Unsuccessful Debt Recovery Under SARFAESI Does Not Prove Fraudulent Insolvency Proceedings: NCLT Delhi

The National Company Law Tribunal (NCLT), New Delhi Bench, has held that unsuccessful enforcement of a bank's debt does not establish that insolvency proceedings were initiated fraudulently. The possibility that the value of secured assets exceeds the outstanding debt is also not sufficient to prove misuse of the insolvency process.

The tribunal made the observations while admitting Indian Bank's insolvency petition against Mahamaya Exports Private Limited. A bench of Judicial Member Manni Sankariah Shanmuga Sundaram and Technical Member Reena Sinha Puri observed:

“The use of SARFAESI remedies, participation in the borrower's CIRP and invocation of a corporate guarantee are consistent remedies directed towards an unpaid bank debt. Unsuccessful enforcement or an asset value said to exceed the debt does not prove that the insolvency application was initiated fraudulently or for a purpose other than resolution”

Indian Bank had approached the tribunal seeking to initiate insolvency proceedings against Mahamaya, which had furnished corporate guarantees for credit facilities extended to ABW Infrastructure Limited.

The bank initially claimed ₹31.37 crore. It later revised the claim to ₹22.19 crore after removing expired and uninvoked bank-guarantee entries. Of this amount, ₹21.99 crore related to two term loans.

Mahamaya argued that the bank had not disbursed any money directly to it. It also contended that the bank was already participating in ABW Infrastructure's insolvency proceedings and that the petition was time-barred. Further, it disputed having guaranteed Term Loan I and argued that the release of the Kapashera property without its consent discharged its liability under the Contract Act.

Rejecting the objection that no money had been disbursed directly to Mahamaya, the tribunal held that Section 5(8)(i) of the Insolvency and Bankruptcy Code includes liability arising from a guarantee for a transaction involving financial debt.

It observed, “Section 5(8)(i) expressly includes the amount of any liability in respect of a guarantee for a transaction falling within Section 5(8)(a) to (h). The term loans were disbursed to ABW Infrastructure Limited against consideration for the time value of money. Mahamaya's guarantees therefore create a financial debt; direct disbursement to the guarantor is not required.”

Relying on the Supreme Court's decision in Laxmi Pat Surana v. Union Bank of India, the tribunal held that a financial creditor can initiate proceedings under Section 7 of the IBC against a corporate guarantor. The creditor need not first exhaust its remedies against the principal borrower.

It also held that the bank's participation in ABW Infrastructure's CIRP did not extinguish Mahamaya's separate liability under the guarantees.

The tribunal held that the bank could proceed against Mahamaya while pursuing ABW, subject to adjustment of recoveries. It found the petition within limitation based on ABW's 2017 acknowledgment. The 2012 guarantee covered Term Loan I, and release of the Kapashera property did not discharge the surviving liability.