarified that the insolvency resolution of the Corporate Guarantor will not discharge the Corporate Debtor from the balance debt.

Brief Facts:

  1. In 2011, the first Respondent, SREI Infrastructure Finance Limited (“Financial Creditor”) granted a loan of Rs. 100 Cr. to the second Respondent, Gujarat Hydrocarbon and Power SEZ Limited ("Corporate Debtor”). The loan was secured by a mortgage made by the Corporate Debtor of its leasehold land and a pledge of shares of the Corporate Debtor and M/s Assam Company India Limited (“ACIL”). The loan was also secured by the Corporate Guarantee furnished by ACIL.
  2. In 2017, CIRP application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“The Code”) was filed against ACIL. After the appointment of the Resolution Professional (“RP”), claim amount of Financial Creditor was assessed at Rs. 241.27 Cr. The Appellant (BRS Ventures) submitted a resolution plan which was accepted by the Committee of Creditors. The Financial Creditor was paid a sum of Rs. 38.87 Cr towards full and final settlement of dues as against the Corporate Guarantor.
  3. In 2020, the Financial Creditor filed an application under Section 7 of the Code, against the Corporate Debtor for the recovery of Rs. 1428 Cr as balance amount from the loan transaction. Appeals were filed against the order admitting the application, however, the same were dismissed by the NCLAT.

The Hon’ble Supreme Court while dismissing the appeals held as under:

  1. Payment of Rs. 38.87 Cr to the Financial Creditor under the resolution plan of ACIL will not extinguish the liability of the Corporate Debtor to pay the entire amount payable under the loan transaction after deducting the amount paid by ACIL.
  2. Holding company is not the owner of the assets of its subsidiary. Therefore, assets of subsidiaries cannot be included in the resolution plan of the holding company.
  3. Financial Creditor can file separate/simultaneous applications under Section 7 of the Code against the Corporate Debtor and the Corporate Guarantor (ACIL) under Section 60(2) of the Code.

The Court took note of the judgement in Lalit Kumar Jain v. UOI1 and held that if the CIRP of the Corporate Guarantor ends in a resolution plan, it would also bind the creditors of the Guarantor, however, the same will not affect the liability of the Principal Borrower to repay the loan after deducting the amount recovered from the Corporate Guarantor. The Court also held that notwithstanding subrogation, the right of the Financial Creditor to recover the balance debt payable by the Corporate Debtor is in no way extinguished and under Section 60(2) of the Code, the Financial Creditor can simultaneously file applications under Section 7 for recovery of the debt against both, the Corporate Debtor and the Corporate Guarantor. The Guarantor can only move against the Corporate Debtor, only after it has satisfied its own liability under the loan transaction and not before that. Therefore, the appeals were dismissed. This judgment underscores the Financial Creditor's right to full recovery of debt, preventing Corporate Debtors from evading their obligations through CIRP filed against the Guarantor.

By - Ansh Mittal

  1. (2021) 9 SCC 321
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