Corporate guarantees executed by corporate debtor constitute “financial debt” under IBC

Corporate guarantees executed by the corporate debtor constitute “financial debt” under IBC and banks to be recognized as financial creditors – Supreme Court

In a recent judgment, Hon’ble Supreme Court has held that the corporate guarantees executed by the corporate debtor constitute “financial debt” within the meaning of Section 5(8) of the IBC as a result Banks to be recognized as financial creditors

ABCAUS Case Law Citation:
5125 (2026) (04) abacus.in SC

Important Case Laws relied upon by Parties:
China Development Bank v. Doha Bank Q.P.S.C. & Ors.
Phoenix ARC (P) Ltd. v. Spade Financial Services Ltd. & Ors.

The instant case involved an important question as to the validity and enforceability of corporate guarantees within the framework of the Insolvency and Bankruptcy Code, 2016 (the Code).

The appellant banks were members of a consortium which had extended loan facilities to two group companies of a Corporate Debtor (CD) who were given a foreign currency loan by a foreign bank. The appellants bank as a members of a consortium extended rupee loan group companies of the CD.

Subsequently, the accounts of CD and group companies were classified as Non-Performing Assets (NPA). Reinstatement Agreements were executed between Foreign Bank and the CD, restructuring the repayment obligations. Later, the CD executed Corporate guarantees in favour of consortium lenders to secure loans extended to its group entities. However, the account of one of the group companies was declared as NPA with retrospective effect.

The NCLT initiated Corporate Insolvency Resolution Process (CIRP) against the CD. An Interim Resolution Professional (IRP) was appointed. A public announcement was issued and the Security Trustee invoked the Corporate Guarantee executed by CD. However, the Foreign Bank disputed existence of Corporate guarantee. However, for the reason that the existence of such guarantees had been disclosed by Group company in their financial statements/annual reports, the foreign did not challenge it.

The CIRP proceeded and the appellant banks submitted a claim to IRP which issued notices to financial creditors and members of the suspended Board of Directors of CD to attend the first meeting of Committee of Creditors (CoC).

The Foreign Bank filed an interlocutory application before NCLT seeking declaration that the corporate guarantees were preferential, undervalued and fraudulent as contemplated under Sections 43, 45 and 66 of the Code and requested derecognition of consortium as financial creditors.

The NCLT inter alia held that there was no material to show submission of proof of claims with corporate guarantees, verification by Resolution Professional did not satisfy the statutory requirements, that claims were admitted without proper documentation and consortium lenders were not financial creditors. Consequently, the Committee of Creditors was directed to be reconstituted.

The NCLAT dismissed the appeal inter alia holding that the corporate guarantees were executed when CD was in default of his obligation and was suffering from severe financial constraints and that there was no documentary evidence to show that there was disclosure regarding the guarantees by the beneficiary lenders of the related party of the CD during restructuring of the debt of corporate debtor.

The Hon’ble Supreme Court observed that the execution of the corporate guarantee executed by CD in favour of Security Trustee for and on behalf of the appellants had not been disputed by the CD.

The Hon’ble Supreme Court further observed that as per RBI Master Circular, in case of restructured assets, its asset classification will be reckoned from the date it became NPA on the first occasion. The appellant banks, therefore, declared the account of the CD as NPA with retrospective effect. Thus, it was evident that the corporate guarantees were executed before declaration of account of the CD as NPA and, therefore, the timing and manner of the corporate guarantees could not be questioned on the ground that the CD and the holding company were already in default. 

Regarding the production of corporate guarantees in a proceeding in New Delhi, Hon’ble Supreme Court observed that the defect of insufficient stamping of the document is curable in nature and does not go to the root of validity of the instrument.  Even otherwise, the Stamp Act is a fiscal measure enacted to secure revenue for the State on certain classes of instrument. It is not intended to be used as a weapon by a litigant to defeat the cause of the opponent.

As a result, the Hon’ble Supreme Court held that the corporate guarantees executed by the corporate debtor constitute “financial debt” within the meaning of Section 5(8) of the Code. The appellants banks were entitled to be recognized as financial creditors. Therefore, rejection of claims of the appellant abnks by the NCLT and NCLAT were legally unsustainable.

As a result, Hon’ble Supreme Court quashed and set aside the judgments passed by NCLAT and NCLT. The Resolution Professional was directed to reconstitute the committee of creditors by including the appellant banks and to proceed with the corporate insolvency resolution process in accordance with law.

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