Payment by corporate guarantor does not extinguish liability of corporate debtor to pay the entire amount payable – SC
In a recent judgment, the Hon’ble Supreme Court has held that payment by corporate guarantor does not extinguish liability of corporate debtor to pay the entire amount payable. 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.
ABCAUS Case Law Citation:
ABCAUS 4164 (2024) (07) SC
Under an agreement the financial creditor granted the corporate debtor a loan for setting up a SEZ project. The corporate debtor was a subsidiary company. The loan granted by the financial creditor to the corporate debtor was secured by a mortgage made by the corporate debtor of its leasehold land and a pledge of shares of the corporate debtor and holding company. The loan was also secured by the corporate guarantee furnished by the holding company.
On account of the default committed by the corporate debtor, the financial creditor invoked the corporate guarantee of the holding company. Thereafter, an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (the IBC) was filed concerning holding company as the guarantee was not honoured.
The adjudicating authority admitted the said application and the Corporate Insolvency Resolution Process (CIRP) of the holding company commenced. After the appointment of the Resolution Professional (RP), the claim amount of the financial creditor was reassessed.
The resolution plan was approved by the Committee of Creditors (the COC), which was approved by the adjudicating authority and order of the adjudicating authority was confirmed in appeal by the National Company Law Appellate Tribunal (the NCLAT).
The appellant in this case was the Resolution Applicant of the holding company and paid amount to financial creditor, against the admitted claim in full and final settlement of all its dues and demands submitted in the resolution plan.
Thereafter, the financial creditor filed an application under Section 7 of the IBC against the corporate debtor. The claim was towards balance amount payable to the financial creditor under the loan facility granted. The adjudicating authority admitted the application under Section 7 of the IBC.
Aggrieved by the said order, the appellant preferred an appeal before the NCLAT which was dismissed.
Before the Hon’ble Supreme Court, the appellant submitted that upon full and final payment to the financial creditor, the appellant has now stepped into the shoes of the financial creditor. It was further submitted that for attracting Section 140 of the Contract Act, the payment by the g uarantor does not have to be of the entire amount due from the principal debtor. Even a partial payment made in the full and final settlement is sufficient to trigger the principle of subrogation.
It was submitted that upon receipt of final settlement amount from the guarantor, the debt repayable to the financial creditor had been discharged. The financial creditor is now estopped from enforcing the remaining part of the debt from the corporate debtor in view of Section 63 read with Section 41 of the Contract Act.
The Hon’ble Supreme Court observed that as far as the guarantee is concerned, the law is very well settled. The liability of the surety and the principal debtor is co-extensive. The creditor has remedies available to recover the amount payable by the principal borrower by proceeding against both or any of them.
The Hon’ble Supreme Court stated that if the creditor recovers a part of the amount guaranteed by the surety from the surety and agrees not to proceed against the surety for the balance amount, that will not extinguish the remaining debt payable by the principal borrower. In such a case, the creditor can proceed against the principal borrower to recover the balance amount. Similarly, if there is a compromise or settlement between the creditor and the surety to which the principal borrower is not a consenting party, the liability of the borrower qua the creditor will remain unaffected. The provisions regarding the discharge of the surety discussed above show that involuntary acts of the principal borrower or creditor do not result in the discharge of surety.
The Hon’ble Supreme Court further observed that the resolution plan of the corporate debtor approved by the adjudicating authority binds the corporate debtor, its employees, members, creditors, guarantor and other stakeholders. Therefore, where a company furnishes a corporate guarantee for securing a loan taken by another company and if the CIRP of the corporate guarantor ends in a resolution plan, it will bind the creditor of the corporate guarantor. The corporate guarantor’s liability may end in such a case by operation of law. However, such 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 Hon’ble Supreme Court observed that in a loan transaction secured by a guarantee, the guarantor has an obligation to repay the loan amount to the creditor, and there is a separate and distinct obligation on the borrower to pay the amount to the creditor. Such a transaction creates a right in favour of the creditor to proceed against the guarantor and borrower for recovery. However, he has the right to recover the amount only to the extent of the loan amount payable by the borrower.
The Hon’ble Supreme Court further opined that consistent with the basic principles of the Contract Act that the liability of the principal borrower and surety is co-extensive, the IBC permits separate or simultaneous proceedings to be initiated under Section 7 by a financial creditor against the corporate debtor and the corporate guarantor.
The Hon’ble Supreme Court further observed that under clause (d) of sub-section (4) of Section 36 of the IBC, the assets of an Indian subsidiary of the corporate debtor shall not be included in the liquidation estate assets and shall not be used for the recovery in liquidation. Section 18 entrusts several duties to the IRPs concerning the corporate debtor’s assets. Consistent with the provisions of Section 36(4)(d), the explanation (b) to Section 18(1) provides that the term ‘assets’ used in Section 18 shall not include the assets of any Indian subsidiary of the corporate debtor.
The Hon’ble Supreme Court stated that holding company and its subsidiary are always distinct legal entities. The holding company would own shares of the subsidiary company. That does not make the holding company the owner of the subsidiary’s assets.
The Hon’ble Supreme Court held that by virtue of the CIRP process of corporate guarantor, the corporate debtor does not get a discharge, and its liability to repay the loan amount to the extent to which it is not recovered from the corporate guarantor is not extinguished.
The Hon’ble Supreme Court further opined that by the involuntary act of the creditor of accepting part of the amount from the surety in the discharge of the entire liability of the surety, even if Section 140 of the Contract Act is attracted, it will confer on the guarantor or the
appellant the right to recover only the amount of settlement from the corporate debtor. The subrogation will be only to the extent of the amount recovered by the creditor from the surety. Notwithstanding the subrogation to the extent of the amount paid on behalf of the corporate guarantor by the resolution applicant, the right of the financial creditor to recover the balance debt payable by the corporate debtor is in no way extinguished.
Accordingly, it was held that:
(i) Payment of the settlement amount to financial creditor under the resolution plan of the corporate guarantor will not extinguish the liability of the corporate debtor to pay the entire amount payable under the loan transaction after deducting the amount paid on behalf of the corporate guarantor in terms of its resolution plan.
(ii) 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, and
(iii) The financial creditor can always file separate applications under Section 7 of the IBC against the corporate debtor and the corporate guarantor. The applications can be filed simultaneously as well.
In the result, the order of the NCLAT was upheld that the appeal was dismissed.
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