Corporate Guarantor Not Absolved From Liability Due To Non-Invocation Of Guarantee: NCLAT Delhi

Corporate Guarantor Not Absolved From Liability Due To Non-Invocation Of Guarantee: NCLAT Delhi

The National Company Law Appellate Tribunal (NCLAT) Delhi bench, comprising Mr. Justice Ashok Bhushan (Chairperson) and Mr. Barun Mitra (Technical Member), ruled that a corporate guarantor cannot evade liability solely due to the non-invocation of the guarantee.

Iskon Infra Engineering Private Limited (the Corporate Guarantor/Company) commenced voluntary liquidation under Section 59 of the Insolvency and Bankruptcy Code, 2016 (IBC). Upon completion of liquidation proceedings, the liquidator filed an application under Section 59(7) of the IBC seeking the dissolution of the company.

Upon receipt of the liquidator's application, the NCLT issued a notice to the Registrar of Companies (RoC). The RoC's report disclosed that the company had provided corporate guarantees amounting to over Rs. 1,257 crores to Abhinav Steels and Power Limited (the Principal Borrower), which had obtained term loans from a consortium of banks including Punjab National Bank, Oriental Bank of Commerce, and Central Bank of India. These guarantees date back to 2010, and there were 23 charges against the corporate guarantor, none of which had been satisfied by either the corporate guarantor or the liquidator.

In response, NCLT Delhi issued notices to the concerned banks. The Central Bank of India filed an objection detailing the working capital term loan secured by the corporate guarantor. Subsequently, NCLT Delhi, through its Order dated November 21, 2023, dismissed the liquidator's petition filed under Section 59(7) of the IBC based on objections raised by the Central Bank of India.

The corporate guarantor then appealed against the NCLT's decision dated November 21, 2023, arguing that since none of the financial creditors had invoked the corporate guarantee and no claims had been made to the liquidator, the liability of a corporate guarantor arises only upon invocation of the guarantee.

The NCLAT Delhi bench dismissed the appeal and upheld that a corporate guarantor cannot evade liability solely due to the non-invocation of the guarantee.

The Appellate Tribunal referred to Clause 10 of the Guarantee Deed between the Principal Borrower and the Corporate Guarantor, which stipulated the terms under which the Corporate Guarantor undertook to pay the debt.

“Lenders shall be at liberty to require the performance by the Guarantor of its obligations hereunder to the same extent in all respects as if the Guarantor had at all times been solely liable to perform the said obligations.”

The NCLAT noted that the liability of a corporate guarantor is coextensive with that of the principal borrower, and lenders are at liberty to require the guarantor to fulfill its obligations.

Furthermore, after considering the observations of the RoC and the objections raised by the Central Bank of India, the NCLAT ruled that the NCLT New Delhi was correct in its decision that the company cannot proceed with the process of voluntary liquidation.

In conclusion, the Appellate Tribunal ruled that the guarantee continues to bind the corporate guarantor to discharge its liability. The fact that the guarantee has not yet been invoked cannot be a ground for the company to be liquidated under Section 59 of the IBC.