Corporate Guarantee Need Not Be Invoked To File Claim In Guarantor's CIRP: NCLAT

The National Company Law Appellate Tribunal (NCLAT) at Delhi has held that a financial creditor can maintain its claim in the Corporate Insolvency Resolution Process (CIRP) of a corporate debtor that had stood as a guarantor for another company, even if the corporate guarantee was never invoked. 

It further held that invocation of a corporate guarantee is relevant only for initiating CIRP against a guarantor, not for admission or maintenance of a claim in an already ongoing CIRP.

The bench of Justice Mohd. Faiz Alam Khan and Technical Member Indevar Pandey, while admitting Union Bank of India (formerly Andhra Bank)'s  claim in the CIRP of KSL & Industries Ltd., which had stood as corporate guarantor for Krishna Knitwear Technology Ltd. and Eskay Knit India Ltd., observed,

“Therefore, whether the cause of action for invoking the guarantee has arisen or not, in our considered opinion, is not relevant for considering the claim of the appellant. In the present case, the claim was filed by the appellant even though the guarantee was not invoked. The acceptance of such a claim is, thus, clearly permissible as per the law laid down by the Hon'ble Supreme Court in China Development Bank.”

The bank had extended credit facilities to the two borrower companies, which were secured by corporate guarantees and mortgage created by KSL & Industries. After the borrower accounts were classified as non-performing assets in November 2015, the bank initiated recovery proceedings before the Debt Recovery Tribunal, Ahmedabad.

When CIRP was later initiated against KSL under Section 10 of the Insolvency and Bankruptcy Code in September 2019, the bank filed a claim of Rs 76.25 crore in KSL's insolvency process. The claim was initially admitted by the interim resolution professional and the bank was included in the committee of creditors.

However, the resolution professional subsequently rejected the claim on the ground that the corporate guarantee had not been invoked, and excluded the bank from the committee of creditors. The National Company Law Tribunal, Ahmedabad, upheld this decision.

Allowing the appeal, the NCLAT held that the Insolvency and Bankruptcy Code makes a clear distinction between claim, debt and default. It ruled that while invocation of a guarantee may be relevant for initiating insolvency proceedings against a guarantor, it is not required for admission of a claim in an ongoing CIRP.

Relying on the Supreme Court's ruling in China Development Bank (2024) , the appellate tribunal held that even if enforcement of a guarantee is barred or has not arisen, the creditor's claim continues to exist and must be considered in the insolvency process.

Accordingly, the NCLAT set aside the orders of the NCLT and the resolution professional, directed admission of Union Bank's claim, and ordered reconstitution of the committee of creditors and reconsideration of the resolution plan.

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