Settlement In Principal Borrower's CIRP Does Not Extinguish Corporate Guarantor's Liability: NCLT Kochi

The National Company Law Tribunal (NCLT) at Kochi has ruled that a settlement reached during the insolvency proceedings of a principal borrower does not, by itself, prevent insolvency proceedings against its corporate guarantor.

The settlement must specifically release the guarantor from its obligations for it to have that effect.

The tribunal observed, “any arrangement or settlement among the members of the Committee of Creditors concerning their inter se rights and obligations cannot, by itself, affect the rights of the Financial Creditor or extinguish the obligations of the Respondent under the Guarantee Agreements. Unless the settlement expressly releases the Corporate Debtor from its guarantee obligations, it cannot bar the present proceedings.”

The order was passed by Judicial Member Vinay Goel and Technical Member Ravichandran Ramasamy on a petition filed by Phoenix ARC Private Limited, trustee of Phoenix Trust FY17-8, against Cherupushpam Films Private Limited.

Phoenix ARC sought initiation of the Corporate Insolvency Resolution Process against Cherupushpam Films as guarantor for loans taken by Kerala Chamber of Commerce and Industry (KCCI).

South Indian Bank had sanctioned credit facilities totalling ₹8.60 crore to KCCI for construction of the Kerala Trade Centre on land belonging to Cherupushpam Films. The company had executed guarantee agreements and created an equitable mortgage over 43.95 cents of land along with the building.

The loan accounts were classified as non-performing assets on September 30, 2013. The debt, along with the underlying securities and rights of the bank, was subsequently assigned to Phoenix ARC in March 2017. The amount claimed in the insolvency petition was ₹14.50 crore.

CIRP had already been initiated against KCCI in February 2022. Phoenix ARC argued that proceedings against Cherupushpam Films were necessary because the land on which the Kerala Trade Centre stood belonged to the company.

Cherupushpam Films disputed its liability. It alleged that signatures of its then managing director on documents relating to the subsequent loan facilities had been forged and that KCCI had diverted the loan proceeds.

The company also raised objections based on limitation, arbitration proceedings between itself and KCCI, and an Enforcement Directorate investigation into the alleged diversion and misappropriation of funds under the Prevention of Money Laundering Act.

It further argued that the resolution process of KCCI had already provided for recovery by Phoenix ARC. Continuing proceedings against Cherupushpam Films would therefore result in double recovery, it contended.

On the forgery allegation, the tribunal noted that the company had not advanced any substantive argument supporting the claim during the hearing. It also found that the defence did not appear to have been raised at the relevant stage and therefore appeared to be an afterthought.

The tribunal rejected the limitation objection. KCCI had acknowledged the debt in its financial statements for the years ending March 31, 2015, March 31, 2017 and March 31, 2018.

Under Section 18 of the Limitation Act, a written acknowledgement of liability made before expiry of the limitation period gives rise to a fresh period of limitation. The tribunal also excluded the COVID-19 period in accordance with the Supreme court's orders and held that the petition was within limitation.

The maintainability objection arose from a settlement recorded by the Kerala High court between members of KCCI's Committee of Creditors. The tribunal held that the settlement did not specifically release Cherupushpam Films from its guarantee obligations.

It also noted that the company's property continued to remain mortgaged with Phoenix ARC as security for the debt.

The tribunal held that insolvency proceedings against the principal borrower and guarantor could proceed simultaneously. Any amount recovered through KCCI's CIRP would have to be accounted for while determining the liability of Cherupushpam Films.

The tribunal found that Phoenix ARC had established the financial debt and default and satisfied the requirements for admission under Section 7. It accordingly admitted the petition and declared a moratorium under Section 14.

Interim Resolution Professional Jossy Steephen Kattur was appointed to conduct the CIRP. The tribunal also directed him to make the required public announcement and take charge of the company's assets and records..

For Petitioners: Advocates Suresh Dobhal and Kevin Thomas

For Corporate Debtor: Advocate Pradeep Joy