Corporate Guarantee Continues Despite Transfer Of Mortgaged Property To New Owner: NCLT Mumbai
The National Company Law Tribunal (NCLT), Mumbai on 24 August held that a Corporate Debtor's liability under a Corporate Guarantee does not end merely because the bank obtains a mortgage from the new owner of the mortgaged property.
A Bench comprising Judicial Member Vinay Goel and Technical Member Charanjeet Singh Gulati admitted Jammu and Kashmir Bank Ltd.'s Section 7 insolvency petition against Essel Infraprojects Limited over a default of Rs. 87.43 crore arising from a Rs. 200 crore credit facility extended to Pan India Utilities Distribution Company Ltd. The Tribunal said:
“Merely because the Bank obtained a mortgage from the new owner of the property would not discharge the Corporate Debtor from its separate liability under the guarantee. There is no document showing that the Bank ever released or discharged the Corporate Debtor from its guarantee. Rather, the guarantee agreement itself provides that the liability of the guarantor would continue even if the Bank accepts additional or substituted security. Therefore, continuation of the mortgage with the new owner of the property cannot, by itself, amount to discharge of the Corporate Debtor from its liability as guarantor.”
The Bank sanctioned the credit facility on 17 December 2013 and disbursed Rs. 125 crore on 28 December and Rs. 75 crore on 30 December. Essel executed a Corporate Guarantee and created a mortgage over 196.16 acres of Gorai Land on 27 December 2013.
After PIUDCL defaulted on the facility, the Bank issued demand notices in January and March 2019. PIUDCL admitted the debt and entered the Corporate Insolvency Resolution Process on 20 September 2019. The Bank demanded payment from Essel on 29 October 2019 and filed the Section 7 petition on 13 November 2023.
Essel argued that the Gorai Land had been transferred under a demerger sanctioned on 4 April 2014 and subsequently to PIIPL under a merger sanctioned on 20 June 2014. It contended that the Bank's subsequent requirement that PIIPL provide fresh security had substituted the earlier arrangement and discharged Essel's guarantee.
The Tribunal rejected the novation argument, finding no express agreement by the Bank to release Essel from the 2013 guarantee. It held that the 2017 sanction arrangement requiring PIIPL to provide additional security did not extinguish the existing guarantee. It further held:
“Clauses 2, 8, 9 and 11, read together, make it clear that the guarantee was an independent and continuing obligation. In particular, Clause 8 expressly provides that the guarantee shall not be determined or prejudiced by any absorption or amalgamation of the Guarantor Company, while Clause 9 stipulates that the guarantee shall be in addition to any other security furnished to the Petitioner.”
The Bench observed that Clauses 2, 8, 9 and 11 of the Corporate Guarantee made it a continuing and independent obligation. Clause 8 provided that the guarantee would not be prejudiced by the absorption or amalgamation of the Guarantor Company, while Clause 9 provided that it would operate in addition to any other security furnished to the Bank.
It held that the transfer of the mortgaged property and continuation of the mortgage with its new owner did not discharge Essel's liability under the Corporate Guarantee. It found that the Bank had established a debt and default exceeding the statutory threshold of Rs. 1 crore.
Accordingly, the NCLT admitted the Section 7 petition, imposed a moratorium and appointed Hemant J. Mehta as the Interim Resolution Professional.
For Petitioner: Adv. Vinodini Srinivasan a/w Adv. Arpita Tiwari
For IRP: Adv. Neha Hajare
For Respondent: Adv. Rohit Gupta a/w Adv. Shakib Dhorjiwala, Adv. Aditi Biswa, Adv. Nateshwari Kadagad i/b Vidhi Partners