Supreme Court of India
BRS VENTURES INVESTMENTS LTD.versusSREI INFRASTRUCTURE FINANCE LTD. & ANR.
- Citation
- 2024 INSC 548
- Decided
- 23 July 2024
- Disposal
- Dismissed
- Bench
- ABHAY S OKA
Holding
Payment by the corporate guarantor under its resolution plan does not extinguish the principal borrower’s liability, a holding company does not own subsidiary assets for inclusion in its plan, and separate or simultaneous Section 7 applications against both guarantor and debtor are permissible.
Summary
The Supreme Court considered a dispute where a financial creditor had obtained a loan of Rs 100 crore from a corporate debtor (Gujarat Hydrocarbon and Power SEZ Ltd.) secured by a corporate guarantee furnished by its holding company, ACIL. After the corporate debtor defaulted, the creditor initiated insolvency proceedings against ACIL, whose resolution plan resulted in a payment of Rs 38.87 crore to the creditor. The creditor later filed a separate insolvency application against the corporate debtor seeking the balance amount. The Court held that the partial payment by the guarantor does not extinguish the principal borrower’s liability, that a holding company does not own the assets of its subsidiaries and therefore such assets cannot be part of its resolution plan, and that the IBC permits simultaneous or separate applications against both the guarantor and the corporate debtor. Consequently, the creditor may continue to recover the remaining debt from the corporate debtor. The appeal was dismissed.
Issues considered
- Whether the payment of Rs 38.87 crore by the corporate guarantor under its resolution plan extinguishes the liability of the principal borrower for the remaining loan amount.
- Whether a holding company is the owner of its subsidiary’s assets and can include those assets in its own resolution plan.
- Whether a financial creditor may file separate or simultaneous applications under Section 7 of the IBC against both the corporate debtor and the corporate guarantor.
Legislation cited
- Contract Act, 1872s. 126, s. 128, s. 133, s. 134, s. 135, s. 136, s. 137, s. 138, s. 139, s. 140
- Insolvency and Bankruptcy Code, 2016s. 18, s. 31, s. 36, s. 60, s. 7
Subjects
Principal borrowerCorporate guarantorResolution planLiability of guarantorBalance debtCorporate Insolvency Resolution ProcessSubrogationHolding companySubsidiary assetsSuretyIBC Section 7Contract Act Section 140
Judgment
[2024] 7 S.C.R. 2143 : 2024 INSC 548
BRS Ventures Investments Ltd.
v.
SREI Infrastructure Finance Ltd. & Anr.
(Civil Appeal No. 4565 of 2021)
23 July 2024
[Abhay S. Oka* and Pankaj Mithal, JJ.]
Issue for Consideration
Whether the payment of Rs.38.87 crores to the financial creditor
under the resolution plan of the corporate guarantor will 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; whether a holding company is the owner of the
assets of its subsidiary and can the assets of the subsidiaries be
included in the resolution plan of the holding company; can the
financial creditor file simultaneous/separate applications under
Section 7 of the IBC against the corporate debtor and the corporate
guarantor as well.
Headnotes†
Insolvency and Bankruptcy Code, 2016 – ss.7, 31 – Contract
Act, 1872 – ss.126, 128, 133-139 – 1st respondent-financial
creditor granted a loan of Rs.100 crores to the 2nd respondent-
corporate debtor – Corporate guarantee furnished by
ACIL-Corporate Guarantor – Corporate debtor defaulted
payment of the loan – s.7 application filed against Corporate
Guarantor – Corporate Insolvency Resolution Process (CIRP)
against the Corporate Guarantor commenced, Rs.38.87 crores
paid to the financial creditor under the resolution plan –
Corporate debtor, if liable to pay the entire amount payable
under the loan transaction after deducting the aforesaid
amount paid on behalf of the corporate guarantor:
Held: Yes – Payment of Rs.38.87 crores to the financial creditor
under the resolution plan of the corporate guarantor will not
extinguish the liability of the 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
* Author
2144 [2024] 7 S.C.R.
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its resolution plan – As far as the guarantee is concerned, the
liability of the surety and the principal debtor is co-extensive – The
creditor has remedies available to recover the amount payable
by the principal borrower by proceeding against both or any of
them – The creditor can proceed against the guarantor first without
exhausting its remedies against the principal borrower – 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 and the creditor can proceed
against the principal borrower to recover the balance amount –
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 – View taken by
NCLAT cannot be faulted. [Paras 14, 15, 17, 28]
Insolvency and Bankruptcy Code, 2016 – ss.7, 60 – Contract
Act, 1872 – Simultaneous proceedings against the Corporate
Debtor and the Guarantor – Permissibility:
Held: Is permissible – 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 u/s.7 by a financial creditor against the corporate
debtor and the corporate guarantor. [Para 19]
Insolvency and Bankruptcy Code, 2016 – ss.18(1) Explanation (b),
36(4)(d) – Whether a holding company is the owner of the
assets of its subsidiary – Can the assets of the subsidiaries
be included in the resolution plan of the holding company –
Whether the assets of the 2nd respondent-corporate debtor
were a part of the CIRP in respect of ACIL-Corporate Guarantor
(holding company of the corporate debtor):
Held: No – NCLAT rightly held that the resolution plan took care
only of the investments of ACIL in the subsidiaries and not the
assets of subsidiaries – Assets of a subsidiary company cannot
[2024] 7 S.C.R. 2145
BRS Ventures Investments Ltd. v.
SREI Infrastructure Finance Ltd. & Anr.
be part of the resolution plan of the holding company – A holding
company and its subsidiary are always distinct legal entities – The
holding company would own shares of the subsidiary company,
but this does not make the holding company the owner of the
subsidiary’s assets – By virtue of the CIRP process of ACIL, 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 did not extinguish.
[Paras 20, 21]
Insolvency and Bankruptcy Code, 2016 – Contract Act, 1872 –
s.140 – Rights of surety on payment or performance – “upon
payment or performance of all that he is liable for”; ‘all that
he is liable’ – Liability of ACIL-Corporate Guarantor was to the
extent of the entire amount repayable by the 2nd respondent-
corporate debtor – In the CIRP of ACIL, the appellant-
Resolution Applicant of ACIL paid Rs.38.87 crores only to the
1st respondent-financial creditor on behalf of ACIL – Plea of
the appellant that it has the right of subrogation over the right
of the financial creditor over the 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:
Held: Rejected – Only the liability of ACIL under the corporate
guarantee to repay the loan to the financial creditor was extinguished
on the payment of Rs.38.87 crores – By the involuntary act of
the creditor of accepting part of the amount from the surety in
the discharge of the entire liability of the surety, even if s.140 is
attracted, it will confer on the guarantor or the appellant the right to
recover only the aforesaid amount from the corporate debtor – 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. [Para 25]
Case Law Cited
Lalit Kumar Jain v. Union of India & Ors. [2021] 3 SCR 1075 :
(2021) 9 SCC 321; Bacha F. Guzdar v. Commissioner of Income
Tax, Bombay [1955] 1 SCR 876; Vodafone International Holdings
BV v. Union of India & Anr. [2012] 1 SCR 573 : (2012) 6
SCC 613 – relied on.
