The Supreme Court has clarified that corporate guarantees executed by a corporate debtor in respect of loans advanced to group entities constitute “financial debt” within the meaning of Section 5(8) of the Insolvency and Bankruptcy Code, 2016, and the beneficiaries thereof are entitled to be treated as financial creditors. Such claims cannot be rejected merely on the grounds of alleged non-disclosure in financial statements, non-filing of the guarantee documents along with Form C, or objections regarding improper stamping, since non-stamping or insufficient stamping is only a curable defect and does not invalidate the instrument.
The Court further held that where the corporate debtor itself admits execution of the guarantee, and the Resolution Professional has verified the instrument, the NCLT/ NCLAT cannot disregard the claim on speculative grounds relating to timing, disclosure, or procedural production of documents. If the findings of the NCLT and NCLAT ignore such material and reject the claim of a financial creditor, those findings are perverse and liable to be interfered with under Section 62 of the Code.
A Two-Judge Bench comprising Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe observed that a liability arising from a corporate guarantee squarely falls within the ambit of “financial debt” under Section 5(8) of the IBC, and that the amount of any liability in respect of guarantees for money borrowed against payment of interest is a financial debt. It reiterated that a guarantor incurs a coextensive liability with that of the principal borrower and such liability is enforceable in law.
The Bench found that the execution of the corporate guarantees was beyond doubt because the corporate debtor itself, through its counsel’s communication dated March 19, 2019, admitted the execution of the guarantees and stated that information regarding the guarantees had always been publicly available and adequately disclosed in financial statements and annual reports of the borrower group.
On the question of timing, the Bench held that the guarantees were executed before declaration of the account of the corporate debtor as NPA. Referring to Clause 17.2.6 of the RBI Master Circular dated July 01, 2015, the Bench noted that where a restructured asset is subjected to restructuring again, its asset classification is reckoned from the date when it first became NPA. Therefore, the retrospective NPA classification from August 26, 2016 could not be used to question the timing and manner of the guarantees executed on March 03, 2017.
The Bench further observed that mere non-disclosure of the corporate guarantees in the financial statements for financial years 2016–17 and 2017–18 could not deprive the appellants of their claim based on those guarantees; and at best, such non-disclosure could be treated as a default committed by the corporate debtor. It also held that the guarantees had been verified by the Resolution Professional after inspecting them in the office of the Security Trustee in New Delhi, and therefore the NCLAT’s finding that there was no material regarding verification was perverse.
The Bench also held that relevant documents can be produced at the appellate stage since an appeal is a continuation of original proceedings. As regards stamp duty, it observed that the guarantees were executed in New Delhi, stamp duty applicable in New Delhi had been paid, and production of the guarantees in proceedings at New Delhi did not attract the Maharashtra Stamp Act, 1958. In any case, insufficient stamping is a curable defect and does not render the instrument void or unenforceable.
Thus, the Bench held that the findings of the NCLT and NCLAT were perverse and legally unsustainable. It observed that merely because the corporate guarantees were not filed along with Form C, the appellants’ claim could not have been negated, and interference under Section 62 of the Code was warranted because the perversity in the findings was glaring and manifest.
Briefly, the dispute concerned the validity and enforceability of corporate guarantees executed by Reliance Infratel Limited, the corporate debtor, in favour of the consortium lenders, and whether such guarantees gave rise to a “financial debt” and corresponding status of “financial creditor” under the IBC.
The Doha Bank had extended a foreign currency loan of USD 250 million to Reliance Infratel Limited on March 19, 2010. Separately, the consortium lenders had extended rupee loan facilities of Rs. 6,015 crores to Reliance Communications Limited and Rs. 735 crores to Reliance Telecom Limited. On February 20, 2015, a deed of hypothecation was executed by the corporate debtor in favour of the Security Trustee, and on March 03, 2017, the corporate debtor executed corporate guarantees in favour of the consortium lenders to secure loans advanced to Reliance Communications Limited and Reliance Telecom Limited.
The accounts of Reliance Communications Limited, Reliance Telecom Limited and the corporate debtor were classified as NPA on August 26, 2016. Thereafter, reinstatement agreements dated September 05, 2016 and December 04, 2016 were executed between Doha Bank and the corporate debtor, restructuring repayment obligations and extending the repayment schedule. The account of Reliance Infratel Limited was later declared NPA on December 22, 2017 with retrospective effect from August 26, 2016.
During the CIRP commenced on May 15, 2018, the Security Trustee invoked the corporate guarantee. On May 17, 2019, the appellants submitted a claim in Form C for Rs. 3,628.67 crores. Doha Bank objected, alleging that the guarantees were preferential, undervalued and fraudulent transactions under Sections 43, 45 and 66 of the IBC and sought derecognition of the consortium as financial creditors. The IRP rejected the objection, but the NCLT held that the claims were not supported by proper documentation and that the consortium lenders were not financial creditors; the NCLAT affirmed that view.
Appearances:
ASG N. Venkataraman, AOR Sanjay Kapur, along with Advocates Surya Prakash, Shubhra Kapur, Santha Smruthi, and Anuraj Mishra, for the Appellant
Senior Advocates Dr. Abhishek Manu Singhvi, Prashanto Chandra Sen, Neeraj Kishan Kaul, Narender Hooda, and Gopal Jain, AORs M/S. Juris Corp., M/S. M. V. Kini & Associates, Abhijnan Jha, and S. S. Shroff, along with Advocates Jayesh H, Jinal Shah, Dhruv Malik, Palak Nenwani, Ronit Chopra, Sayantan Chandra, Rajlakshmi Singh, Vanisha Mehta, Vaijayant Paliwal, Charu Bansal, Shruti Poddar, Rajendra Barot, Nilang Desai, Saloni Thakker, Nafisa Khandeparkar, Bharat Makkar, Pranav Tomar, Harshil Goda, Naman Saraswat, Tavinder Sidhu, Vikas Soni, Kanav Singhal, and Kamini Sharma, for the Respondent
