NCLAT: Subsequent Agreements Cannot Nullify Existing Corporate Guarantee under IBC
- REEDLAW
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REEDLAW Legal News Network reports: In a decisive ruling, the National Company Law Appellate Tribunal (NCLAT), Principal Bench, clarified that execution of subsequent financial agreements does not nullify or novate existing corporate guarantees when the original sanction letters expressly provide for their continuance. The Tribunal further observed that insufficiency of stamp duty on such corporate guarantees cannot invalidate a Section 7 application under the Insolvency and Bankruptcy Code, 2016, thereby reaffirming the enforceability of existing guarantees in insolvency proceedings.
The National Company Law Appellate Tribunal (NCLAT), Principal Bench, comprising Justice Ashok Bhushan (Chairperson) and Mr. Barun Mitra (Technical Member), while adjudicating a Company Appeal, held that execution of subsequent financial agreements does not extinguish or novate earlier corporate guarantees when sanction letters explicitly provide for the continuance of existing securities, and insufficiency of stamp duty on such guarantees does not invalidate a Section 7 proceeding under the Insolvency and Bankruptcy Code, 2016.
The Appellant, being the suspended director of the Corporate Debtor, had challenged the admission of a Section 7 application under the Insolvency and Bankruptcy Code, 2016, by which the Adjudicating Authority had admitted the Corporate Debtor into the Corporate Insolvency Resolution Process. The Section 7 petition had been filed by the Financial Creditor against the Corporate Debtor, which stood as a Corporate Guarantor for the financial facilities extended to the Principal Borrower. The Appellant contended that the deeds of guarantee dated 22 August 2015 and 18 November 2016, relied upon by the Financial Creditor, were insufficiently stamped and hence unenforceable under law. It was submitted that the Adjudicating Authority had erred in acting upon such unstamped documents, contrary to the provisions of the Maharashtra Stamp Act and established judicial precedents holding unstamped instruments inadmissible in evidence.
The Appellant further argued that, subsequent to the execution of the earlier guarantee deeds, new financial facilities had been sanctioned in 2019 and 2020, which were accompanied by a fresh Working Capital Consortium Agreement and a new deed of guarantee dated 6 November 2020. It was urged that with the execution of the new agreement and guarantee, the earlier guarantees stood extinguished, amounting to novation of the contract. Accordingly, the Appellant contended that no default could be claimed under the old guarantees and that the Financial Creditor had failed to invoke the new deed of guarantee, rendering the Section 7 application non-maintainable.
In response, the Financial Creditor maintained that the insufficiency of stamp duty on the guarantee deeds could not be a ground to reject the Section 7 petition, as such a defect was curable. It was argued that the obligation to pay any deficit stamp duty lay with the borrower or the guarantor and that the Principal Borrower had already undertaken to pay any such deficit if demanded. The Financial Creditor relied on judicial precedents to assert that technical defects in stamping could not defeat the substantive rights of creditors under the IBC. It was also submitted that the subsequent sanction letters of 2019 and 2020 were fully covered by the existing securities and guarantees executed earlier, which continued to bind the Corporate Guarantor.
Upon consideration, the Appellate Tribunal observed that the sanction letters dated 26 December 2019 and 9 September 2020 explicitly stated that the existing securities would continue to remain applicable and would also cover the new facilities granted. The Tribunal noted that both the guarantee deeds of 2015 and 2016 unequivocally bound the Corporate Guarantor to make payments on demand in case of default by the Principal Borrower and permitted the invocation of the guarantee by any member of the consortium. The Working Capital Consortium Agreement, dated 6 November 2020, also clarified that it did not affect existing securities. Accordingly, the Tribunal held that the argument of novation raised by the Appellant was untenable and that the earlier guarantees remained enforceable.
The Appellate Tribunal concluded that the Adjudicating Authority had correctly admitted the Section 7 application, as the existence of debt and default had been clearly established and the Corporate Debtor remained liable under the guarantees executed in 2015 and 2016. The appeal was thus dismissed, affirming the initiation of CIRP against the Corporate Guarantor.
Mr. Ashish Mohan, Sr. Advocate, with Ms. Sunanda Tulsyan, Advocate, represented the Appellant.
Mr. Kunal Tandon, Sr. Advocate, with Mr. Tushar Singh, Ms. Aastha Kaushik, and Ms. Natasha, Advocates, appeared for the Respondent No. 1.
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