Introduction
The Hon’ble Supreme Court (‘SC’) in the recent case of SKIL Infrastructure Limited. v. Sudip Bhattacharya[i] upheld the observations of the National Company Law Appellate Tribunal (‘NCLT’) that guarantors cannot be treated as financial creditors (‘FC’) and file claims in the corporate insolvency resolution process (‘CIRP’) when no amounts have been paid by them on the invocation of the guarantees. This is an interesting case where the guarantors sought admission of their claims on the strength of certain counter-indemnity clauses and imminent confirmation of liabilities in view of pending legal proceedings before the Debt Recovery Tribunal (‘DRT’).
Brief Facts
A master restructuring agreement was executed between lenders and the SKIL group, of which M/s SKIL Infrastructure Limited (‘Appellant’), under the credit facilities, was secured by the corporate debtor (‘CD’) with personal and corporate guarantees (‘CGs’).
The Appellant, a promoter of the CD, provided a CG while Shri Nikhil Gandhi and Shri Bhavesh Gandhi, who were associated with the Appellant, furnished personal guarantees for financial facilities extended to the CD.
Under a separate contract, the Appellant obtained counter indemnity to cover the loss owing to the default of the CD.
When the CD defaulted, lenders invoked the personal and CGs, however, the Appellant did not pay any payment towards these invoked guarantees.
Legal proceedings for recovery were initiated against both the CD and the Appellant before the DRT. Additionally, an application under s. 7 of the Insolvency and Bankruptcy Code, 2016 (‘IBC’) was filed against the CD, which was admitted by the NCLT.
Following the NCLT’s admission of the application, a public announcement was made to invite claims from creditors. The Appellant submitted its claim as a FC relying on the contract containing the counter indemnity clause.
However, the NCLT rejected the Appellant's claim as a FC, leading to the Appellant challenging this decision in the National Company Law Appellate Tribunal (‘NCLAT’).
The arguments of the Appellant in NCLAT
The Appellant relied on certain agreements whereunder the CD and third parties had undertaken to indemnify the Appellant for any loss suffered due to the enforcement of the guarantees given by the promoter. It was on the basis of this counter-indemnity clause, that the Appellant based its claim as a FC. The Appellant argued that this obligation should be considered in the context of their claim for financial debt, as outlined in s. 5(8)(h) of the IBC.
The Appellant contended that the DRT proceedings were underway, their liability was imminent, and therefore, their claim as a FC was maintainable under s. 5(8)(h) of the IBC, irrespective of whether the claim had matured or not.
The Appellant also argued that in view of s. 125 of the Contract Act, 1872, they were entitled to recover damages from the CD for any loss suffered pursuant to the enforcement of guarantees and therefore their claim was maintainable.
The observations/ findings of NCLAT
The NCLAT observed that the Appellant, as a promoter of the CD, had executed guarantees to secure financial facilities extended by lenders. However, the NCLAT held that being guarantors did not automatically confer FC status upon them, as their obligation was to guarantee repayment rather than to receive financial debt from the CD.
The NCLAT emphasized that the mere initiation of proceedings did not automatically qualify the claim as a financial debt under the IBC.
The NCLAT held that since no payments had been made by the Appellant towards the invocation of guarantees, they had not suffered any loss and therefore the reliance on s.5(8)(h) of the IBC for the claim to be treated as financial debt was held to be incorrect.
Importantly, the NCLAT observed that the contract which contained the counter indemnity clause was entered prior to the contract of guarantee. The NCLAT therefore observed that the counter indemnity obligations could not be said to cover the obligations arising from the contract of guarantee, which was subsequently entered. In other words, the NCLAT also held that there was no clear nexus between the two contractual obligations.
The NCLAT therefore concluded that the claim filed by the Appellant was not a financial debt under s. 5(8)(h) of the IBC. Being aggrieved, the Appellant filed an appeal before the SC.
Observations of the SC
The SC, in a very brief judgment, refused to interfere with the findings of NCLAT and dismissed the appeal of the Appellant.
It observed that the Appellant is a corporate guarantor under the IBC, and its claim against third parties will not make the Appellant a FC against the CD itself.
Our Analysis
The decision assumes significance in the context of the interplay between the personal/CG and counter-indemnity obligations which are routinely entered into. In this case, it has been categorically held that any claim as a financial debt would not be maintainable unless the claim is already existent and cannot be based on future or potential liabilities. The NCLAT’s decision is a fairly detailed and reasoned order touching upon the parties' contractual obligations and various decisions governing the issue.
Further, the decision clarifies the scope of ‘financial debt’ under s.5(8)(h) of the IBC and categorically holds that claims which do not meet the statutory criteria of a financial debt are not admitted under the IBC.
End Note
[i] [2024] 161 taxmann.com 474 (SC) dated 01.04.2024.
Authored by Nitish Solanki, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.