2146 [2024] 7 S.C.R.
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Amit Lal Goverdhan Lalan v. State Bank of Travancore & Ors.
[1968] 3 SCR 724; Economic Transport Organization, Delhi
v. Charan Spinning Mills Pvt. Ltd. & Anr. [2010] 2 SCR 887 :
(2010) 4 SCC 114; Lala Kapurchand Godha & Ors. v. Mir Nawab
Himayatalikhan Azamjah [1963] 2 SCR 168; Jaypee Kensington
Boulevard Apartments Welfare Association & Ors. v. NBCC (India)
Ltd. & Ors. [2021] 12 SCR 603 : (2022) 1 SCC 401; Committee
of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta &
Ors. [2019] 16 SCR 275 : (2019) SCC Online SC 1478; Laxmi
Pat Surana v. Union of India & Anr. [2021] 2 SCR 924 : (2021) 8
SCC 481; Punjab National Bank Ltd. v. Shri Vikram Cotton Mills
& Anr. [1970] 2 SCR 462 : (1970) 1 SCC 60; State Bank of India
v. V. Ramakrishnan & Anr. [2018] 10 SCR 974 : (2018) 17 SCC
394 – referred to.
Shib Charan Das v. Muqaddam & Ors., AIR 1936 ALL 62; Kadamba
Sugar Industries Pvt. Ltd. v. Devru Ganapathi Hegde Bhairi, 1993
SCC Online KAR 7; Maitreya Doshi v. Anand Rathi Global Finance
Ltd. & Anr. [2022] 15 SCR 536 : (2022) SCC Online SC 1276;
Darbari Lal & Anr. v. Mahbub Ali Mian & Ors. (1927) SCC Online
ALL 121 – referred to.
State Bank of India v. Ghanshyam Surajbali Kurmi (2022) SCC
Online NCLT 14567 – referred to.
List of Acts
Insolvency and Bankruptcy Code, 2016; Contract Act, 1872.
List of Keywords
Principal borrower/corporate debtor; Financial creditor; Corporate
guarantor; Resolution plan of the corporate guarantor; Liability of
Corporate Guarantor; Corporate guarantor’s liability; Balance debt;
Corporate Insolvency Resolution Process (CIRP); Subrogation;
Holding company; Subsidiary; Owner; Assets of subsidiary;
Corporate guarantee; Guarantor; Surety; Resolution plan of the
holding company; Distinct legal entities.
Case Arising From
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 4565 of 2021
From the Judgment and Order dated 11.05.2021 of the National
Company Law Appellate Tribunal, Delhi in CAAT(I)-1109 and 1096
of 2020
[2024] 7 S.C.R. 2147
BRS Ventures Investments Ltd. v.
SREI Infrastructure Finance Ltd. & Anr.
Appearances for Parties
Jaideep Gupta, Sr. Adv., Ajay Gaggar, Amarjit Singh Bedi, Yashwant
Gaggar, Ms. Racheeta Chawla, Ms. Riddhi Bose, Ms. Anindita Mitra,
Advs. for the Appellants.
Navin Pawa, Sr. Adv., Abhimanyu Bhandari, Arav Pandit, Thakur
Ankit Singh, Ms. Rooh-e-hina Dua, Shamik Shirishbhai Sanjanwala,
Raheel Patel, Shantanu Parmar, Advs. for the Respondents.
Darius Khambata, Sr. Adv., Ritin Rai, Rishabh Parikh, Tirth Nayak,
Vinam Gupta, Advs. for the Intervenor.
Judgment / Order of the Supreme Court
Judgment
Abhay S. Oka, J.
FACTUAL ASPECTS
1. The 2nd respondent–Gujarat Hydrocarbon and Power SEZ Limited,
is a corporate debtor. The corporate debtor approached the 1st
respondent–SREI Infrastructure Finance Limited (the financial
creditor), for a grant of a loan. Under the agreement dated 5 th
January 2011, 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. The loan was also secured by the corporate guarantee dated
5th January 2011 furnished by ACIL. The financial creditor filed an
Original Application before the Debt Recovery Tribunal-I, Kolkata
(for short, ‘the DRT’) to recover the outstanding loan amount. 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
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said application. Thus, the Corporate Insolvency Resolution Process
(for short, ‘CIRP’) of ACIL commenced. The 1st respondent-financial
creditor filed a claim of Rs.648.81 crores, out of which the claim of
Rs.357.29 crores was admitted towards the claim by the Interim
Resolution Professional (for short, ‘IRP’). After the appointment of the
Resolution Professional (RP), the claim amount of the 1st respondent
financial creditor was reassessed at Rs.241.27 crores inclusive of the
principal amount of Rs.100 crores. 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’). The appellant paid Rs.38.87 crores to the 1st respondent-
financial creditor, against the admitted claim of Rs.241.27 crores in
full and final settlement of all its dues and demands submitted in
the resolution plan.
2. 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. A suspended Director of the corporate debtor
also preferred an appeal against the said order of the adjudicating
authority. By the impugned judgment of the NCLAT, both appeals
have been dismissed.
3. M/s. Zaveri & Co. Pvt. Ltd. has filed I.A. No.11685 of 2023 for
intervention. It is stated in the application that the applicant and
other interested parties had submitted the resolution plan of the
2nd respondent-corporate debtor. A final resolution plan was submitted
by the applicant on 23rd August 2021, proposing to pay a sum of
Rs.135 crores within a period of 15 months to the creditors of the
2nd respondent-corporate debtor. The COC of the 2nd respondent-
corporate debtor approved the resolution plan of the applicant on
[2024] 7 S.C.R. 2149
BRS Ventures Investments Ltd. v.
SREI Infrastructure Finance Ltd. & Anr.
30th August 2021. As required by the approved resolution plan,
the applicant has furnished a bank guarantee of Rs.2 crores on
3rd September 2021.
SUBMISSIONS OF THE APPELLANT
4. Mr. Jaideep Gupta, the learned senior counsel appearing for the
appellant, submitted that in the CIRP of ACIL, the appellant’s
resolution plan was duly approved. As per the resolution plan, 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. He 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. Therefore, through ACIL, the
appellant would step into the shoes of the 1st respondent-financial
creditor. He would, thus, submit 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. He submitted that upon payment of Rs.38.87 crores to
the 1st respondent-financial creditor, as a full and final settlement of
its total dues of Rs.241.27 crores, the appellant has now stepped
into the shoes of the 1st respondent-financial creditor. He relied on
this Court’s decision in the case of Amit Lal Goverdhan Lalan v.
State Bank of Travancore & Ors.1
5. The learned senior counsel further submitted that for attracting
Section 140 of the Contract Act, the payment by the guarantor does
not have to be of the entire amount due from the principal debtor.
Even a partial payment made in the full and final settlement is
sufficient to trigger the principle of subrogation. He placed reliance on
a decision of the Allahabad High Court in the case of Shib Charan
Das v. Muqaddam & Ors.2 He submitted that the High Court of
Karnataka, in the case of Kadamba Sugar Industries Pvt. Ltd. v.
Devru Ganapathi Hegde Bhairi3 has held that acceptance of the
1 [1968] 3 SCR 724
2 AIR 1936 ALL 62
3 1993 SCC Online KAR 7
2150 [2024] 7 S.C.R.
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lesser amount by the creditor under the complete satisfaction of the
dues paid by the surety, entitled surety to the right of subrogation. The
surety is entitled to all the rights of the creditor against the principal
debtor. He also relied upon a decision of this Court in the case of
Economic Transport Organization, Delhi v. Charan Spinning
Mills Pvt. Ltd. & Anr.4
6. He submitted that upon 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.
Moreover, there is a right of subrogation. He relied upon a decision
of this Court in the case of Lala Kapurchand Godha & Ors. v.
Mir Nawab Himayatalikhan Azamjah.5
SUBMISSIONS OF THE 1 ST RESPONDENT – FINANCIAL
CREDITOR
7. Mr Abhimanyu Bhandari, the learned counsel appearing for the
1st respondent-financial creditor, has taken us through the impugned
orders. He pointed out 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.
He pointed out 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
4 [2010] 2 SCR 887 : (2010) 4 SCC 114
5 [1963] 2 SCR 168
[2024] 7 S.C.R. 2151
BRS Ventures Investments Ltd. v.
SREI Infrastructure Finance Ltd. & Anr.
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. He submitted that the holding company and its subsidiaries
are distinct legal persons, and the holding company does not own
the subsidiary’s assets. The learned counsel relied upon a decision
of this Court in the case of Vodafone International Holdings BV
v. Union of India & Anr.6 He also relied upon a decision of this
Court in the case of Jaypee Kensington Boulevard Apartments
Welfare Association & Ors. v. NBCC (India) Ltd. & Ors.7 Inviting
our attention to the information memorandum in the CIRP of ACIL,
he submitted that the same did not contain the particulars of the
assets of the 2nd respondent-corporate debtor. It was specifically
stated therein that the 2nd respondent-corporate debtor was still to
unlock the value of the land, that is, the value of the investment
made by ACIL. It was disclosed that the 2nd respondent-corporate
debtor was a 51% subsidiary of ACIL. The assets and liabilities of
ACIL, disclosed in the information memorandum, did not include
the assets and liabilities of the subsidiaries. Therefore, the assets
and liabilities of the 2nd respondent-corporate debtor were not part
of CIRP of ACIL. He also pointed out the definition clause in the
resolution plan. The liquidation value of ACIL was shown as Rs.360
crores, and the financial value did not include its subsidiaries’ income.
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. He submitted that only a sum of Rs.38.87
crores was given to the 1st respondent-financial creditor. Therefore,
the liability of the 2nd respondent-corporate debtor concerning the
balance amount continued to exist.
8. He invited our attention to the decision of this Court dated
21st May 2021 in the case of Lalit Kumar Jain v. Union of India
& Ors.8 This judgment lays down that it is open for the creditors
to move against personal guarantors under the IBC. He submitted
6 [2012] 1 SCR 573 : (2012) 6 SCC 613
7 [2021] 12 SCR 603 : (2022) 1 SCC 401
8 [2021] 3 SCR 1075 : (2021) 9 SCC 321
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that because the liability of the guarantor is co-extensive with the
corporate debtor, this Court held that the approval of a resolution plan
of the corporate debtor does not ipso facto discharge guarantors of
the corporate debtor of their liabilities under the contract of guarantee.
It was held that by involuntary process or due to liquidation or
insolvency proceedings, corporate guarantors are not absolved of
their liability, which arises out of an independent contract. In this
case, the entire outstanding amount payable by the 2nd respondent-
corporate debtor has not been recovered from ACIL. Therefore, 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. Reliance was placed upon a decision of
this Court in the case of Maitreya Doshi v. Anand Rathi Global
Finance Ltd. & Anr.9
9. Regarding the plea of subrogation, the learned counsel pointed
out that the plea was never raised before the adjudicating authority
and the NCLAT. The ground of subrogation was made by way of
an amendment to the memorandum of this appeal; therefore, the
contention not raised earlier cannot be considered at this stage. He
pointed out that the COC and the adjudicating authority have already
approved the resolution plan for the 2nd respondent-corporate debtor.
He submitted that this Court had settled this issue in the case of
Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar
Gupta & Ors.10 He relied upon a decision of the Hyderabad Bench
of the NCLT in the case of State Bank of India v. Ghanshyam
Surajbali Kurmi,11 which covered the issue.
SUBMISSIONS OF INTERVENORS
10. Mr. Darius Khambata, the learned senior counsel appearing for the
intervenor, also made detailed submissions. He pointed out that under
9 [2022] 15 SCR 536 : 2022 SCC Online SC 1276
10 [2019] 16 SCR 275 : 2019 SCC Online SC 1478
11 2022 SCC Online NCLT 14567
[2024] 7 S.C.R. 2153
BRS Ventures Investments Ltd. v.
SREI Infrastructure Finance Ltd. & Anr.
Section 128 of the Contract Act, the liability of a surety is co-extensive
with that of the principal debtor unless there is something contrary
to that in the contract. He relied upon a decision of this Court in the
case of Laxmi Pat Surana v. Union of India & Anr12 on this behalf.
He submitted that the guarantor’s liability is separate and distinct
from the principal debtor as held by this Court in the case of Punjab
National Bank Ltd. v. Shri Vikram Cotton Mills & Anr.13 This Court
held that a binding obligation created under a composition under
Section 391 of the Companies Act, 1956, between the company
and its creditors, did not affect the liability of surety. He submitted
that any variation in the contract between the creditor and guarantor
does not discharge the principal debtor. If there is a variance made
without the guarantor’s consent in the contract between the corporate
debtor and the creditor, it amounts to the discharge of the guarantor
as regards the transactions subsequent to the variance. He pointed
out various provisions of the Contract Act regarding the discharge of
a guarantor. Relying upon Section 60(2) of the IBC and a decision
of this Court in the case of Lalit Kumar Jain,8 he urged that the
IBC permits simultaneous petitions against the corporate debtor and
corporate guarantor. He also invited our attention to Section 60(2)
of the IBC. He relied upon a decision of this Court in the case of
State Bank of India v. V. Ramakrishnan & Anr.14 He submitted
that Section 140 of the Contract Act will be applicable only when the
guarantor pays all that he is liable for under the contract of guarantee.
He submitted that if the guarantor makes only a part payment of the
debt, Section 140 will not have any application. He relied upon a
decision of the Allahabad High Court in the case of Darbari Lal &
Anr. v. Mahbub Ali Mian & Ors.15 He submitted that this proposition
finds support even in the decision of the Allahabad High Court in the
case of Shib Charan Das2 relied upon by the appellant. He pointed
out that in the information memorandum of ACIL, the assets and
liabilities of the 2nd respondent-corporate debtor were not included.
The assets of the 2nd respondent-corporate debtor cannot be treated
as a part of ACIL’s assets. He submitted that the resolution plan of
ACIL has been prepared based on the information memorandum.
12 [2021] 2 SCR 924 : (2021) 8 SCC 481
13 [1970] 2 SCR 462 : (1970) 1 SCC 60
14 [2018] 10 SCR 974 : (2018) 17 SCC 394
15 (1927) SCC Online ALL 121
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He submitted that the information memorandum and the resolution
plan must be consistent with Section 36(4)(d) of the IBC.
REPLY OF THE APPELLANT
11. Replying to the submissions made by the learned counsel appearing
for the 1st respondent-financial creditor, the learned senior counsel
appearing for the appellant reiterated his submissions on the
applicability of Section 140 of the Contract Act. His submission is
that the information memorandum indicates taking over the business
of ACIL and the 2nd respondent-corporate debtor. He 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.
CONSIDERATION
12. Before we deal with the submissions canvassed across the Bar, we
must note the issues formulated in the impugned judgment of the
NCLAT. Based on the submissions made before it, two issues were
framed, which read thus:
“13. Following issues arise in this appeal for our
consideration:
(i) Whether the application under Section 7 of IBC is
barred by limitation?
(ii) 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?”
13. The present appellant did not canvas the issue of subrogation before
the NCLAT. It is also not urged in the memorandum of appeal before
the NCLAT. We may note here that the appellant has not seriously
pressed the issue of the bar of limitation in this appeal. The NCLAT
rendered the findings on both issues in favour of the respondents.
There is no dispute that the 1st respondent financial creditor had
granted a loan of Rs.100 crores to the 2nd respondent corporate
debtor. The loan was secured by the corporate guarantee furnished
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BRS Ventures Investments Ltd. v.
SREI Infrastructure Finance Ltd. & Anr.
by ACIL, which is the holding company of the corporate debtor. There
is no dispute that the 2nd respondent-corporate debtor committed a
default in payment of the loan amount. Therefore, the guarantee
was invoked by the 1st respondent-financial creditor, which led to
the filing of an application under Section 7 of the IBC against ACIL.
The CIRP of ACIL was completed, and the resolution plan was
approved. The claim lodged by the 1st respondent-financial creditor
was of Rs.241.27 crores. However, as per the resolution plan, the
1st respondent-financial creditor had to accept a haircut as it was
provided therein that the 1st respondent-financial creditor would get
only a sum of Rs.38.87 crores from the resolution applicant.
LIABILITY OF GUARANTOR / SURETY
14. As far as the guarantee is concerned, the law is very well settled.
The liability of the surety and the principal debtor is co-extensive. The
creditor has remedies available to recover the amount payable by the
principal borrower by proceeding against both or any of them. The
creditor can proceed against the guarantor first without exhausting
its remedies against the principal borrower. Chapter VIII of the
Contract Act contains provisions regarding indemnity and guarantee.
Section 126 is relevant for our purposes, which reads thus:
“126. “Contract of guarantee”, “surety”, “principal
debtor” and “creditor”.— A “contract of guarantee” is a
contract to perform the promise, or discharge the liability,
of a third person in case of his default. The person who
gives the guarantee is called the “surety”; the person in
respect of whose default the guarantee is given is called the
“principal debtor”, and the person to whom the guarantee
is given is called the “creditor”. A guarantee may be either
oral or written.”
A surety is also known as a guarantor. Section 128 reads thus:
“128. Surety’s liability.— The liability of the surety is
co- extensive with that of the principal debtor, unless it is
otherwise provided by the contract.”
It lays down the fundamental principle that the liability of the surety
is co-extensive with that of the principal debtor unless otherwise
provided by the contract. Sections 133 to 139 deal with the discharge
of surety, which read thus:
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“133. Discharge of surety by variance in terms of
contract.— Any variance, made without the surety’s
consent, in the terms of the contract between the principal
debtor and the creditor, discharges the surety as to
transactions subsequent to the variance.
134. Discharge of surety by release or discharge of
principal debtor.— The surety is discharged by any
contract between the creditor and the principal debtor, by
which the principal debtor is released, or by any act or
omission of the creditor, the legal consequence of which
is the discharge of the principal debtor.
135. Discharge of surety when creditor compounds
with, gives time to, or agrees not to sue, principal
debtor.— A contract between the creditor and the principal
debtor, by which the creditor makes a composition with,
or promises to give time to, or not to sue, the principal
debtor, discharges the surety, unless the surety assents
to such contract.
136. Surety not discharged when agreement made with
third person to give time to principal debtor.— Where
a contract to give time to the principal debtor is made by
the creditor with a third person, and not with the principal
debtor, the surety is not discharged.
137. Creditor’s forbearance to sue does not discharge
surety.— Mere forbearance on the part of the creditor to
sue the principal debtor or to enforce any other remedy
against him does not, in the absence of any provision in
the guarantee to the contrary, discharge the surety.
138. Release of one co-surety does not discharge
others.— Where there are co-sureties, a release by the
creditor of one of them does not discharge the others;
neither does it free the surety so released from his
responsibility to the other sureties.
139. Discharge of surety by creditor’s act or omission
impairing surety’s eventual remedy.— If the creditor
does any act which is inconsistent with the rights of the
surety, or omits to do any act which his duty to the surety
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requires him to do, and the eventual remedy of the surety
himself against the principal debtor is thereby impaired,
the surety is discharged.”
Thus, the law provides that if any variance is made without surety’s
consent in the terms of the contract between the principal debtor and
the creditor, it amounts to discharge of the surety as to the transactions
subsequent to the variance. Under the provisions of Section 133,
surety can be discharged only when there is a variance made in the
terms of the contract between the principal debtor and the creditor.
Section 134 contemplates a situation where the principal debtor is
released by a contract between the creditor and the principal debtor. In
such a case, the surety is discharged. If by any act or omission on the
part of the creditor, the legal consequence of which is the discharge
of the principal debtor, the surety stands discharged. Section 135
is based on the same principle on which Section 133 is based. If
there is a contract between the creditor and the principal debtor by
which the creditor makes a composition or promise with the principal
debtor, or gives time to the principal debtor or agrees not to sue the
principal debtor, it amounts to discharge of the surety provided the
surety has not assented to such a contract. If the creditor contracts
with a third party to give time to the principal debtor, and when the
principal debtor is not a party to such a contract, the surety is not
discharged. Section 137 lays down a settled principle that it is not
necessary for the creditor to first sue the principal debtor or adopt a
remedy against him. If the creditor omits to do that, unless there is a
contract to the contrary, it will not amount to discharge of the surety.
This means that without proceeding to recover the debt against the
principal debtor, the creditor can proceed against the surety unless
there is a contract to the contrary. Even if the creditor discharges
one surety, it will not amount to the discharge of the other surety.
There are two other contingencies provided under Sections 138
and 139. We are not concerned with these two contingencies in
the present case.
15. 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. Similarly, if there is a compromise or settlement between
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the creditor and the surety to which the principal borrower is not a
consenting party, the liability of the borrower qua the creditor will
remain unaffected. The provisions regarding the discharge of the
surety discussed above show that involuntary acts of the principal
borrower or creditor do not result in the discharge of surety.
16. In the case of Lalit Kumar Jain,8 this Court dealt with the legal effect
of approving the resolution plan in CIRP of the corporate debtor on
the liability of the surety. This is in the context of Section 135 of the
Contract Act, which provides that if the creditor compounds with or
gives time or agrees not to sue the principal debtor, it amounts to
discharge of the surety. In paragraphs 122 to 125 of the said decision,
this Court held thus:
“122. It is therefore, clear that the sanction of a resolution
plan and finality imparted to it by Section 31 does not per
se operate as a discharge of the guarantor’s liability. As to
the nature and extent of the liability, much would depend
on the terms of the guarantee itself. However, this Court
has indicated, time and again, that an involuntary act of
the principal debtor leading to loss of security, would
not absolve a guarantor of its liability. In Maharashtra
SEB [Maharashtra SEB v. Official Liquidator, (1982)
3 SCC 358] the liability of the guarantor (in a case
where liability of the principal debtor was discharged
under the Insolvency law or the Company law), was
considered. It was held that in view of the unequivocal
guarantee, such liability of the guarantor continues and
the creditor can realise the same from the guarantor
in view of the language of Section 128 of the Contract
Act, 1872 as there is no discharge under Section 134
of that Act. This Court observed as follows : (SCC pp.
362-63, para 7)
“7. Under the bank guarantee in question the Bank
has undertaken to pay the Electricity Board any sum
up to Rs 50,000 and in order to realise it all that the
Electricity Board has to do is to make a demand.
Within forty-eight hours of such demand the Bank
has to pay the amount to the Electricity Board which
is not under any obligation to prove any default on
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BRS Ventures Investments Ltd. v.
SREI Infrastructure Finance Ltd. & Anr.
the part of the Company in liquidation before the
amount demanded is paid. The Bank cannot raise the
plea that it is liable only to the extent of any loss that
may have been sustained by the Electricity Board
owing to any default on the part of the supplier of
goods i.e. the Company in liquidation. The liability
is absolute and unconditional. The fact that the
Company in liquidation i.e. the principal debtor has
gone into liquidation also would not have any effect
on the liability of the Bank i.e. the guarantor. Under
Section 128 of the Contract Act, 1872, the liability of
the surety is coextensive with that of the principal
debtor unless it is otherwise provided by the contract.
A surety is no doubt discharged under Section 134
of the Contract Act, 1872 by any contract between
the creditor and the principal debtor by which the
principal debtor is released or by any act or omission
of the creditor, the legal consequence of which is the
discharge of the principal debtor. But a discharge
which the principal debtor may secure by
operation of law in bankruptcy (or in liquidation
proceedings in the case of a company) does not
absolve the surety of his liability (see Jagannath
Ganeshram Agarwale v. Shivnarayan Bhagirath
[Jagannath Ganeshram Agarwale v. Shivnarayan
Bhagirath, 1939 SCC OnLine Bom 65 : AIR 1940
Bom 247]; see also Fitzgeorge, In re [Fitzgeorge,
In re,(1905)1KB462] ).”
123. This legal position was noticed and approved later
in Industrial Finance Corpn. of India Ltd. v. Cannanore
Spg. & Wvg. Mills Ltd. [Industrial Finance Corpn. of India
Ltd. v. Cannanore Spg. & Wvg. Mills Ltd., (2002) 5 SCC
54] An earlier decision of three Judges in Punjab National
Bank v. State of U.P. [Punjab National Bank v. State of
U.P., (2002) 5 SCC 80] pertains to the issues regarding
a guarantor and the principal debtor. The Court observed
as follows : (Punjab National Bank case [Punjab National
Bank v. State of U.P., (2002) 5 SCC 80] , SCC p. 80-81,
paras 1-6)
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“1. The appellant had, after Respondent 4’s
management was taken over by U.P. State Textile
Corporation Ltd. (Respondent 3) under the Industries
(Development and Regulation) Act, advanced some
money to the said Respondent 4. In respect of the
advance so made, Respondents 1, 2 and 3 executed
deeds of guarantee undertaking to pay the amount
due to the Bank as guarantors in the event of the
principal borrower being unable to pay the same.
2. Subsequently, Respondent 3 which had taken
over the management of Respondent 4 became
sick and proceedings were initiated under the Sick
Textile Undertakings (Nationalisation) Act, 1974 (for
short “the Act”). The appellant filed suit for recovery
against the guarantors and the principal debtor of
the amount claimed by it.
3. The following preliminary issue was, on the
pleadings of the parties, framed:
‘Whether the claim of the plaintiff is not maintainable
in view of the provisions of Act 57 of 1974 as alleged
in Para 25 of the written statement of Defendant 2?’
4. The trial court as well as the High Court, both
came to the conclusion that in view of the provisions
of Section 29 of the Act, the suit of the appellant was
not maintainable.
5. We have gone through the provisions of the said
Act and in our opinion the decision of the courts
below is not correct. Section 5 of the said Act provides
for the owner to be liable for certain prior liabilities
and Section 29 states that the said Act will have an
overriding effect over all other enactments. This Act
only deals with the liabilities of a company which is
nationalised and there is no provision therein which
in any way affects the liability of a guarantor who is
bound by the deed of guarantee executed by it. The
High Court has referred to a decision of this Court in
Maharashtra SEB v. Official Liquidator [Maharashtra
SEB v. Official Liquidator, (1982) 3 SCC 358] where the
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BRS Ventures Investments Ltd. v.
SREI Infrastructure Finance Ltd. & Anr.
liability of the guarantor in a case where liability of the
principal debtor was discharged under the Insolvency
law or the Company law, was considered. It was
held in this case that in view of the unequivocal
guarantee, such liability of the guarantor continues
and the creditor can realise the same from the
guarantor in view of the language of Section 128
of the Contract Act, 1872 as there is no discharge
under Section 134 of that Act.
6. In our opinion, the principle of the aforesaid decision
of this Court is equally applicable in the present
case. The right of the appellant to recover money
from Respondents 1, 2 and 3 who stood guarantors
arises out of the terms of the deeds of guarantee
which are not in any way superseded or brought
to a naught merely because the appellant may not
have been able to recover money from the principal
borrower. It may here be added that even as a result
of the Nationalisation Act the liability of the principal
borrower does not come to an end. It is only the mode
of recovery which is referred to in the said Act.”
124. In Kaupthing Singer & Friedlander Ltd. [Kaupthing
Singer & Friedlander Ltd. (No. 2), In re, (2012) 1 AC 804 :
(2011) 3 WLR 939 : (2012) 1 All ER 883, paras 11, 12,
53-54] the UK Supreme Court reviewed a large number
of previous authorities on the concept of double proof
i.e. recovery from guarantors in the context of insolvency
proceedings. The Court held that: (AC p. 814, para 11)
“11. The function of the rule is not to prevent a double
proof of the same debt against two separate estates
(that is what insolvency practitioners call “double
dip”). The rule prevents a double proof of what is in
substance the same debt being made against the
same estate, leading to the payment of a double
dividend out of one estate. It is for that reason
sometimes called the rule against double dividend.
