In a landmark judgment, the Supreme Court of India has clarified the legal principles surrounding corporate insolvency and the liability of guarantors. The case, BRS Ventures Investments Ltd. v. SREI Infrastructure Finance Ltd. & Anr. (Civil Appeal No. 4565 of 2021), was decided by a bench comprising Justice Abhay S. Oka and Justice Pankaj Mithal.
Background of the Case
The dispute originated when Gujarat Hydrocarbon and Power SEZ Limited (the corporate debtor) defaulted on a loan of Rs. 100 crores granted by SREI Infrastructure Finance Limited (the financial creditor) for setting up a SEZ project. The loan was secured by a corporate guarantee from Assam Company India Limited (ACIL), the holding company of the corporate debtor. Upon default, SREI invoked the corporate guarantee and initiated the Corporate Insolvency Resolution Process (CIRP) against ACIL under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC).
ACIL’s resolution plan was approved, and BRS Ventures Investments Ltd. (the appellant) was the successful resolution applicant. The appellant paid Rs. 38.87 crores to SREI as full and final settlement of ACIL’s dues. However, SREI later filed another application under Section 7 of the IBC against the corporate debtor for the remaining debt of Rs. 1428 crores. The National Company Law Appellate Tribunal (NCLAT) dismissed the appeals against this application, leading to the present appeal before the Supreme Court.
Key Legal Issues
1. Liability of the Guarantor and Principal Debtor:
– The primary issue was whether the payment made under the resolution plan of the corporate guarantor (ACIL) extinguished the liability of the principal borrower (the corporate debtor).
2. Right of Subrogation:
– The appellant argued that upon making the payment, it stepped into the shoes of the financial creditor under Section 140 of the Indian Contract Act, 1872, and thus had the right to recover the dues from the corporate debtor.
3. Simultaneous Proceedings:
– The court examined whether simultaneous insolvency proceedings could be initiated against both the corporate debtor and the corporate guarantor under the IBC.
Court’s Decision
The Supreme Court upheld the decision of the NCLAT, dismissing the appeal. The key observations and conclusions of the court are as follows:
1. Liability of Principal Borrower:
– The court held that the payment of Rs. 38.87 crores under the resolution plan of ACIL does not extinguish the liability of the corporate debtor to repay the entire loan amount, after deducting the amount paid under the resolution plan.
2. Right of Subrogation:
– The court clarified that Section 140 of the Indian Contract Act, 1872, would only apply if the guarantor (ACIL) paid the entire debt. Since only a partial payment was made, the appellant’s right of subrogation is limited to the amount paid. The financial creditor retains the right to recover the remaining debt from the corporate debtor.
3. Simultaneous Proceedings:
– The court affirmed that under Section 60 of the IBC, separate or simultaneous insolvency proceedings can be initiated against both the corporate debtor and the corporate guarantor.
Important Observations
Justice Abhay S. Oka, delivering the judgment, stated:
“The payment of the sum of Rs. 38.87 crores to the financial creditor under the resolution plan of the corporate guarantor-ACIL will not extinguish the liability of the principal borrower/corporate debtor to pay the entire amount payable under the loan transaction after deducting the amount paid on behalf of the corporate guarantor in terms of its resolution plan.”
He further emphasized:
“A holding company is not the owner of the assets of its subsidiary. Therefore, the assets of the subsidiaries cannot be included in the resolution plan of the holding company.”
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Representation
– Appellant: BRS Ventures Investments Ltd., represented by Senior Counsel Mr. Jaideep Gupta.
– Respondent: SREI Infrastructure Finance Ltd., represented by Counsel Mr. Abhimanyu Bhandari.
– Intervenor: M/s. Zaveri & Co. Pvt. Ltd., represented by Senior Counsel Mr. Darius Khambata.
