Ferro Alloys Vs. Rural Electrification [CA (AT) (Insolvency) No. 92 of 2017] - Synopsis
Team SoOLEGAL 19 Nov 2020

In this particular case, Ferro Alloys Vs. Rural Electrification [CA (AT) (Insolvency) No. 92 of 2017], an appeal was lodged by Rural Electrification Corporation Limited ('REC') under section 7 of Insolvency and Bankruptcy Code against Ferro Alloys Corporation Limited ('FACL')-Corporate Guarantor, for a loan issued by FACOR Limited ('Corporate Debtor'). When granting the said facility, a corporate guarantee arrangement was concluded by FACL in favour of REC and shares were also pledged by Corporate Debtor and Corporate Guarantor in favour of REC. Later, the Corporate Debtor defaulted on payment and the account was listed as a Non-Performing Asset (NPA) by the Financial Creditor. Subsequently, Financial Creditor even invoked Corporate Guarantee and requested FACL to refund the unpaid sum. NCLT ruled that according to the Corporate Guarantee Arrangement, Corporate Guarantor had the duty of Corporate Debtor and that its obligation was co-extensive, constant and separate. The claim submitted by REC against the Corporate Guarantor u/s 7 of IBC was then approved by the NCLT. The order was challenged before the NCLAT by Corporate Debtor, one of the owners of Corporate Debtor and Bank of India being one of the financial creditors of Corporate Debtor.
The question to be resolved in the appeal before NCLAT was whether IBC's application under section 7 could be sustained against the Corporate Guarantor without the initiation of CIRP against the Principal Creditor.
NCLAT noted that CIRP can be instituted against a guarantor who is a 'corporate person' and who, by virtue of the statute, (by that very fact or act) becomes a 'corporate debtor' by meeting the contents of the terms as specified in Section 3(8) of IBC. It also noticed that the Corporate Guarantor, that is FACL, had shown the remaining balance in its books of accounts, thereby acknowledging the liability and the default. Although the provisions of the IBC do not stipulate any inter-section rights, duties, and responsibilities of the guarantor qua 'Financial Creditor,' the same must also be noted in the provisions of the Indian Contract Act, which deal specifically and in-depth with the same. Based on the numerous judgments of the Hon'ble Supreme Court, including the one in the case of Kesoram Mills [(1996) 59 ITR 767], in which it held that the responsibility of the firm to pay the debt had arisen when the borrower defaulted in making payments and the creditor submitted a request/notice invoking the guarantee, NCLAT noted that the guarantee had been invoked by REC against FACL. In view of the above, NCLAT held that without initiating any CIRP against the 'Principal Borrower,' it is still available to the 'Financial Creditor' to initiate CIRP u/s 7 against the 'Corporate Guarantor,' as the creditor is also the 'Financial Creditor' qua 'Corporate Guarantor.'

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