Summary
Payment under the corporate guarantor’s resolution plan did not discharge the principal borrower’s unpaid debt. The creditor could proceed under Section 7 against the borrower after crediting what it had received. The Court also held that a subsidiary’s assets cannot be included in its holding company’s resolution plan and that any subrogation here could extend only to the amount actually paid.
Issues
- Whether payment in the corporate guarantor’s insolvency resolution extinguished the principal borrower’s remaining liability.
- Whether separate or simultaneous insolvency applications against borrower and guarantor were maintainable.
- Whether the holding company’s resolution included its subsidiary’s assets.
- Whether payment under the guarantor’s plan transferred the creditor’s entire claim by subrogation.
Provisions considered
- Sections 126 and 128, Indian Contract Act, 1872The guarantee creates an obligation distinct from the borrower’s, with co-extensive liability unless the contract provides otherwise; the creditor may pursue either. (¶¶ 14, 18)
- Sections 133–137, Indian Contract Act, 1872Rules releasing a surety through specified contractual dealings do not make the borrower’s unpaid liability disappear upon the guarantor’s involuntary discharge in insolvency. (¶¶ 14, 15, 16)
- Section 140, Indian Contract Act, 1872Any subrogation on the payment made here was confined to the debt actually cleared, leaving the creditor’s claim for the balance intact. (¶¶ 24, 25)
- Section 31, Insolvency and Bankruptcy Code, 2016An approved guarantor resolution plan binds its creditor but does not release the principal debtor’s unpaid balance. (¶¶ 17, 23)
- Section 7 read with Section 60(2) and (3), Insolvency and Bankruptcy Code, 2016Separate or simultaneous insolvency proceedings against the corporate borrower and guarantor are permitted, with the prescribed common forum. (¶¶ 19, 28)
- Section 18 and Section 36(4)(d), Insolvency and Bankruptcy Code, 2016A subsidiary’s own assets are excluded from the holding company’s insolvency assets and liquidation estate; ownership of shares is distinct from ownership of company assets. (¶¶ 20, 21, 27)
Held
- Unless the contract provides otherwise, surety and borrower have co-extensive liability, and the creditor need not first exhaust remedies against the borrower. Their obligations are separate, but aggregate recovery cannot exceed the debt payable. (¶¶ 14, 18)
- The guarantor’s discharge through an approved resolution plan is by operation of law. It does not discharge the borrower; payment of Rs.38.87 crores must be deducted, with the balance remaining recoverable from the borrower. (¶¶ 15, 16, 17, 23, 28)
- The IBC permits a financial creditor to bring separate Section 7 applications against the corporate borrower and corporate guarantor, including simultaneously. (¶¶ 19, 28)
- A holding company owns shares in its subsidiary, not the subsidiary’s assets. Those assets cannot form part of the holding company’s resolution plan, and were not included in ACIL’s approved plan here. (¶¶ 20, 21, 22, 27, 28)
- Section 140 does not transfer an unpaid balance merely because a smaller payment extinguished the guarantor’s liability through insolvency. Even if applicable here, subrogation extended only to the amount paid, without extinguishing the financial creditor’s balance claim. (¶¶ 24, 25, 26)
Result
Appeal dismissed without costs; NCLAT decision sustaining admission of the Section 7 application against the principal borrower upheld.