Supreme Court ruled that the approval of a resolution plan for a guarantor does not automatically discharge the underlying debt of the principal borrower.
A two-judge Bench of the Supreme Court comprising Justice Abhay S. Oka and Pankaj Mithal was hearing an appeal on Tuesday and observed that the approval of a resolution plan for the guarantor company under the IBC does not automatically release the principal borrower from its liabilities. The Supreme Court Bench affirmed that both the guarantor and the principal debtor have co-extensive liabilities under Section 128 of the Contract Act, and these liabilities persist unless specifically discharged through legal provisions or the insolvency process itself.
In a recent Supreme Court judgment, the court delved into the intricate dynamics between a financial creditor, a corporate debtor, and a guarantor, examining the implications of insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC). The case centred on Gujarat Hydrocarbon and Power SEZ Limited (the corporate debtor), SREI Infrastructure Finance Limited (the financial creditor), and M/s. Assam Company India Limited (ACIL), which acted as the corporate guarantor.
The genesis of the dispute lay in a loan agreement dated 5th January 2011, wherein SREI Infrastructure Finance Limited extended a loan of Rs. 100 crores to Gujarat Hydrocarbon and Power SEZ Limited for a SEZ project. This loan was secured by a mortgage on the corporate debtor's leasehold land and shares pledged by both the corporate debtor and its parent company, ACIL. Furthermore, ACIL provided a corporate guarantee to secure the loan. When the corporate debtor defaulted on its obligations, SREI invoked ACIL's corporate guarantee, leading to insolvency proceedings against ACIL under Section 7 of the IBC.
Subsequently, a resolution plan was successfully submitted and approved for ACIL, the guarantor, by the appellant. However, despite this resolution plan, SREI Infrastructure Finance Limited filed a separate application under Section 7 of the IBC against the corporate debtor, seeking recovery of the remaining balance of Rs. 1428 crores. The central contention was whether this application was maintainable post the approval of ACIL's resolution plan.
The Supreme Court meticulously analyzed the legal principles governing the liability of guarantors and the impact of a resolution plan under the IBC. It underscored that while Section 31 of the IBC binds all stakeholders to a resolution plan approved for a corporate debtor, including guarantors, such approval does not automatically discharge a guarantor's liability. The court emphasized that the liability of a guarantor and a principal debtor (the corporate debtor) is co-extensive under Sections 126 and 128 of the Indian Contract Act, 1872, unless specifically discharged by due process.
Crucially, the judgment elucidated that the approval of ACIL's resolution plan did not absolve the corporate debtor from its outstanding liabilities to SREI Infrastructure Finance Limited. The court affirmed that the financial creditor was well within its rights to pursue recovery against the corporate debtor under Section 7 of the IBC, despite the earlier resolution plan involving ACIL.
The court's decision provides clarity on the distinct legal statuses of corporate debtors and their guarantors in insolvency proceedings, reinforcing that the discharge of one does not ipso facto discharge the other. This judgment is pivotal in defining the scope of liabilities under the IBC, ensuring that creditors retain their rights to pursue claims independently against both entities when necessary.
In conclusion, the Supreme Court's ruling affirms the principle that the approval of a resolution plan for a guarantor does not automatically discharge the underlying debt of the principal borrower. It underscores the independent nature of guarantor liabilities and upholds the rights of creditors to seek redress under the IBC against both corporate debtors and their guarantors as per their respective obligations and liabilities.
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