In the simplest case of suretyship (where the surety
has neither given nor been provided with security, and
has an unlimited liability) there is a triangle of rights
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and liabilities between the principal debtor (“PD”),
the surety (“S”) and the creditor (“C”). PD has the
primary obligation to C and a secondary obligation
to indemnify S if and so far as S discharges PD’s
liability, but if PD is insolvent S may not enforce that
right in competition with C. S has an obligation to C to
answer for PD’s liability, and the secondary right of
obtaining an indemnity from PD. C can (after due
notice) proceed against either or both of PD and S.
If both PD and S are in insolvent liquidation, C can
prove against each for 100p in the pound but may
not recover more than 100p in the pound in all.”
125. In view of the above discussion, it is held that
approval of a resolution plan does not ipso facto
discharge a personal guarantor (of a corporate debtor)
of her or his liabilities under the contract of guarantee.
As held by this Court, the release or discharge of a
principal borrower from the debt owed by it to its
creditor, by an involuntary process i.e. by operation
of law, or due to liquidation or insolvency proceeding,
does not absolve the surety/guarantor of his or her
liability, which arises out of an independent contract.”
(emphasis added)
This Court dealt with a situation where a resolution plan for the
principal borrower was approved in CIRP, and the principal borrower
was discharged from the debt by operation of law through an
involuntary process. It was held that the contract between the creditor
and the surety is independent; therefore, the approval of the resolution
plan of the principal borrower will not amount to the discharge of
the surety. The same principles will apply when the resolution plan
is approved in CIRP of the surety. In such a case, the surety gets a
discharge from his liability under the guarantee by operation of law
or by involuntary process. It will not amount to the discharge of the
principal borrower.
17. Section 31 of the IBC reads thus:
“31. Approval of resolution plan.–
(1) If the Adjudicating Authority is satisfied that the
resolution plan as approved by the committee of
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SREI Infrastructure Finance Ltd. & Anr.
creditors under sub-section (4) of section 30 meets
the requirements as referred to in sub-section (2) of
section 30, it shall by order approve the resolution
plan which shall be binding on the corporate debtor
and its employees, members, creditors, including
the Central Government, any State Government or
any local authority to whom a debt in respect of the
payment of dues arising under any law for the time
being in force, such as authorities to whom statutory
dues are owed, guarantors and other stakeholders
involved in the resolution plan.
Provided that the Adjudicating Authority shall, before
passing an order for approval of resolution plan under this
sub-section, satisfy that the resolution plan has provisions
for its effective implementation.
(2) Where the Adjudicating Authority is satisfied that the
resolution plan does not confirm to the requirements
referred to in sub-section (1), it may, by an order, reject
the resolution plan.
(3) After the order of approval under sub-section (1),-
(a) the moratorium order passed by the Adjudicating
Authority under section 14 shall cease to have effect;
and
(b) the resolution professional shall forward all records
relating to the conduct of the corporate insolvency
resolution process and the resolution plan to the
Board to be recorded on its database.
(4) The resolution applicant shall, pursuant to the resolution
plan approved under sub-section (1), obtain the necessary
approval required under any law for the time being in force
within a period of one year from the date of approval of
the resolution plan by the Adjudicating Authority under
sub-section (1) or within such period as provided for in
such law, whichever is later:
Provided that where the resolution plan contains a
provision for combination, as referred to in section 5 of
the Competition Act, 2002, the resolution applicant shall
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obtain the approval of the Competition Commission of India
under that Act prior to the approval of such resolution plan
by the committee of creditors.”
(emphasis added)
The resolution plan of the corporate debtor approved by the
adjudicating authority binds the corporate debtor, its employees,
members, creditors, guarantor and other stakeholders. Therefore,
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.
18. As observed earlier, in such a loan transaction secured by a guarantee,
the guarantor has an obligation to repay the loan amount to the
creditor, and there is a separate and distinct obligation on the borrower
to pay the amount to the creditor. Such a transaction creates a right in
favour of the creditor to proceed against the guarantor and borrower
for recovery. However, he has the right to recover the amount only
to the extent of the loan amount payable by the borrower.
SIMULTANEOUS PROCEEDINGS UNDER THE IBC AGAINST THE
CORPORATE DEBTOR AND GUARANTOR
19. Now, we turn to the provisions of the IBC. Sub-section (8) of Section 5
defines ‘financial debt’. Clauses (a) and (i) of sub-section (8) show
that the money borrowed against the payment of interest and the
amount of any liability in respect of any guarantee for repayment
of the loan covered by clause (a) have been put under separate
headings. Thus, the liability of the guarantor or surety is a financial
debt, and even the money borrowed against the payment of interest
is also a financial debt. In the light of these provisions, Section 60
of the IBC is relevant, which reads thus:
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SREI Infrastructure Finance Ltd. & Anr.
“60. Adjudicating Authority for corporate persons. -
(1) The Adjudicating Authority, in relation to insolvency
resolution and liquidation for corporate persons including
corporate debtors and personal guarantors thereof shall
be the National Company Law Tribunal having territorial
jurisdiction over the place where the registered office of
a corporate person is located.
(2) Without prejudice to sub-section (1) and notwithstanding
anything to the contrary contained in this Code, where a
corporate insolvency resolution process or liquidation
proceeding of a corporate debtor is pending before
a National Company Law Tribunal, an application
relating to the insolvency resolution or liquidation
or bankruptcy of a corporate guarantor or personal
guarantor, as the case may be, of such corporate
debtor shall be filed before the National Company
Law Tribunal.
(3) An insolvency resolution process or liquidation
or bankruptcy proceeding of a corporate guarantor
or personal guarantor, as the case may be, of the
corporate debtor pending in any court or tribunal shall
stand transferred to the Adjudicating Authority dealing
with insolvency resolution process or liquidation
proceeding of such corporate debtor.
(4) The National Company Law Tribunal shall be vested
with all the powers of the Debt Recovery Tribunal as
contemplated under Part III of this Code for the purpose
of sub-section (2).
(5) Notwithstanding anything to the contrary contained
in any other law for the time being in force, the National
Company Law Tribunal shall have jurisdiction to entertain
or dispose of –
(a) any application or proceeding by or against the
corporate debtor or corporate person;
(b) any claim made by or against the corporate debtor
or corporate person, including claims by or against
any of its subsidiaries situated in India; and
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(c) any question of priorities or any question of law
or facts, arising out of or in relation to the insolvency
resolution or liquidation proceedings of the corporate
debtor or corporate person under this Code.
(6) Notwithstanding anything contained in the Limitation
Act, 1963 or in any other law for the time being in force,
in computing the period of limitation specified for any suit
or application by or against a corporate debtor for which
an order of moratorium has been made under this Part,
the period during which such moratorium is in place shall
be excluded.”
(emphasis added)
Sub-section (2) of Section 60 contemplates separate or simultaneous
insolvency proceedings against the corporate debtor and guarantor.
