Corporate Guarantee Constitutes Financial Debt u/s 5(8)(i): NCLAT Upholds NCLT’s Admission of S.7 Petition [Read Order]
The Tribunal held that once a corporate entity voluntarily executes a guarantee, it becomes independently liable for the debt, which qualifies as “financial debt” under Section 5(8)(i) of the Insolvency and Bankruptcy Code (IBC).
In a recent case, the principal bench of the National Company Law Appellate Tribunal (NCLAT), New Delhi, upheld the order of the National Company Law Tribunal (NCLT), which had admitted a Section 7 application against the corporate debtor based on guarantees executed in favour of the financial creditor, the respondent.
The Appellant, being a shareholder of the Corporate Debtor approached the appellate Tribunal. Relying on Supreme Court precedents, the Tribunal held that both statutory conditions for admission, existence of financial debt and occurrence of default were satisfied.
This appeal arises from the order passed by the NCLT, whereby the petition under Section 7 of the Insolvency and Bankruptcy Code (IBC) filed by JM Financial Credit Solutions Ltd. against Hem Infrastructure and Property Developers Pvt. Ltd. (the corporate debtor) was admitted.
The dispute originated in six financial facilities sanctioned by JM Financial between 2017 and 2022, aggregating to ₹288.20 crore. These loans were extended not to the corporate debtor directly, but to an unincorporated Association of Persons (AOP) named M/s Hem Bhattad, constituted in 2006 for real estate development in Mumbai.
To secure these loans, Hem Infrastructure executed six corporate guarantees between December 2017 and December 2021. Defaults began in January 2023, when the AOP failed to meet repayment obligations and also defaulted on TDS dues. The borrower’s accounts were classified as NPAs in May 2023, prompting JM Financial to issue demand notices under SARFAESI and subsequently demand payment of ₹242.82 crore from the corporate debtor as guarantor. No payment was made.
JM Financial filed the Section 7 petition in 2024 seeking CIRP against Hem Infrastructure on the strength of the guarantees. The NCLT admitted the Section 7 petition, initiating CIRP against Hem Infrastructure solely based on the guarantees. Aggrieved, Peninsula Holdings & Investments Pvt. Ltd. (appellant) being a shareholder of the Corporate Debtor,filed the present appeal before the NCLAT, seeking to quash the admission order as legally unsustainable, procedurally flawed, and contrary to the objectives of the IBC.
The appellant contended that Hem Infrastructure was only a “passive conduit” in the AOP’s operations and not actively involved in the default. It argued that the guarantee should not be treated as creating independent liability and that the financial creditor ought to have first proceeded against the AOP before invoking insolvency against the guarantor.
The appellant also claimed that its investment interest was being unfairly prejudiced and attempted to question the commercial rationale behind the creditor’s choice of proceeding against the guarantor rather than the borrower.
Section 5(8), IBC defines “financial debt” as a debt disbursed against consideration for the time value of money, including loans, debentures, bonds, and other instruments with commercial effect of borrowing.
The financial creditor maintained that Hem Infrastructure had voluntarily executed binding corporate guarantees, which created enforceable liability. It relied on Supreme Court rulings in Laxmi Pat Surana v. Union Bank of India and SBI v. Athena Energy Ventures Pvt. Ltd., which confirmed that guarantees constitute financial debt and that creditors may proceed against either borrower or guarantor.
The respondent submitted documentary evidence establishing both the existence of financial debt and the occurrence of default, and argued that the NCLT’s order was reasoned and free from irregularity.
The two-member bench of Ashok Bhushan (Chairperson) and Indevar Pandey (Technical Member) upheld the NCLT’s admission order. It ruled that once a corporate entity voluntarily binds itself as a guarantor, it becomes independently answerable for the debt, and such liability constitutes “financial debt” under Section 5(8)(i) of the IBC.
The Tribunal confirmed that the statutory twin test for admission under Section 7, existence of financial debt and occurrence of default, was satisfied. It rejected the appellant’s plea that the creditor should have first proceeded against the AOP, holding that the liability of borrower and guarantor is concurrent and the creditor’s choice cannot be questioned.
The Tribunal further observed that the NCLT’s order disclosed clear satisfaction regarding debt and default, supported by documentary evidence, and there was no material irregularity or perversity.
It emphasised that the appellant’s grievance was essentially rooted in its desire to protect its investment interest, which does not amount to a legal injury under the IBC. Once insolvency is admitted, management vests in the Interim Resolution Professional, and shareholders must participate through statutory mechanisms rather than contest admission.
The Tribunal dismissed the appeal, affirming that corporate guarantees create enforceable financial debt under Section 5(8)(i), and that default triggers CIRP admission under Section 7.
Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
