NCLT Ahmedabad Admits CIRP Against JSW Subsidiary, Holds Guarantor Liability Co-extensive With Borrower

The Ahmedabad Bench of the National Company Law Tribunal (NCLT) on 17 June held that insolvency proceedings against a corporate guarantor cannot be made conditional on the realisation of assets of the principal borrower and reaffirmed that a guarantor's liability remains co-extensive with that of the principal debtor under Section 128 of the Indian Contract Act, 1872.

Judicial Member Chitra Hankare and Technical Member Dr. V.G. Venkata Chalapathy admitted the insolvency petition filed by Krishkan Investment Pvt. Ltd. against Utkal Steels Ltd., a subsidiary of JSW Steel initiated the Corporate Insolvency Resolution Process (CIRP), and appointed Pankaj Bhattad as Interim Resolution Professional (IRP). The Bench held:

“The realization of the assets of the principal borrower are matters to be dealt with within the CIRP of the principal borrower and cannot be made a precondition for initiation of insolvency proceedings against the Corporate Guarantor. Further, in terms of Section 128 of the Indian Contract Act, 1872, the liability of a guarantor is co-extensive with that of the principal borrower.”

Krishkan Investment Pvt. Ltd., a non-banking financial company, sanctioned an MSME business loan facility of Rs 4 crore to Cubatics Processors India Pvt. Ltd. in September 2024. Cubatics secured the facility by creating a charge over its 2.10 MW wind energy project and executing a deed of hypothecation. Utkal Steels Ltd., along with two other entities, furnished corporate guarantees under a Deed of Guarantee dated 2 September.

The principal borrower initially serviced the loan but later defaulted and admitted its inability to repay by January. Despite repeated follow-ups, notices, and emails, neither the borrower nor the guarantors discharged the liability.

Krishkan Investment issued a recall notice on 26 February, demanding repayment within seven days. When payment did not follow, it recorded the default on 4 March. As of 15 April, the outstanding amount stood at Rs 4,16,51,899, inclusive of interest at 12% per annum and penal interest at 3% per annum.

Utkal Steels opposed the petition, arguing that it did not sign the sanction letter and that the creditor prematurely recalled the 60-month loan after two EMI defaults. It further contended that the creditor should have proceeded first against the principal borrower and the primary security before invoking the corporate guarantee.

It also pointed to another guarantor, Artex Textiles Pvt. Ltd., and the wind energy project valued at Rs 7 crore, arguing that enforcement should have begun there. It stated that it faced financial distress due to client defaults and asset slump sales and sought time to regularise dues while claiming it remained a going concern.

The Tribunal held that Utkal Steels executed the Deed of Guarantee and accepted co-extensive liability. It relied on the sanction letter, guarantee deed, recall notice, and account statements to establish financial debt and default. It rejected the argument on prior enforcement of security and noted that the principal borrower already underwent CIRP under an order dated 25 March. It held that asset realisation in that CIRP could not delay proceedings against the guarantor.

The Bench also recorded that Utkal Steels admitted financial difficulties and inability to repay, which amounted to acknowledgment of liability. It found that financial debt and default stood established.

Accordingly, the NCLT admitted the petition and triggered CIRP against Utkal Steels Ltd.