Insolvency Action Against Guarantor Inequitable When Arbitration Against Borrower Is Unsettled: NCLT Hyderabad

The Hyderabad Bench of the National Company Law Tribunal (NCLT) declined to admit a petition filed by the State Bank of India (SBI) seeking initiation of insolvency proceedings against Mallampati Madhu, the personal guarantor of TN (DK) Expressways Limited, holding that such action would be inequitable while a substantial arbitral award of Rs. 288.96 crores in its favour remains under challenge and unrealised.

A Bench comprising Judicial Member Rajeev Bhardwaj and Technical Member Sanjay Puri observed:

“In view of the arbitral award (of Rs. 288.96 crores) in favour of the Principal Borrower being substantially higher than the amount of default (of Rs. 138.27 crores)… initiation of CIRP against the guarantor would be discriminatory vis-à-vis the Applicant.”

SBI contended that TN (DK) Expressways, had availed credit facilities of Rs. 224 crores from a consortium of lenders and defaulted in repayment. Mallampati Madhu, had executed a deed of personal guarantee securing the loan, and upon non-payment despite a demand notice, SBI initiated proceedings under Section 95 of the IBC.

While the insolvency action against Madhu under consideration, TN (DK) Expressways secured a major legal victory in an arbitration against the National Highways Authority of India (NHAI). The company was awarded Rs. 288.96 crore, more than double the amount owed to the bank. Although NHAI is currently challenging this award in the Delhi High Court, the sum is potentially sufficient to fully discharge the outstanding debt.

The Tribunal, while holding that the existence of debt and default was established and the petition was within limitation, emphasised that the Adjudicating Authority retains discretion under the IBC to admit such applications.

It relied on Vidarbha Industries Power Ltd. v. Axis Bank Ltd., observing that “surrounding circumstances, including the financial viability of the borrower, are relevant considerations.”

Since the arbitral award of Rs. 288.96 crores in favour of TN (DK) Expressways exceeds the claimed default of Rs. 138.27 crores and relates to the same project, the Tribunal held that initiating insolvency proceedings against the personal guarantor while CIRP against the principal borrower had not been admitted would be premature and discriminatory.

Accordingly, the petition was disposed of with liberty to SBI to revive proceedings if TN (DK) Expressways fails to realise the arbitral award or if circumstances materially change.