Therefore, sub-section (3) of Section 60 provides that if CIRP in
respect of the corporate guarantor is pending before an adjudicating
authority and if the CIRP against the corporate debtor is pending
before another adjudicating authority, CIRP proceedings against the
corporate guarantor must be transferred to the adjudicating authority
before whom CIRP in respect of the corporate debtor is pending.
Thus, 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.
WHETHER THE ASSETS OF THE CORPORATE DEBTOR
WERE PART OF CIRP IN RESPECT OF ACIL – CORPORATE
GUARANTOR
20. Now, we will deal with the submissions made by the appellant
that the assets of the 2nd respondent-corporate debtor were also
a part of the CIRP in respect of ACIL. This submission was made
on the ground that according to the appellant, the information
memorandum published in accordance with Section 29 of the IBC
indicates taking over of the business of ACIL and the 2nd respondent-
corporate debtor. Clause 3, under the heading “SEZ Business” in
the information memorandum, specifically mentions that ACIL has
acquired, through its subsidiary (2nd respondent-corporate debtor),
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SREI Infrastructure Finance Ltd. & Anr.
296 hectares of land for setting up the SEZ project. It is further stated
that the entire project cost of SEZ, inclusive of land acquisition, was
financed through equity and unsecured loans contributed by ACIL.
It further records that SEZ is a separate company. However, it is
stated that the financial obligations of the SEZ units are on ACIL.
As SEZ is stated to be a separate company, it is not included in
the resolution plan, which was duly approved. As rightly found by
the NCLAT, the resolution plan takes care only of the investments
of ACIL in the subsidiaries and not the assets of subsidiaries. As
indicated in the subsequent paragraphs, considering the scheme
of the IBC, assets of a subsidiary company cannot be part of the
resolution plan of the holding company.
21. It is necessary to take notice of the two critical provisions of the IBC,
which are Sections 18 and 36. Section 18 and Section 36 read thus:
“18. Duties of interim resolution professional.-
The interim resolution professional shall perform the
following duties, namely: -
(a) collect all information relating to the assets, finances
and operations of the corporate debtor for determining
the financial position of the corporate debtor, including
information relating to-
(i) business operations for the previous two years;
(ii) financial and operational payments for the previous
two years;
(iii) list of assets and liabilities as on the initiation
date; and
(iv) such other matters as may be specified;
(b) receive and collate all the claims submitted by creditors
to him, pursuant to the public announcement made under
sections 13 and 15;
(c) constitute a committee of creditors;
(d) monitor the assets of the corporate debtor and manage
its operations until a resolution professional is appointed
by the committee of creditors;
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(e) file information collected with the information utility, if
necessary; and
(f) take control and custody of any asset over which the
corporate debtor has ownership rights as recorded in the
balance sheet of the corporate debtor, or with information
utility or the depository of securities or any other registry
that records the ownership of assets including –
(i) assets over which the corporate debtor has
ownership rights which may be located in a foreign
country;
(ii) assets that may or may not be in possession of
the corporate debtor;
(iii) tangible assets, whether movable or immovable;
(iv) intangible assets including intellectual property;
(v) securities including shares held in any subsidiary of
the corporate debtor, financial instruments, insurance
policies;
(vi) assets subject to the determination of ownership
by a court or authority;
(g) to perform such other duties as may be specified by
the Board.
Explanation. – For the purposes of this, the term
“assets” shall not include the following, namely: -
(a) assets owned by a third party in possession
of the corporate debtor held under trust or under
contractual arrangements including bailment;
(b) assets of any Indian or foreign subsidiary of
the corporate debtor; and
(c) such other assets as may be notified by the Central
Government in consultation with any financial sector
regulator.
.. .. .. .. .. .. .. .. .. ..
(emphasis added)
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36. Liquidation estate. –
(1) For the purposes of liquidation, the liquidator shall
form an estate of the assets mentioned in sub-section
(3), which will be called the liquidation estate in relation
to the corporate debtor.
(2) The liquidator shall hold the liquidation estate as a
fiduciary for the benefit of all the creditors.
(3) Subject to sub-section (4), the liquidation estate shall
comprise all liquidation estate assets which shall include
the following: -
(a) any assets over which the corporate debtor has
ownership rights, including all rights and interests
therein as evidenced in the balance sheet of the
corporate debtor or an information utility or records in
the registry or any depository recording securities of
the corporate debtor or by any other means as may
be specified by the Board, including shares held in
any subsidiary of the corporate debtor;
(b) assets that may or may not be in possession
of the corporate debtor including but not limited to
encumbered assets;
(c) tangible assets, whether movable or immovable;
(d) intangible assets including but not limited to
intellectual property, securities (including shares held
in a subsidiary of the corporate debtor) and financial
instruments, insurance policies, contractual rights;
(e) assets subject to the determination of ownership
by the court or authority;
(f) any assets or their value recovered through
proceedings for avoidance of transactions in
accordance with this Chapter;
(g) any asset of the corporate debtor in respect of
which a secured creditor has relinquished security
interest;
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(h) any other property belonging to or vested in the
corporate debtor at the insolvency commencement
date; and
(i) all proceeds of liquidation as and when they are
realised.
(4) The following shall not be included in the liquidation
estate assets and shall not be used for recovery in
the liquidation: -
(a) assets owned by a third party which are in
possession of the corporate debtor, including –
(i) assets held in trust for any third party;
(ii) bailment contracts;
(iii) all sums due to any workmen or employee
from the provident fund, the pension fund and
the gratuity fund;
(iv) other contractual arrangements which do
not stipulate transfer of title but only use of the
assets; and
(v) such other assets as may be notified by the
Central Government in consultation with any
financial sector regulator;
(b) assets in security collateral held by financial services
providers and are subject to netting and set-off in multi-
lateral trading or clearing transactions;
(c) personal assets of any shareholder or partner of a
corporate debtor as the case may be provided such assets
are not held on account of avoidance transactions that
may be avoided under this Chapter;
(d) assets of any Indian or foreign subsidiary of the
corporate debtor; or
(e) any other assets as may be specified by the Board,
including assets which could be subject to set-off on
account of mutual dealings between the corporate debtor
and any creditor.”
(emphasis added)
[2024] 7 S.C.R. 2171
BRS Ventures Investments Ltd. v.
SREI Infrastructure Finance Ltd. & Anr.
There is a mandate of clause (d) of sub-section (4) of Section 36 of
the IBC that the assets of an Indian subsidiary of the corporate debtor
shall not be included in the liquidation estate assets and shall not be
used for the recovery in liquidation. Section 18 entrusts several duties
to the IRPs concerning the corporate debtor’s assets. Consistent
with the provisions of Section 36(4)(d), the explanation (b) to
Section 18(1) provides that the term ‘assets’ used in Section 18
shall not include the assets of any Indian subsidiary of the corporate
debtor. Perhaps the reason for including these two provisions is that
it is well-settled that a shareholder has no interest in the company’s
assets. This view has been taken by this Court in paragraph 10 of
its decision in the case of Bacha F. Guzdar v. Commissioner of
Income Tax, Bombay,16 which reads thus:
“10. The interest of a shareholder vis-à-vis the company
was explained in Charanjit Lal Chowdhury v. Union of India
[Charanjit Lal Chowdhury v. Union of India, 1950 SCC 833 at
p. 862 : 1950 SCR 869 at p. 904]. That judgment negatives
the position taken up on behalf of the appellant that a
shareholder has got a right in the property of the company.
