A financial creditor can seek to initiate insolvency process against a corporate guarantor of a company first, instead of the company itself in case the guarantee fails, the National Company Law Appellate Tribunal (NCLAT) has held.
Corporate insolvency resolution process, thus, can go ahead against the guarantor under section 7 of the Insolvency and Bankruptcy Act (IBC) even without having proceeded and exhausted against all legal remedies against the principal debtor, the NCLAT said.
This, the appellate tribunal said, can be done as any corporate guarantee given by a parent company for the subsidiary becomes a debt as soon it is invoked and subsequently the corporate guarantor becomes a debtor under the terms of IBC.
“Guarantee of such nature is included within the definition of financial debt. There is, therefore, no reason why a financial creditor cannot invoke Section 7 against the corporate guarantors, once the guarantee is invoked. The judgement is within the contours of the Code and does not particularly add any additional nuances, except that it may be the first of its kind,” Saurav Kumar, Partner at IndusLaw said.
The appellate tribunal’s judgement came on an insolvency plea of Rural Electrification Corporation (REC) against Ferro Alloys Corporation, which was the corporate guarantor for its subsidiary for FACOR Power. FACOR Power had borrowed Rs 510.97 crore from REC, the corporate guarantee for which was provided by Ferro Alloys Corporation.
After FACOR Power failed on repayments and became a Non-Performing Asset (NPA), REC decided to invoke the corporate guarantee provided by Ferro Alloys Corporation and asked the latter to pay the total outstanding dues of Rs 564 crore within 21 days of Sep 30, 2015. Ferro Alloys Corporation, however, failed to pay following which REC approached the National Company Law Tribunal (NCLT), Kolkata, which also held that the corporate guarantee provided is joint and co-extensive with that of the principal debtor.
Source: Business Standards, January 9, 2019