BRS VENTURES INVESTMENTS LTD. VS. SREI INFRASTRUCTURE FINANCE LIMITED Civil Appeal 4565 of 2021
Facts:
1) The corporate debtor approached the 1st respondent–SREI Infrastructure Finance Limited (the financial creditor), for a grant of a loan, the financial creditor granted the corporate debtor a loan of Rs.100 crores for setting up a SEZ project. The corporate debtor is a subsidiary of M/s. Assam Company India Limited (ACIL). The loan granted by the financial creditor to the corporate debtor was secured by a mortgage made by the corporate debtor of its leasehold land and a pledge of shares of the corporate debtor and ACIL
2) The loan was secured by corporate guarantee furnished by ACIL. On 24th March 2015, a “debt repayment and settlement agreement” was executed to which the financial creditor, the corporate debtor and ACIL (the guarantor) were parties. On account of the default committed by the corporate debtor, the financial creditor invoked the corporate guarantee of ACIL. Thereafter, an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (for short, ‘the IBC’) was filed concerning ACIL as the guarantee was not honoured. The adjudicating authority vide order dated 26th October 2017 admitted the said application.
3) The appellant is the successful Resolution Applicant of ACIL. The appellant submitted a resolution plan. The resolution plan was approved on 13th August 2018 by the Committee of Creditors (for short, ‘the COC’), which was approved by the adjudicating authority by the order dated 20th September 2018. The order of the adjudicating authority was confirmed in appeal by the National Company Law Appellate Tribunal (for short, ‘the NCLAT’)
4) On 10th February 2020, the 1st respondent financial creditor filed an application under Section 7 of the IBC against the 2nd respondent corporate debtor. The claim of the 1st respondent-financial creditor was of Rs.1428 crores, which is claimed to be the balance amount payable to the financial creditor under the loan facility of Rs.100 crores. By the order dated 18th November 2020, the adjudicating authority admitted the application under Section 7 of the IBC. Aggrieved by the said order, the appellant preferred an appeal before the NCLAT which was dismissed.
Issue: Whether the second Application under Section 7 of IBC is not maintainable against the Corporate Debtor as for the same debt and default, CIRP has already been taken place against the Corporate Guarantor and the Financial Creditor has accepted the amount in full and final settlement of all its dues?
Arguments:
Appellant:
1) Counsel submitted that in the CIRP of ACIL, the appellant’s resolution plan was duly approved. A sum of Rs.38.87 crores was paid to the 1st respondent-financial creditor, which was in full and final settlement of the dues of the 1st respondent-financial creditor. It was submitted that upon such payment being made by the appellant, Section 140 of the Indian Contract Act, 1872 (for short, ‘the Contract Act’) would squarely apply as the rights of the 1st respondent-financial creditor shall stand subrogated in favour of the appellant.
2) Counsel submitted that the appellant has the right of subrogation over the right of the financial creditor over the principal borrower (corporate debtor) in respect of its dues as well as the security provided to the financial creditor of the mortgage in respect of SEZ land.
3) It was submitted that Even a partial payment made in the full and final settlement is sufficient to trigger the principle of subrogation. It was further submitted that Hupon receipt of Rs.38.87 crores from the guarantor, the debt repayable to the 1st respondent financial creditor has been discharged. The 1st respondent financial creditor is now estopped from enforcing the remaining part of the debt from the 2nd respondent-corporate debtor in view of Section 63 read with Section 41 of the Contract Act. The 1st respondent financial creditor applied Section 7 of the IBC against the 2nd respondent corporate debtor, though the entire debt of the 1st respondent financial creditor has been discharged
4) Counsel submitted that the business of the 2nd respondent-corporate debtor was included in the insolvency plan. He submitted that by the admission of an application under Section 7 against the 2nd respondent corporate debtor, a valuable asset of ACIL has been taken away
Respondent:
1) Counsel submitted that the resolution plan of the 2nd respondent-corporate debtor has been approved by the adjudicating authority by the order dated 19th September 2023. He submitted that no payment was made against the claim raised by ACIL as it was an unsecured financial creditor primarily because the liquidation value of the 2nd respondent corporate debtor is much lower than the total claim amount of the secured financial creditors. He pointed out that the main grievance of the appellant is that the institution of corporate insolvency has been upheld against the 2nd respondent corporate debtor, for the assets allegedly part of the CIRP of ACIL, which is the holding company of the 2nd respondent corporate debtor
2) It was submitted that under Section 36(4) of the IBC, the assets of the subsidiary of the corporate debtor cannot be included in the liquidation estate assets. He invited our attention to Section 18 of the IBC, which contains the duties of IRPs. He submitted that if there is a resolution of a corporate debtor, the assets of any of its subsidiaries will not be included in the scope of the resolution process.
3) It was submitted that It is expressly provided in clauses 13.1 and 13.3 of the resolution plan that all the assets of ACIL shall stand extinguished, and the corporate guarantee of ACIL would also be extinguished. There is a specific clause that no right of subrogation shall be available to the existing guarantors.
4) It held that there is no bar on the 1st respondent-financial creditor to proceed against the 2nd respondent-corporate debtor for the remaining amount. In this case, the 1st respondent-financial creditor first moved against the guarantor and, after exhausting the remedies against the guarantor, filed an application under Section 7 against the 2nd respondent-corporate debtor. Merely because the creditor has made a partial recovery from the guarantor, it does not absolve the corporate debtor of his financial obligations.
Decision: Supreme Court dismissed the appeal.
Rationale:
1) Relying on the various provisions of Indian Contract act, Hon’ble SC it held that If the creditor recovers a part of the amount guaranteed by the surety from the surety and agrees not to proceed against the surety for the balance amount, that will not extinguish the remaining debt payable by the principal borrower. In such a case, the creditor can proceed against the principal borrower to recover the balance amount.
2) It noted that where a company furnishes a corporate guarantee for securing a loan taken by another company and if the CIRP of the corporate guarantor ends in a resolution plan, it will bind the creditor of the corporate guarantor. The corporate guarantor’s liability may end in such a case by operation of law. However, such a resolution plan of the corporate guarantor will not affect the liability of the principal borrower to repay the loan amount to the creditor after deducting the amount recovered from the corporate guarantor or the amount paid by the resolution applicant on behalf of the corporate guarantor as per the resolution plan.
3) It held that consistent with the basic principles of the Contract Act that the liability of the principal borrower and surety is co-extensive, the IBC permits separate or simultaneous proceedings to be initiated under Section 7 by a financial creditor against the corporate debtor and the corporate guarantor.
4) It held that by virtue of the CIRP process of ACIL (corporate guarantor), the 2nd respondent-corporate debtor does not get a discharge, and its liability to repay the loan amount to the extent to which it is not recovered from the corporate guarantor is not extinguished.
5) It held that The subrogation will be only to the extent of the amount recovered by the creditor from the surety. Notwithstanding the subrogation to the extent of the amount paid on behalf of the corporate guarantor by the resolution applicant, the right of the financial creditor to recover the balance debt payable by the corporate debtor is in no way extinguished.
6) The financial creditor can always file separate applications under Section 7 of the IBC against the corporate debtor and the corporate guarantor. The applications can be filed simultaneously as well.
Order:
