Corporate Guarantor’s Liability Upheld; NCLAT Orders Admission of Claims and Sets Aside Flawed Resolution Plan in CIRP
- REEDLAW
- 4 hours ago
- 3 min read
REEDLAW Legal News Network reports: In a decisive ruling, the National Company Law Appellate Tribunal (NCLAT), New Delhi Bench, held that a Corporate Guarantor’s liability continues independently despite the liquidation of the principal borrower. The Tribunal further clarified that such claims must be duly admitted and verified during the Corporate Insolvency Resolution Process (CIRP), and any resolution plan that fails to recognise valid claims is liable to be set aside as contrary to the principles of fairness and equity under the Insolvency and Bankruptcy Code, 2016.
The National Company Law Appellate Tribunal (NCLAT), New Delhi Bench, comprising Justice Yogesh Khanna (Judicial Member) and Mr. Ajai Das Mehrotra (Technical Member), while adjudicating a Company Appeal, held that the Corporate Guarantor’s liability subsists independently even after the liquidation of the principal borrower. The Bench emphasised that the claims of such guarantors must be properly admitted and verified during CIRP to ensure equitable treatment among creditors. It was observed that resolution plans which ignore genuine claims or fail to incorporate them violate the Code’s objectives and are liable to be set aside.
The Appellant had extended financial assistance to the Principal Borrower through subscription to compulsorily convertible debentures, secured by a corporate guarantee from the Corporate Guarantor, which further hypothecated its immovable assets in favour of the Appellant. The Principal Borrower underwent the Corporate Insolvency Resolution Process (CIRP) and proceeded to liquidation, resulting in the Appellant's claim remaining largely unpaid. Subsequently, the corporate guarantee was invoked, and the Corporate Guarantor was admitted into CIRP, where the Appellant filed its claim. The Resolution Professional rejected the claim on the ground that the same debt could not be claimed simultaneously in the CIRPs of both the principal borrower and the guarantor, relying on this Tribunal's earlier decision. Despite legal developments and Supreme Court rulings affirming that a guarantor’s liability continues independently even after liquidation of the principal borrower, the Resolution Professional declined to admit the claim, citing conflicting judicial precedents and the advanced stage of CIRP.
The Adjudicating Authority dismissed the Appellant’s application seeking claim admission, emphasising the time-bound nature of CIRP and noting that the claim was initially rejected years earlier. The Appellate Tribunal examined the settled Supreme Court position that discharge or liquidation of the principal borrower does not absolve the surety or guarantor of liability, which arises from an independent contract. The Tribunal highlighted procedural deficiencies in the approved resolution plan, including failure to serve the Appellant notice of the Committee of Creditors meetings, misclassification of the Appellant’s secured status, and absence of critical disclosures affecting the plan’s fairness and feasibility. These deficiencies materially affected the Appellant's interests, compromising the integrity of the resolution process.
Consequently, the Appellate Tribunal set aside the impugned order and quashed the approved resolution plan, directing its reconsideration by the Committee of Creditors in light of the principles and parameters prescribed under the Insolvency and Bankruptcy Code and its Regulations. The Resolution Professional was instructed to verify and admit the Appellant’s claim in accordance with the law, ensuring fairness and adherence to statutory duties of claim collation, transparency, and neutrality. The appeal was allowed, while all pending applications were closed without cost implications.
Mr. Vivek Kohli, Sr. Advocate, with Ms. Nimita Kaul and Ms. Shivambika Singh, Advocates, represented the Appellant.
Ms. Muskan Sabharwal and Mr. Shaunak Mitra, Advocates, appeared for the Respondent.
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