NCLT Delhi Admits CIRP Against Prodot Media, Holds Guarantee Liability Survives Borrower's Resolution Plan

The New Delhi Bench of the National Company Law Tribunal (NCLT) on 1 July held that a corporate guarantor's co-extensive liability is not extinguished merely because a Financial Creditor's claim has been partially admitted under the resolution plan of the principal borrower.

Judicial Member Mahendra Khandelwal and Technical Member Atul Chaturvedi admitted an insolvency petition filed by Pashupati Facility and Management Service Pvt. Ltd. against Prodot Media Pvt. Ltd., in its capacity as a corporate guarantor for the loan default of Teriyaki Builders Pvt. Ltd. The Bench observed:

“The mere fact that the Financial Creditor has lodged its claim in the CIRP of the Principal Borrower and that a Resolution Plan proposes partial payment does not extinguish or suspend the independent and co-extensive liability of the Corporate Guarantor. Any amount realized in the CIRP of the Principal Borrower would only reduce the outstanding liability, but cannot bar initiation of proceedings against the Guarantor for the entire debt due and payable as on the date of default.”

On 15 December 2022, Teriyaki Builders Pvt. Ltd. obtained an inter-corporate deposit of Rs. 1.35 crore from Pashupati Facility and Management Service Pvt. Ltd., carrying interest at 8% per annum and repayable within 180 days or on demand. To secure repayment, Teriyaki Builders arranged for two corporate guarantors, including Prodot Media Pvt. Ltd., which executed a Deed of Guarantee and subsequently a Deed of Hypothecation in favour of the Financial Creditor.

The loan remained unpaid, following which CIRP was initiated against Teriyaki Builders on 29 August 2023. The Financial Creditor's claim in those proceedings was admitted to the extent of Rs. 1.40 crore, with the resolution plan proposing payment of Rs. 63.42 lakh. On 1 April 2024, the Financial Creditor invoked the corporate guarantee against Prodot Media, but the company failed to make any payment.

Prodot Media argued that since the Financial Creditor's claim had already been admitted in the CIRP of the principal borrower, initiating insolvency proceedings against the guarantor for the entire amount was not maintainable. It contended that after adjusting the proposed recovery under the borrower's resolution plan, the remaining liability fell below the statutory threshold of Rs. 1 crore.

The Corporate Debtor further argued that a guarantor's liability arises only after invocation of the guarantee and, therefore, interest could not be calculated for the period prior to such invocation. It alleged that the insolvency proceedings were being used as a recovery mechanism.

The Tribunal rejected the submissions and noted that the Deed of Guarantee recorded the Corporate Debtor's obligation to discharge the liabilities of the Principal Borrower in case of default. It further observed that the Deed of Hypothecation reinforced the security arrangement created in favour of the Financial Creditor. The Bench observed:

“In the present case, once the debt and default of the Principal Borrower stand established, and the Corporate Debtor has executed a valid and enforceable guarantee, the Corporate Debtor cannot escape liability. The guarantee being an independent and continuing obligation, the Financial Creditor is legally entitled to invoke the same and proceed under Section 7 of the Code.”

Further, the Bench noted that the loan disbursal and default were established through documentary evidence, including the loan agreement, NeSL records and the invocation notice. It held that the contention that interest could not be calculated before invocation was untenable, as the guarantor's liability arises from the default committed by the Principal Borrower and the guarantee in the present case was a continuing and unconditional obligation.

Accordingly, the NCLT admitted the petition and imposed a moratorium. Rajiv Bajaj was appointed as the Interim Resolution Professional (IRP).

For Applicants: Advocates Kanika Singhal, Deepshikha and Abhyudaya Bisht

For Respondents: Advocates Saket Gogia, Gauri Pande, Man Singh, Sheetal Maggon, Deepesh Meena, Aditya K.S