Case Note & Summary
The Supreme Court allowed the appeal filed by the Appellant Consortium against the order of the National Company Law Appellate Tribunal (NCLAT) which had affirmed the National Company Law Tribunal's (NCLT) order rejecting the consortium's claims as financial creditors. The dispute arose from corporate guarantees executed by Reliance Infratel Limited (RITL), the corporate debtor, in favor of the consortium lenders to secure loans extended to its group entities, Reliance Communications Limited and Reliance Telecom Limited. The corporate debtor had executed a Facility Agreement with Doha Bank in 2010, and later, in 2017, executed corporate guarantees in favor of the consortium. The accounts of the corporate debtor and its group entities were declared non-performing assets in 2016 and 2017. During the Corporate Insolvency Resolution Process initiated in 2018, the consortium submitted claims based on the corporate guarantees. Respondents objected, alleging that the guarantees were preferential, undervalued, and fraudulent, and that they were not properly disclosed or stamped. The NCLT rejected the consortium's claims, holding that there was no proper documentation and that the consortium lenders were not financial creditors. The NCLAT affirmed this decision, citing the timing of the guarantees, lack of disclosure in financial statements, and insufficient stamping. The Supreme Court reversed these findings, holding that a corporate guarantee constitutes a financial debt under Section 5(8) of the Insolvency and Bankruptcy Code, 2016, as it involves disbursal against consideration for the time value of money. The Court noted that the execution of the guarantees was admitted by the corporate debtor's counsel, and the guarantees were verified by the Resolution Professional based on legally valid documents. The Court also held that non-disclosure in financial statements or insufficient stamping does not invalidate the guarantee or the creditor's status. The Court found the concurrent findings of the tribunals to be perverse and set aside the orders, directing that the consortium be treated as financial creditors and the Committee of Creditors be reconstituted accordingly.
Headnote
A) Insolvency Law - Financial Debt - Corporate Guarantee - Section 5(8) IBC, 2016 - Liability arising from corporate guarantee falls within ambit of financial debt - Essential ingredient of financial debt is disbursal against consideration for time value of money - Guarantor incurs coextensive liability with principal borrower - Held that corporate guarantees executed by corporate debtor constitute financial debt under Section 5(8) (Paras 22-23). B) Insolvency Law - Verification of Claims - Improper Verification - Sections 18, 25 IBC, 2016 - Claims verified by IRP based on legally valid documents - Objections regarding non-disclosure in financial statements and insufficient stamping do not invalidate guarantee - Held that rejection of claims on grounds of improper verification was erroneous (Paras 24-25). C) Insolvency Law - Interference with Tribunal Findings - Section 62 IBC, 2016 - Concurrent findings of NCLT and NCLAT can be interfered with if perverse or based on erroneous legal principles - Held that findings of tribunals were perverse and warrant interference (Para 26).
Issue of Consideration
Whether corporate guarantees executed by the corporate debtor constitute 'financial debt' under Section 5(8) of the Insolvency and Bankruptcy Code, 2016; whether claims of appellants were liable to be rejected for non-submission or improper verification of documents; whether findings recorded by tribunals warrant interference under Section 62 of the Code.
Final Decision
Appeal allowed. Orders of NCLT dated 02.03.2021 and NCLAT dated 14.10.2022 set aside. Appellants are declared financial creditors of the corporate debtor. Committee of Creditors to be reconstituted accordingly. No order as to costs.
Law Points
- Corporate guarantee constitutes financial debt under Section 5(8) of IBC
- 2016
- Guarantor's liability is coextensive with principal borrower
- Non-disclosure in financial statements does not invalidate guarantee
- Stamping deficiency does not render guarantee void ab initio
- Concurrent findings of tribunals can be interfered with if perverse
