Lenders can move insolvency plea against guarantor without initiating CIRP for defaulting firm: NCLAT

New Delhi: The National Company Law Appellate Tribunal (NCLAT) has held that the lenders of defaulting companies can initiate corporate insolvency resolution process against corporate guarantors without invoking Corporate Insolvency Resolution Process (CIRP) for the principal borrowers. A three-member bench of the appellate tribunal in a judgement said that corporate guarantors are also financial creditors. “We hold that it is not necessary to initiate Corporate Insolvency Resolution Process against the principal borrower before initiating ‘Corporate Insolvency Resolution Process’ against the corporate guarantors.” [caption id=“attachment_5107021” align=“alignleft” width=“380”] Representational image. News 18[/caption] “Without initiating any CIRP against the principal borrower, it is always open to the financial creditor to initiate CIRP under Section 7 against the corporate guarantors, as the creditor is also the financial creditor’ qua (being) corporate guarantor,” said NCLAT bench headed by chairman Justice S J Mukhopadhaya. Section 7 of the Insolvency and Bankruptcy Code (IBC) empowers a financial creditor either by itself or jointly with other financial creditors to file insolvency plea against its corporate debtor before the National Company Law Tribunal (NCLT). It also allows the lenders to suggest name of person to act as the resolution professional of the company. “The provision of the I and B Code do not bar a ‘financial creditor’ from initiating CIRP against the guarantor, who comes within the meaning of corporate debtor,” said the NCLAT. NCLAT’s direction came earlier this month over a batch of petitions filed against an order of the NCLT Kolkata bench, where it has allowed the insolvency plea filed by the state-owned Rural Electrification Corporation (REC) against Ferro Alloys Corporation. REC had sanctioned a loan aggregating Rs 517.90 crore to Facor Power in May, 2009. For that, a corporate guarantee agreement was signed with Ferro Alloys, which had later pledged 19.80 crore shares. Later, Facor Power defaulted on repayment of dues and its account was classified as non-performing asset (NPA). Following this, lenders invoked the corporate guarantee and asked Ferro Alloys to pay the amount, due and payable by Facor Power, amounting to Rs 564.63 crore as on 30 September, 2015. The tribunal had on 6 July, 2017 admitted the application filed by REC under Section 7 and this was challenged before NCLAT by Ferro Alloys. However, NCLAT dismissed the appeal and said that as guarantee was invoked by REC against Ferro Alloys and demand was raised, the latter became a corporate debtor of REC. The bench also observed that in its annual report for FY 2016-17, Ferro Alloys had shown Rs 517.90 crore payable to the financial creditor and it was clear that the firm admitted the debt and in absence of payment, it was default.     To keep watching India’s No. 1 English Business News Channel – CNBC-TV18, call your Cable or DTH Operator and ask for the Colors Family Pack (inclusive of 24 channels), available for Rs. 35/- per month, or subscribe to the channel for Rs. 4/- per day. To keep watching the Leader in Global Market & Business News – CNBC-TV18 Prime HD, call your Cable or DTH Operator and ask for the Colors Family HD Pack (inclusive of 25 channels), available for Rs. 50/- per month, or subscribe to the channel for Rs. 1/- per day.