A corporate guarantee which only obligates the guarantor to infuse equity/share capital or meet project cost overruns, without undertaking repayment of the loan liability of the principal borrower, does not create a “financial debt” within the meaning of Section 5(8) of the Insolvency and Bankruptcy Code, 2016 and cannot form basis for initiation of CIRP under Section 7. Further, default of a corporate guarantor arises only upon invocation of guarantee and failure to honour the demand; therefore, where guarantee was invoked during the Section 10A suspension period, the Section 7 application is barred.

advocatemmmohan

IBC — Section 7 application — Corporate guarantee confined to equity infusion — No financial debt for repayment of loan — CIRP not maintainable (Paras 9–21, 29, 36)

Issue: Whether corporate guarantee dated 30.06.2010 executed by Corporate Debtor created liability to repay loan of principal borrower so as to constitute “financial debt” under Section 5(8) of the Insolvency and Bankruptcy Code, 2016.
Facts: Canara Bank sanctioned term loans aggregating ₹144.40 crores to principal borrower for thermal power project; Corporate Debtor/Indiabulls Real Estate Ltd. executed guarantee dated 30.06.2010 undertaking timely infusion of equity and meeting cost overruns. Bank later invoked guarantee by recall notice dated 30.09.2020 demanding repayment of entire outstanding dues of ₹202.03 crores and filed Section 7 application alleging default by Corporate Debtor.
Held: Guarantee deed dated 30.06.2010 only obligated Corporate Debtor to infuse equity/share capital and meet cost overruns, and did not undertake repayment of financial debt of principal borrower. Invocation demanding repayment of entire loan amount was contrary to guarantee terms; consequently, no “financial debt” or default was established against Corporate Debtor and Section 7 application was not maintainable. (Paras 9–21, 29, 36)

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Corporate guarantee — Subsequent substitution deed — Discharge of earlier guarantor — Suppression of material document by Financial Creditor (Paras 14–20, 35)

Issue: Effect of subsequent guarantee deed dated 11.01.2012 substituting guarantors and discharging Corporate Debtor.
Facts: After scheme of arrangement approved by Delhi High Court, power business and obligations of Corporate Debtor stood transferred to new entities; subsequent guarantee deed dated 11.01.2012 expressly recorded release of Corporate Debtor from earlier guarantee obligations except limited contingent obligations if substituted guarantors failed. Financial Creditor omitted reference to subsequent deed in Section 7 application.
Held: Subsequent guarantee deed clearly discharged Corporate Debtor from original guarantee obligations except limited contingent obligations; suppression of this material document and filing Section 7 proceedings without proper examination of contractual documents reflected casual and improper approach by Financial Creditor. (Paras 14–20, 35)

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IBC — Section 10A — Corporate guarantor default arises only upon invocation of guarantee — Application barred (Paras 30–32)

Issue: Whether Section 7 application against Corporate Debtor was barred by Section 10A IBC.
Facts: Principal borrower account was classified NPA on 28.09.2017, but guarantee against Corporate Debtor was invoked only through recall notice dated 30.09.2020 granting three days’ time for payment. NCLT treated NPA date as date of default and rejected Section 10A objection.
Held: Default of corporate guarantor arises only upon invocation of guarantee and failure to pay within stipulated period; therefore, default occurred on 04.10.2020, falling within Section 10A suspension period. NCLT erred in treating NPA date of principal borrower as default date of guarantor; Section 7 application was barred by Section 10A. (Paras 30–32)

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Adjudicating Authority — Contradictory orders by same Bench on same date — Non-application of mind (Paras 33–34)

Issue: Whether NCLT could admit Section 7 application against one corporate guarantor after rejecting identical application against another guarantor on same facts and same recall notice.
Facts: On same date, same NCLT Bench dismissed Section 7 application against another corporate guarantor (RattanIndia Enterprises Ltd.) holding that no financial debt existed, but admitted present Section 7 application arising out of same debt, same recall notice and identical contractual framework.
Held: Passing contradictory orders on same date by same Bench on identical facts demonstrated clear non-application of mind and rendered impugned admission order unsustainable. (Paras 33–34)