Recently, in BRS Ventures vs SREI Infrastructure, the Supreme Court held that insolvency proceedings could be conducted simultaneously against both the principal borrower and a corporate guarantor for the same debt and default. It also ruled that the assets of a subsidiary are not included in the insolvency resolution process of its holding company.

SREI Infrastructure Finance Limited (SREI) extended a loan of ₹100 crore to Gujarat Hydrocarbon and Power SEZ Limited (GHPL), which was secured by a corporate guarantee from its parent company, Assam Company India Limited (ACIL). After GHPL failed to repay the loan, the corporate guarantee issued by ACIL was invoked, leading to initiation of insolvency proceedings against ACIL under the Insolvency and Bankruptcy Code, 2016 (IBC). Previously, BRS Ventures had taken over ACIL through the IBC process, for ₹38 crore in a full and final settlement of debt. 

Subsequently, SREI initiated insolvency proceedings against GHPL for the unpaid loan amount. BRS Ventures opposed, arguing that since the debt was settled during ACIL’s insolvency proceedings, SREI’s rights over the loan would be transferred to BRS.

Additionally, BRS contended that simultaneous insolvency proceedings against GHPL and ACIL were not permissible since the debt had been settled. The National Company Law Appellate Tribunal (NCLAT) rejected BRS Ventures’ objections. The matter then went to the Supreme Court. 

Three questions stood before the SC. First, whether the liability of the principal borrower persists if the corporate guarantor’s liability is extinguished. Second, whether insolvency proceedings could be initiated simultaneously against both the principal borrower and the corporate guarantor for the same debt and default. Third, whether the assets of a subsidiary are included in the insolvency resolution of the holding company. 

The SC affirmed that the liabilities of the surety and the principal borrower are co-extensive; the creditor can proceed against either or both. 

The apex court held that if a creditor recovers a part of the guaranteed amount from the surety and agrees not to pursue the surety for the remaining balance, then this does not extinguish the principal borrower’s remaining debt. In such instances, the creditor can still seek the balance from the principal borrower. Similarly, if there is a compromise or settlement between the creditor and the surety without the principal borrower’s consent, the borrower’s liability to the creditor remains unchanged. As per the Supreme Court, the provisions concerning the discharge of the surety indicate that involuntary acts by the principal borrower or the creditor do not result in the surety’s discharge.

On simultaneous proceedings against the principal borrower and the guarantor, the Court said, yes, since Section 60(2) of IBC allows for separate or simultaneous insolvency proceedings. 

Furthermore, Section 60(3) stipulates that if insolvency proceedings for the principal borrower and the guarantor are pending before different adjudicating authorities, the proceedings against the guarantor should be transferred to the adjudicating authority handling the principal borrower’s case. 

On the inclusion of a subsidiary’s assets in the insolvency resolution proceedings of its holding company, the court emphasised that a holding company and its subsidiary are distinct legal entities. Holding shares in a subsidiary does not make the holding company the owner of the subsidiary’s assets. Citing the Vodafone International vs Union of India case, the court noted that if a subsidiary is wound up, its assets belong to the liquidator, not the holding company. Thus, a subsidiary’s assets cannot be included in the resolution plan of its holding company. 

The SC noted that taking over ACIL through insolvency proceedings did not make BRS a borrower of Gujarat Hydrocarbon. Under the Indian Contract Act, 1872, a corporate guarantor can assume the creditor’s position only to recover the amounts it has paid towards the corporate debtor’s liability to the creditor. If the surety pays the full amount owed under the guarantee, then the Contract Act allows the surety to recover the entire amount from the principal debtor. Thus, the surety acquires the creditor’s rights to recover the amount paid under the guarantee from the principal debtor. However, if the surety only pays part of the amount owed to the creditor, its rights under the Contract Act are limited to recovering the amount it paid. 

Consequently, the Supreme Court determined that BRS’s payments to SREI would only reduce GHPL’s liability to the extent of the amount paid in respect of ACIL, leaving GHPL responsible for the remaining loan. 

(The writers are advocates at Trinity Chambers, Delhi)

Published on August 11, 2024