Tribunal affirms financial creditor's right to initiate CIRP against corporate guarantor despite ongoing resolution proceedings for principal borrower.
In a significant decision, the National Company Law Tribunal (NCLT) Kochi Bench has admitted the insolvency petition filed by Phoenix ARC Private Limited against Cherupushpam Films Private Limited, marking a pivotal ruling in the realm of corporate insolvency and bankruptcy proceedings. The petition, initiated under Section 7 of the Insolvency and Bankruptcy Code, 2016, sought the initiation of the Corporate Insolvency Resolution Process (CIRP) against Cherupushpam Films, who served as a corporate guarantor for financial facilities availed by the Kerala Chamber of Commerce and Industry, the principal borrower.
The tribunal's bench, comprising Shri Vinay Goel (Member, Judicial) and Shri Ravichandran Ramasamy (Member, Technical), addressed the complex legal arguments presented by both the financial creditor and the corporate debtor. The central issue revolved around the maintainability of the insolvency proceedings against the guarantor while the CIRP of the principal borrower was already in progress.
Phoenix ARC, acting as the financial creditor, argued that the corporate debtor, Cherupushpam Films, was liable under the guarantee agreements executed in favor of the original lender, The South Indian Bank Limited. The financial facilities, initially granted for the construction of a commercial complex on the debtor’s land, were later assigned to Phoenix ARC. The tribunal found that procedural defects related to the assignment deed and trust deed, which had previously led to the petition's dismissal, were rectified, allowing the case to be considered on its merits.
The tribunal delved into the arguments of limitation, acknowledging that the principal borrower had made written acknowledgements of liability within the statutory period, thus extending the limitation period against the guarantor. Furthermore, the tribunal relied on the Supreme Court's orders regarding the exclusion of time due to the COVID-19 pandemic, confirming that the application was filed within the permissible timeframe.
A crucial point of contention was the corporate debtor’s assertion of alleged forgery in the loan and guarantee documents. However, the tribunal dismissed this defense, noting that no substantive evidence was provided to support such claims, and deemed it an afterthought.
The tribunal also clarified that the settlement reached in the CIRP of the principal borrower did not discharge the guarantor from its obligations, emphasizing that insolvency proceedings are distinct from recovery proceedings. It upheld the financial creditor's right to pursue simultaneous proceedings against both the principal borrower and the guarantor.
In its final decision, the NCLT admitted the insolvency petition, declared a moratorium, and appointed Mr. Jossy Steephen Kattur as the Interim Resolution Professional (IRP) to oversee the CIRP of Cherupushpam Films. The tribunal's ruling underscores the co-extensive nature of the guarantor’s liability with that of the principal borrower, reinforcing the legal framework governing corporate insolvency in India.
This judgment could have far-reaching implications for future insolvency proceedings, particularly regarding the interplay between principal borrowers and guarantors in corporate debt scenarios.
Bottom Line :
Insolvency and Bankruptcy Code, 2016 Section 7 petition against corporate guarantor is maintainable notwithstanding pendency of CIRP of principal borrower - Acknowledgements of debt in principal borrower's financial statements, where guarantee agreement binds guarantor to such acknowledgements, extend limitation against guarantor - Demand notice under Section 13(2) of SARFAESI Act can amount to invocation of guarantee - Settlement in CIRP of principal borrower does not by itself discharge guarantor or bar Section 7 proceedings - Proceedings under IBC are not recovery proceedings and simultaneous action against principal borrower and guarantor is permissible.
Statutory provision(s): Insolvency and Bankruptcy Code, 2016 Section 7, SARFAESI Act Section 13(2), Limitation Act Sections 18 and 19, Indian Contract Act Sections 128, 140, 141.
