Introduction
The Supreme Court of India, in its landmark judgment in BRS Ventures Investments Ltd. v. SREI Infrastructure Finance Ltd. (Civil Appeal No. 4565 of 2021, decided on July 23, 2024), has reaffirmed the legal principle that the initiation and resolution of the Corporate Insolvency Resolution Process (CIRP) of a corporate guarantor do not bar financial creditors from subsequently filing CIRP proceedings against the corporate debtor for the remaining unpaid debt. This ruling has far-reaching implications for creditors, corporate debtors, and resolution applicants under the Insolvency and Bankruptcy Code, 2016 (IBC).
Factual Background
The dispute arose from a loan of Rs.100 crores granted by SREI Infrastructure Finance Ltd. (the financial creditor) to Gujarat Hydrocarbon and Power SEZ Ltd. (the corporate debtor). The loan was secured by a corporate guarantee furnished by Assam Company India Limited (ACIL), the holding company of the corporate debtor. Due to defaults by the corporate debtor, the financial creditor invoked the corporate guarantee and initiated CIRP against ACIL, which culminated in an approved resolution plan. Under this plan, the financial creditor received Rs.38.87 crores in full and final settlement of its claim against ACIL. However, the financial creditor later filed a separate CIRP application under Section 7 of the IBC against the corporate debtor for the remaining amount.
The appellant, BRS Ventures Investments Ltd., the successful resolution applicant of ACIL, contested this move, arguing that the financial creditor’s claim had already been settled and that subrogation rights had transferred to the appellant under Section 140 of the Indian Contract Act, 1872.
Issues Before the Supreme Court
- Whether the financial creditor’s Section 7 IBC application against the corporate debtor was barred, given the CIRP completion of the corporate guarantor (ACIL)?
- Whether the appellant, as the resolution applicant of ACIL, had acquired subrogation rights over the financial creditor’s claims against the corporate debtor?
Arguments Advanced
Appellant (BRS Ventures Investments Ltd.)
- Contended that the financial creditor’s claim was settled under ACIL’s resolution plan and, therefore, any further claim against the corporate debtor was barred under Sections 41 and 63 of the Contract Act.
- Argued that under Section 140 of the Contract Act, upon settling the debt, the appellant had stepped into the shoes of the financial creditor and had the exclusive right to recover from the corporate debtor.
- Relied on Amit Lal Goverdhan Lalan v. State Bank of Travancore (1968) and Shib Charan Das v. Muqaddam (AIR 1936 ALL 62), which held that a guarantor acquiring subrogation rights can recover from the principal debtor.
Financial Creditor (SREI Infrastructure Finance Ltd.)
- Asserted that under Section 128 of the Contract Act, the liability of a guarantor is co-extensive with that of the principal debtor, and a partial settlement with the guarantor does not discharge the corporate debtor’s liability.
- Cited Lalit Kumar Jain v. Union of India (2021) 9 SCC 321, which held that a guarantor’s discharge under CIRP does not extinguish the liability of the principal debtor.
- Emphasized that under Section 60(2) of the IBC, simultaneous insolvency proceedings against corporate guarantors and corporate debtors are permissible.
Court’s Reasoning and Decision
Liability of the Corporate Debtor Post-CIRP of Guarantor
The Supreme Court ruled that the financial creditor retained the right to initiate CIRP against the corporate debtor for the remaining unpaid debt, even after recovering part of the amount from the guarantor. The Court reaffirmed the well-settled principle that the liability of a surety and a principal debtor is co-extensive, but they are distinct obligations.
Subrogation Rights under Section 140 of the Contract Act
The Court clarified that subrogation under Section 140 applies only when the guarantor has fully discharged the principal debtor’s liability. Since ACIL’s resolution plan provided only a partial settlement, subrogation was limited to the amount paid (Rs.38.87 crores). The financial creditor was entitled to recover the balance from the corporate debtor.
Separate Proceedings Against Corporate Guarantor and Corporate Debtor
The Court emphasized that under the IBC framework, financial creditors are permitted to pursue separate insolvency proceedings against both corporate guarantors and corporate debtors. The Court cited State Bank of India v. V. Ramakrishnan (2018) 17 SCC 394, which upheld creditors’ rights to proceed independently against debtors and guarantors.
Key Takeaways
- The CIRP of a corporate guarantor does not preclude financial creditors from initiating CIRP against the corporate debtor for outstanding dues.
- The liability of the corporate debtor remains, even if the financial creditor has partially recovered from the guarantor.
- Subrogation under Section 140 applies only to the extent of the amount paid by the guarantor and does not extinguish the financial creditor’s residual claim against the corporate debtor.
- The IBC permits simultaneous insolvency proceedings against corporate debtors and their guarantors.
Conclusion
The Supreme Court’s decision in BRS Ventures Investments Ltd. v. SREI Infrastructure Finance Ltd. fortifies creditors’ rights by ensuring that corporate debtors cannot evade liability merely because CIRP of a corporate guarantor has been concluded. This ruling reinforces the principle that insolvency resolution of a guarantor does not impact the primary liability of the debtor unless expressly discharged. The judgment will serve as a crucial precedent in insolvency jurisprudence, ensuring robust creditor protection and commercial certainty under the IBC.
FAQs:
1. Can a lender start insolvency against both the borrower and the guarantor under IBC?
Yes. Under the Insolvency and Bankruptcy Code (IBC), a financial creditor can initiate separate insolvency proceedings against both the principal borrower and the corporate guarantor. The law treats their liabilities as co-existing, not alternative.
2. Does settling a debt with a guarantor stop a creditor from suing the borrower?
No. Even if a creditor recovers part of the debt through the corporate guarantor’s insolvency process, they can still pursue the remaining unpaid amount from the principal borrower. The borrower’s liability continues until the full debt is satisfied.
3. What are subrogation rights in case of debt repayment by a guarantor?
Subrogation means the guarantor steps into the creditor’s shoes after paying off the borrower’s debt. However, this right arises only if the guarantor pays the full amount. Partial payment limits subrogation only to the amount actually paid.
4. Is the liability of a guarantor different from the main borrower under Indian contract law?
While the guarantor’s liability is co-extensive with that of the borrower, it is still a separate obligation. This means both can be independently pursued for recovery, and settlement with one doesn’t automatically release the other unless explicitly agreed.
5. Can insolvency against a guarantor impact claims against the main borrower?
No. Under IBC, insolvency resolution of a corporate guarantor does not affect the creditor’s rights against the corporate debtor. Creditors can continue or initiate proceedings against the borrower even after a resolution plan for the guarantor is approved.
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