It is true that the shareholders of the company have
the sole determining voice in administering the affairs
of the company and are entitled, as provided by the
articles of association, to declare that dividends should
be distributed out of the profits of the company to the
shareholders but the interest of the shareholder either
individually or collectively does not amount to more
than a right to participate in the profits of the company.
The company is a juristic person and is distinct from
the shareholders. It is the company which owns the
property and not the shareholders. The dividend is a
share of the profits declared by the company as liable
to be distributed among the shareholders.”
(emphasis added)
A holding company and its subsidiary are always distinct legal
entities. The holding company would own shares of the subsidiary
company. That does not make the holding company the owner of
16 [1955] 1 SCR 876
2172 [2024] 7 S.C.R.
Digital Supreme Court Reports
the subsidiary’s assets. In the case of Vodafone International
Holdings BV,6 this Court took the view that if a subsidiary company
is wound up, its assets do not belong to the holding company but
to the liquidator. As mentioned in the decision, the reason is that a
company is a separate legal persona and the fact that the parent
company owns all its share has nothing to do with its separate
legal existence. Therefore, the assets of the subsidiary company
of the corporate debtor cannot be part of the resolution plan of the
corporate debtor.
22. In the impugned judgment, the NCLAT has referred to various
clauses in the revised resolution plan of ACIL, including clauses
12.3 and 13.3 and held that these clauses do not suggest that the
1st respondent-financial creditor accepted the amount as full and final
settlement of all its dues. It was held that the effect of approval of
the resolution plan is that the right to recover the loan amount from
the corporate guarantor stands extinguished. Chapter VI, under the
heading ‘financial, value and projections’ in the approved resolution
plan, records as follows:
“The projections have been made on the basis that ACIL
shall continue to operate all the businesses. Provided
that the investments of ACIL in the subsidiaries may be
discontinued/liquidated sold depending a business exigency.
Therefore, the business plan financial projections do
not include income that the subsidiaries.”
(emphasis added)
Clause 13.3 of the approved resolution plan reads thus:
“13.3 All corporate guarantees, indemnities, letters of
comfort, undertakings provided by ACIL., in respect of any
third party liability (including of subsidiaries) shall stand
revoked and extinguished on the effective date pursuant to
approval of the resolution plan by the order of the NCLT,
without the requirement of any further act or deed by the
Resolution Applicant and/or ACIL.”
The effect of the said clause is that the liabilities of ACIL in respect
of the third parties including the subsidiaries shall stand revoked
and extinguished with effect from the effective date.
[2024] 7 S.C.R. 2173
BRS Ventures Investments Ltd. v.
SREI Infrastructure Finance Ltd. & Anr.
23. Thus, 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.
SUBROGATION UNDER SECTION 140 OF THE CONTRACT ACT
24. Now, we come to the argument based on subrogation as provided
under Section 140 of the Contract Act. Reliance was placed by both
parties on conflicting decisions of different High Courts. Therefore,
this issue will have to be resolved. Section 140 is relevant which
reads thus:
“140. Rights of surety on payment or performance.—
Where a guaranteed debt has become due, or default
of the principal debtor to perform a guaranteed duty has
taken place, the surety upon payment or performance of
all that he is liable for is invested with all the rights which
the creditor had against the principal debtor.”
The words used in Section 140 are “upon payment or performance
of all that he is liable for”. When the principal debtor commits a
default and when the liability under the deed of guarantee of the
surety is not limited to a particular amount, its liability is in respect of
the entire amount repayable by the principal debtor to the creditor.
The words ‘all that he is liable’ used under Section 140 cannot be
ignored. The principal borrower must continuously indemnify the
surety. Section 140 of the Contract Act may be founded on the said
obligation. The 1st respondent-financial creditor relied upon a decision
of this Court in the case of Economic Transport Corporation,
Delhi,4 which holds that the doctrine of subrogation is a creature
of equity. Therefore, the Section will have to be interpreted having
regard to the equitable principles. If the surety pays the entirety of
the amount payable under guarantee to the creditor, Section 140
provides a remedy to the surety to recover the entire amount paid
by him in the discharge of his obligations. Therefore, the surety gets
invested with the rights of the creditor to recover from the principal
debtor the amount which was paid as per the guarantee. If the
surety pays only a part of the amount payable to the creditor, the
equitable right the surety gets under Section 140 will be confined
to the debt he cleared.
2174 [2024] 7 S.C.R.
Digital Supreme Court Reports
25. Under the corporate guarantee, in the facts of this case, the liability
of ACIL was to the extent of the entire amount repayable by the
2nd respondent-corporate debtor to the corporate creditor. In the
CIRP of ACIL, the appellant paid a sum of Rs.38.87 crores only to
the 1st respondent-financial creditor. The amount was paid by the
appellant on behalf of ACIL, the corporate guarantor. For the rest of
the amount payable as per the guarantee, the 1st respondent-financial
creditor had to take a haircut because of the involuntary process
by operation of law. Only the liability of ACIL under the corporate
guarantee to repay the loan to the 1st respondent-financial creditor
has been extinguished on the payment of Rs.38.87 crores. By the
involuntary act of the creditor of accepting part of the amount from
the surety in the discharge of the entire liability of the surety, even
if Section 140 is attracted, it will confer on the guarantor or the
appellant the right to recover only the amount mentioned above from
the corporate debtor. 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.
26. In the circumstances, we cannot accept the submissions made by the
learned counsel appearing for the appellant based on Section 140 of
the Contract Act. As stated earlier, the issue of the subrogation
canvassed before us has not been pressed into service by the
appellant, as can be seen even from the written submissions.
27. The last argument sought to be canvassed was that by the admission
of an application under Section 7 of the IBC against the 2nd respondent-
corporate debtor, the valuable assets of ACIL have been taken
away. As observed earlier, the assets of the subsidiary company of
ACIL cannot form part of the CIRP process of ACIL, and factually,
the assets of the 2nd respondent-corporate debtor were not part of
the resolution plan approved in the CIRP of ACIL.
28. Hence, we summarize some of our conclusions as under:
a. Payment of the sum of Rs.38.87 crores to the 1st respondent-
financial creditor under the resolution plan of the corporate
guarantor-ACIL will not extinguish the liability of the
2nd respondent-principal borrower/corporate debtor to pay the
[2024] 7 S.C.R. 2175
BRS Ventures Investments Ltd. v.
SREI Infrastructure Finance Ltd. & Anr.
entire amount payable under the loan transaction after deducting
the amount paid on behalf of the corporate guarantor in terms
of its resolution plan;
b. 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, and
c. 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;
29. Thus, the view taken by NCLAT cannot be faulted. Accordingly, the
appeal is hereby dismissed with no order as to costs.
Result of the case: Appeal dismissed.
†
Headnotes prepared by: Divya Pandey
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