In a landmark decision, the Supreme Court clarified that the discharge of the surety from its liabilities will not amount to the discharge of the principal borrower. Thus, insolvency proceedings against the corporate guarantor will not preclude creditors from initiating separate or simultaneous insolvency proceedings against the corporate debtor. In addition, the court upheld that being a separate legal entity, the assets of the subsidiary company cannot be included in the resolution plan during the CIRP of the holding company.
Brief Background
Gujarat Hydrocarbon & Power SEZ Ltd. (the corporate debtor) received a loan of 100 crores from SREI Infrastructure Finance Ltd. (the financial creditor), secured by mortgaging leasehold land, pledging shares, and a corporate guarantee from its parent company, Assam Company India Ltd. (ACIL). Due to a default in repayment, the financial creditor-initiated proceedings with the Debt Recovery Tribunal to recover the outstanding amount and on account of the corporate guarantor's default, the financial creditor invoked the corporate guarantee of ACIL and filed an application under section 7 of the IBC.
The Adjudicating Authority commenced the CIRP against ACIL, assessing the financial creditor's claim at 241.27 crores. BRS Ventures Investments Ltd., the Successful Resolution Applicant (SRA), had its resolution plan approved and paid 38.87 crore to the financial creditor against the admitted claim of Rs. 241.27 cr. in full and final settlement of all its dues and demands.
Later, the financial creditor filed another Section 7 application against the corporate debtor for 1428 crores, representing the remaining balance of the initial loan. The Adjudicating Authority admitted this application, prompting BRS Ventures to appeal to the National Company Law Appellate Tribunal (NCLAT), which dismissed the appeal, and consequently, the present appeal was filed with the Supreme Court.
Rationale Of The Court
A. Liability of Guarantor/Surety: Justice Abhay S. Oka while highlighting section 128 of the Contracts Act reiterated that the liability of the surety and the principal debtor is co-extensive.
Therefore, if the creditor recovers part of the guaranteed amount from the surety and agrees not to pursue the surety for the balance, it does not extinguish the remaining debt payable by the principal borrower and hence the creditor can proceed against the principal debtor for the recovery of the remaining balance.
Reliance was placed on Lalit Kumar Jain vs Union of India, where the court held that the contract between the creditor and the surety is independent, thereby the approval of a resolution plan for the principal borrower does not discharge the surety.
Applying the same principle, the court in the present case held that the approval of a resolution plan in the CIRP of the corporate guarantor does not discharge the liability of the principal borrower to repay the creditor, after deducting amounts recovered from the corporate guarantor or the resolution applicant on behalf of the guarantor.
B. Simultaneous Proceedings under the IBC Against the Corporate Debtor and Guarantor: The court placed reliance on Section 60(2) of the Insolvency and Bankruptcy Code (IBC) Section 60(3) while aligning with the basic principles of the Contract Act and held that the liability of the principal borrower and surety is co-extensive, and a financial creditor can initiate separate or simultaneous proceedings under Section 7, against both the corporate debtor and the corporate guarantor.
C. Whether the Assets of the Corporate Debtor were part of CIRP in respect of ACIL-Corporate Guarantor: The issue before the court as argued by the appellant was that the assets of the corporate debtor were also a part of the CIRP in respect of ACIL, i.e., the corporate guarantor.
The Court reiterated that a holding company and its subsidiary are always distinct legal entities. Therefore, the holding company would own shares of the subsidiary company but that does not make the holding company the owner of the subsidiary's assets by highlighting Section 36 of the IBC which mandates that assets of an Indian subsidiary of the corporate debtor are excluded from the liquidation estate and cannot be used for recovery in liquidation and section 18 which clarifies that 'assets' do not include the assets of any Indian subsidiary of the corporate debtor.
Therefore, through the CIRP process of ACIL (the corporate guarantor), the corporate debtor does not get discharged and the liability to repay the remaining loan amount to which it is not recovered from the corporate guarantor is not extinguished.
D. Subrogation under Section 140 of the Contract Act: The court while assessing section 140 of the Contract Act, emphasised on "upon payment or performance of all that he is liable for" which cannot be ignored as the liability of the surety lies in respect of the entire amount repayable by the principal debtor to the creditor.
The corporate guarantee liability of ACIL was extinguished with a payment of Rs. 38.87 crores by the resolution applicant (appellant). The guarantor can only recover this amount from the corporate debtor, as subrogation is limited to what the creditor recovered from the surety.
Therefore, the court held, that despite subrogation for the amount paid by the resolution applicant on behalf of the corporate guarantor, the financial creditor retains the right to recover the remaining debt from the corporate debtor denying the submissions of the appellant.
Court's Findings
Justice Abhay S Oka while dismissing the matter, was of the opinion that the payment of Rs. 38.87 crores to the financial creditor under ACIL's resolution plan does not extinguish the corporate debtor's liability. The corporate debtor remains liable to pay the remaining amount after deducting the amount paid on behalf of the corporate guarantor as per its resolution plan.
A holding company is not the owner of the assets of its subsidiary. Therefore, the assets of the subsidiaries cannot be included in the resolution plan of the holding company.
The financial creditor can always file separate as well as simultaneous applications under Section 7 of the IBC against both the corporate debtor and the corporate guarantor.
Conclusion
The Supreme Court's ruling provides crucial clarity on the doctrine of Subrogation, eliminating the conflicting judgements of different high courts and providing a transparent interplay between corporate guarantors and principal debtors within the framework of insolvency and bankruptcy proceedings. By affirming that the liability of a guarantor and the principal borrower is co-extensive and that separate or simultaneous proceedings against both partiesare permissible, the Court has reinforced that a resolution plan for a corporate guarantor does not absolve the principal debtor of its remaining liabilities, ensuring that creditors have a robust mechanism to recover outstanding dues.
In essence, the Court's judgment balances the principles of equity, affirming that the part payment of the debt to the financial creditor under the resolution plan of the corporate guarantor does not negate the financial obligations of the principal debtor. This approach keeps the insolvency process effective and allows creditors to fully pursue their claims, making the creditors secure for their dues.
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