Introduction
In the case of BRS Ventures Investments Ltd. v. SREI Infrastructure Finance Ltd.[i], the Hon’ble Supreme Court of India addressed crucial aspects of the Insolvency and Bankruptcy Code, 2016 (‘IBC’). The primary issue was whether the approval of a resolution plan for a corporate debtor (‘CD’) extinguishes the obligation of a guarantor. The Supreme Court emphasised that the liability of the guarantor and the principal debtor is co-extensive, allowing a financial creditor (‘FC’) to pursue both parties independently. This ruling clarified that the settlement with the guarantor does not extinguish the remaining debt owed by the principal debtor. As insolvency law continues to evolve, this case highlights the ongoing liabilities of the guarantors and reaffirms the independent nature of their contractual obligations, irrespective of the debtor’s insolvency status.
Brief Facts
This case involved Gujarat Hydrocarbon and Power SEZ Ltd., the CD, which obtained a loan of Rs. 100 crores from SREI Infrastructure Finance Ltd., the FC, under an agreement to set up a special economic zone (‘SEZ’) project. The loan was secured by a mortgage of the CD’s leasehold land, a pledge of shares, and a corporate guarantee from its holding company, Assam Company India Limited (‘ACIL’).
When the CD defaulted on the loan repayment, the FC initiated proceedings before the Debt Recovery Tribunal (‘DRT’) to recover the outstanding amount. Simultaneously, the FC invoked the corporate guarantee and initiated a corporate insolvency resolution professional (‘CIRP’) against ACIL under s. 7 of the IBC. The resolution plan submitted by BRS Venture Investment Ltd. (‘Appellant’) was approved on 20.09.2018. Under this plan, the Appellant made a payment of Rs. 38.87 crores to the FC as a full settlement against an admitted claim of Rs. 241.27 crores, inclusive of the principal amount.
Despite the settlement through the resolution plan for the corporate guarantor, the FC later filed a second application under s. 7 of the IBC against the CD, claiming Rs. 1428 crores, which included the balance due from the original loan facility. The CD opposed this application, arguing that it was barred by principles of estoppel and limitation, contending that the settlement with ACIL should preclude further claims for the same debt.
The National Company Law Tribunal (‘NCLT’) rejected the CD’s plea and proceeded to initiate CIRP against it. The CD then appealed to the National Company Law Appellate Tribunal (‘NCLAT’), which also dismissed the appeal.
The matter was subsequently brought before the Supreme Court, where the CD argued that the FC could not pursue the remaining debt from the principal borrower after partially settling the guaranteed amount with the guarantor.
Held
The Supreme Court dismissed the appeal and upheld the decision of the NCLAT and NCLT, observing that the liability of the guarantor and the principal debtor is co-extensive, as per s. 128 of the Indian Contract Act, 1872 (‘Contract Act’), meaning that the FC has the right to recover the debt from either the principal borrower or the guarantor.
The Supreme Court affirmed that an FC could proceed against the guarantor first without extinguishing its remedies against the principal borrower. Even if the creditor recovers part of the amount guaranteed by the guarantor and agrees not to proceed against the guarantor for the remaining balance, this does not extinguish the debt owed by the principal borrower.
Furthermore, the Supreme Court held that the contract between the creditor and the guarantor is independent of the approval of the resolution plan for the principal borrower. Therefore, the discharge of the guarantor by operation of law or involuntary process does not discharge the principal borrower from its liability. The Court upheld that simultaneous insolvency proceedings can be initiated against the CD and the guarantor under the IBC, reflecting that their liabilities are distinct and separate.
The Court rejected the Appellant’s claim that the assets of the CD were part of the CIRP concerning ACIL, ruling that the assets of a subsidiary company cannot be included in the resolution plan of its holding company. It was emphasised that the assets of an Indian subsidiary of a CD are not to be included in the liquidation estate assets as per s. 36(4)(d) of the IBC, reinforcing the principle that a holding company does not own the assets of its subsidiaries.
In this case, ACIL's CIRP process did not discharge the CD from its obligation to repay the loan amount. The CD’s liability to repay the loan, minus the amount recovered from the corporate guarantor, remained intact. Thus, the Supreme Court upheld the impugned order passed by NCLAT, affirming the FC’s right to proceed against the principal borrower for the balance amount owed.
Our Analysis
This judgment is highly significant for India’s insolvency jurisprudence. It reaffirms that a guarantor’s obligations remain intact regardless of the principal debtor's insolvency proceedings. Further, the judgment reinforces the principle that a holding company and its subsidiaries are distinct legal entities, and their assets cannot be conflated during insolvency proceedings. This ensures that the corporate veil is respected and that shareholders’ rights in subsidiaries remain protected during liquidation or resolution processes.
This ruling, grounded in s. 128 of the Contract Act states that a guarantor’s liability is co-extensive with the principal debtor, strengthening creditor confidence and reinforcing the robustness of financial contracts under the IBC framework. The judgment also clarifies that FCs can independently and simultaneously initiate proceedings against both the principal debtor and the guarantor under s. 7 of the IBC, ensuring multiple avenues for debt recovery and setting a precedent that will influence the drafting and negotiation of future financial contracts.
End Note
[i] [2024] 165 taxmann.com 157 (SC), [22-07-2024].
Authored by Siddharth Jha, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.
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