Supreme Court Rules on Corporate Guarantor’s Liability in Insolvency Cases
The Supreme Court of India has delivered a significant ruling in BRS Ventures Investments Ltd. v. SREI Infrastructure Finance Ltd. & Anr., clarifying the rights of financial creditors to initiate Corporate Insolvency Resolution Process (CIRP) against both principal borrowers and their corporate guarantors. The ruling settles key issues regarding subrogation, simultaneous insolvency proceedings, and the scope of liability under the Insolvency and Bankruptcy Code, 2016 (IBC).
Background of the Case
The case arose from a financial transaction involving Gujarat Hydrocarbon and Power SEZ Limited (corporate debtor), which had borrowed Rs.100 crores from SREI Infrastructure Finance Ltd. (financial creditor). The loan was secured by a corporate guarantee from Assam Company India Limited (ACIL). Upon default, the financial creditor invoked the guarantee but later filed for CIRP against ACIL under Section 7 of the IBC.
ACIL’s resolution plan, proposed by BRS Ventures Investments Ltd., was approved, with the financial creditor receiving Rs.38.87 crores as full and final settlement of its admitted claim. However, the financial creditor later initiated a separate CIRP against the corporate debtor for the outstanding amount, leading to legal challenges from BRS Ventures.
Key Legal Issues Before the Supreme Court
- Whether the financial creditor could initiate CIRP against the corporate debtor after receiving a partial settlement from the guarantor.
- Whether the principle of subrogation applied in favor of BRS Ventures after it settled ACIL’s liability.
- Whether assets of a subsidiary could be included in the CIRP of its parent company.
Petitioner’s Arguments
The appellant, BRS Ventures, argued:
- The financial creditor had already settled its claim through ACIL’s resolution plan and could not pursue further claims against the corporate debtor.
- Under Section 140 of the Indian Contract Act, 1872, BRS Ventures, having discharged ACIL’s liability, was entitled to step into the creditor’s shoes and recover the dues from the corporate debtor.
- The initiation of CIRP against the corporate debtor violated the principle of finality in insolvency proceedings.
Respondent’s Arguments
The financial creditor contended:
- The settlement in ACIL’s CIRP did not extinguish the corporate debtor’s liability, as the guarantee was an independent contract.
- Under IBC, creditors have the right to initiate insolvency proceedings against both the corporate debtor and the guarantor.
- The approval of ACIL’s resolution plan did not affect the creditor’s right to recover from the corporate debtor.
Supreme Court’s Observations
The Supreme Court examined key provisions of the IBC and the Indian Contract Act, making the following observations:
1. Co-Extensive Liability of Guarantors and Principal Debtors
The Court reaffirmed that the liability of a guarantor is co-extensive with that of the principal debtor unless explicitly restricted. This principle allows creditors to initiate simultaneous CIRP against both entities.
2. Subrogation Rights Under Section 140 of the Contract Act
The Court clarified that subrogation applies only when the guarantor pays the full debt. Since BRS Ventures settled only a portion of the financial creditor’s claim, it could not claim subrogation over the corporate debtor’s remaining liability.
3. Independent Nature of Corporate Guarantees
The Court held that the approval of a resolution plan for the guarantor does not automatically discharge the corporate debtor’s liability, as the contracts are independent.
4. Subsidiary Assets Not Part of Parent Company’s CIRP
The Court ruled that assets of a subsidiary cannot be included in the CIRP of its parent company, reaffirming the distinct legal identities of corporate entities.
Final Judgment
The Supreme Court ruled:
- The financial creditor was entitled to initiate CIRP against the corporate debtor despite receiving a partial settlement from ACIL.
- BRS Ventures could not claim subrogation, as it did not settle the entire debt.
- The corporate debtor’s liability remained intact, allowing further recovery actions.
- The NCLAT’s decision upholding the financial creditor’s claims was affirmed.
Implications of the Judgment
This ruling clarifies that creditors can pursue both the principal debtor and the guarantor in insolvency proceedings. It also reinforces the principle that corporate guarantees do not lose validity merely because one party undergoes insolvency resolution.
The judgment provides greater clarity for financial institutions, ensuring that secured creditors retain their rights even after partial settlements. It also sets a precedent for future disputes involving corporate guarantees and insolvency resolutions.
Petitioner Name: BRS Ventures Investments Ltd..Respondent Name: SREI Infrastructure Finance Ltd. & Anr..Judgment By: Justice Abhay S. Oka, Justice Pankaj Mithal.Place Of Incident: India.Judgment Date: 23-07-2024.
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