Recently, the Supreme Court held that corporate guarantees executed by a corporate debtor constitute “financial debt” within the meaning of Section 5(8) of the Insolvency and Bankruptcy Code, 2016, and that lenders secured through such guarantees are entitled to recognition as “financial creditors” in insolvency proceedings. The Apex Court overturned concurrent findings of the NCLT and NCLAT excluding the SBI-led consortium from the Committee of Creditors during CIRP proceedings of Reliance Infratel Limited. The Court observed that the findings rejecting the consortium’s claims were “glaring and manifest” instances of perversity warranting interference even in a second appellate jurisdiction.
Brief facts:
The case arose from insolvency proceedings initiated against Reliance Infratel Limited under the Insolvency and Bankruptcy Code, 2016, where a dispute emerged regarding the status of an SBI-led consortium of lenders claiming to be “financial creditors” on the basis of corporate guarantees and security documents executed by the Corporate Debtor in relation to loans advanced to Reliance Communications Limited and Reliance Telecom Limited. Following financial distress and classification of the group entities as Non-Performing Assets (NPAs), corporate guarantees were executed in favour of the consortium lenders as part of restructuring arrangements.
However, during the Corporate Insolvency Resolution Process (CIRP), Doha Bank challenged the validity and enforceability of those guarantees on grounds including improper stamping, defective verification, and alleged execution after default had already occurred. Although the Resolution Professional admitted the consortium’s claims, the NCLT and subsequently the NCLAT refused to recognise the consortium lenders as “financial creditors” under Sections 5(7) and 5(8) of the IBC, leading the SBI consortium to approach the Apex Court under Section 62 of the IBC, challenging the exclusion from the Committee of Creditors.
Contentions of the Appellants:
The Appellants argued that liabilities arising from corporate guarantees squarely fall within the definition of “financial debt” under Section 5(8) of the IBC, thereby making the consortium lenders valid “financial creditors.” The Counsel submitted that the corporate guarantees and Deed of Hypothecation had been duly executed, properly stamped, and verified by the Resolution Professional after inspection of original records. The Appellants also relied upon communications issued on behalf of the Corporate Debtor acknowledging execution of the guarantees and disclosure of the same in financial statements and annual reports. The Counsel further contended that the NCLT and NCLAT had ignored settled legal principles recognising corporate guarantees as financial debt and had returned findings contrary to the record and established law.
Contentions of the Respondent:
The Counsel for Doha Bank and other Respondents questioned the validity and enforceability of the corporate guarantees, contending that they were executed after the Corporate Debtor and its group entities had already slipped into financial distress and been classified as NPAs. The Respondent further argued that the guarantees were not disclosed in the financial statements for the financial years 2016-17 and 2017-18 and had been withheld before the NCLT. The Counsel also raised objections regarding insufficiency of stamp duty and alleged non-compliance with Section 186 of the Companies Act, 2013, submitting that no special resolution had been passed despite the substantial value of the guarantees. On these grounds, it was contended that the consortium lenders could not be treated as “financial creditors” under the IBC.
Observation of the Court:
The Division Bench of Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe observed that “A liability arising from the corporate guarantee squarely falls within the ambit of financial debt as defined under Section 5(8) of the Code. The amount of any liability in respect of any of the guarantees for money borrowed against the payment of interest is a “financial debt” within Section 5(8) of the Code. It is well settled legal proposition that a guarantor incurs a coextensive liability with that of a principal borrower and such liability is enforceable in law.”
The Court observed that the statutory framework of Sections 5(7) and 5(8) of the Insolvency and Bankruptcy Code clearly recognises liabilities arising out of corporate guarantees as “financial debt,” since such transactions carry the essential feature of disbursal against consideration for the time value of money. The Bench reiterated that a guarantor incurs coextensive liability with the principal borrower and such liability remains enforceable in law. The Court therefore held that lenders secured through valid corporate guarantees are entitled to be treated as “financial creditors” under the IBC framework.
The Bench further observed that the execution of the corporate guarantees by the Corporate Debtor stood conclusively established from the material available on record, including communications issued on behalf of the Corporate Debtor acknowledging the guarantees and their disclosure in financial statements and annual reports. Rejecting allegations that the guarantees were suspicious or fabricated, the Bench held that once execution had been admitted, their validity could not subsequently be questioned.
The Court also clarified that the timing of the guarantees could not be treated as suspicious merely because the Corporate Debtor was undergoing financial distress, particularly when the guarantees had been executed as part of restructuring arrangements prior to reclassification of accounts as NPAs.
The Bench emphasised that technical objections relating to non-disclosure in financial statements, verification, or insufficiency of stamp duty could not defeat otherwise valid claims arising from the guarantees. The Court held that defects relating to stamping are curable in nature and do not render an instrument void or unenforceable, observing that stamp laws cannot be used as a technical weapon to defeat legitimate claims.
Finally, the Court concluded that the tribunals had grossly erred in excluding the consortium lenders from the category of financial creditors despite the admitted execution of the guarantees and supporting material on record.
The decision of the Court:
Allowing the appeal, the Apex Court quashed the judgments of the NCLAT and NCLT, and recognised the SBI-led consortium as “financial creditors” of the corporate debtor. The Resolution Professional was directed to reconstitute the Committee of Creditors by including the appellants and to continue the CIRP in accordance with law.
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