In a significant decision, the Supreme Court held that a corporate guarantor’s insolvency resolution under the Insolvency & Bankruptcy Code ( IBC ) of 2016 will not prevent the creditor from initiating another insolvency process against the corporate debtor for the balance debt.
The respondent no.1, the Financial Creditor had initiated the Corporate Insolvency Resolution Process ( CIRP ) against Respondent No. 2, the Corporate Debtor after default was committed by the Corporate Debtor in repayment of the debt amount of Rs. 100 crores. The corporate debtor is a subsidiary of M/s. Assam Company India Limited ( ACIL ), which acted as a corporate guarantor of the corporate debtor.
The financial creditor had initiated a CIRP against the Corporate Guarantor, wherein the Appellant ( Resolution Applicant ) had submitted a resolution plan amounting to Rs. Rs.38.87 crores for the resolution of the Corporate Guarantor. The creditor accepted the resolution as the full and final settlement of the liability that the guarantor owes to the financial creditor on behalf of the corporate debtor.
After the completion of CIRP against the corporate guarantor, the financial creditor initiated CIRP against the Corporate Debtor for the remaining amount of debt. The question was whether the CIRP could be initiated against the corporate debtor when the creditor had accepted the corporate guarantor’s resolution plan in full and final settlement of all its debt.
The two member bench comprising Justices Abhay S Oka and Pankaj Mithal held that 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.
The question that appeared before the Supreme Court was “Whether the second Application under Section 7 of IBC is not maintainable against the Corporate Debtor as for the same debt and default?
The court held that the creditor can initiate CIRP against the corporate debtor even after the CIRP has already taken place against the Corporate Guarantor.
As per Section 140 of the Indian Contract Act of 1872, the corporate guarantor can step into the shoes of the creditor to recover the loan amount paid by him against the corporate debtor’s liability towards the creditor. The Court clarified that the subrogation will be only to the extent of the amount recovered by the creditor from the surety.
Further it was clarified that the insolvency resolution of the corporate guarantor will not result in the discharge of the corporate debtor towards the remaining debt.
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