Stamp Duty Is A Fiscal Measure To Secure Revenue; Cannot Be Used To Defeat Creditors' Claims: Supreme Court

A bench of Justices Pamidighantam Sri Narasimha and Alok Aradhe set aside the March 2, 2021 order of the NCLT and the October 14, 2022 judgment of the NCLAT, which had rejected the claims of the SBI-led consortium of lenders against Reliance Infratel Ltd. on grounds including insufficient stamping, non-disclosure and lack of proper verification and denied them status as financial creditors..

The court said that the legal position on insufficient stamping is well-settled and such a defect is curable in nature. Clarifying that deficiency of stamp duty does not go to the root of the validity of the instrument, the court observed:

“The production of corporate guarantees in a proceeding in New Delhi, does not attract the provisions of Maharashtra Stamp Duty Act, 1958. In any case, the legal position governing the effect of insufficiently stamped document is no longer res integra and the same does not become void or unenforceable merely on that account. The defect of insufficient stamping of the document is curable in nature and does not go to the root of validity of the instrument. Even otherwise, the Stamp Act is a fiscal measure enacted to secure revenue for the State on certain classes of instrument. It is not intended to be used as a weapon by a litigant to defeat the cause of the opponent.”

The ruling came in an appeal arising out of insolvency proceedings initiated by Doha Bank against Reliance Infratel, admitted into CIRP on May 15, 2018, where the validity of corporate guarantees was questioned on grounds of stamping, non-disclosure and verification. The NCLT and NCLAT had rejected the lenders' claims on these grounds.

Disagreeing with the tribunals' findings, the court held that liabilities arising from corporate guarantees fall within “financial debt” under Section 5(8) of the IBC, and that guarantors incur coextensive liability with the principal borrower.

“The corporate guarantees executed by the corporate debtor constitute “financial debt” within the meaning of Section 5(8) of the Code. The appellants are entitled to be recognized as financial creditors.”

The court also noted that disclosures regarding the guarantees had been made on an ongoing basis and held that mere non-disclosure in certain financial years would not defeat creditor claims. It said:

“It is pertinent to note that in the communication dated 19.03.2019 sent by the counsel of the CD, it is stated that disclosures about the corporate guarantees have been made by the CD in their financial statements on an ongoing basis. In any case, mere non-disclosure of corporate guarantee in the financial statements of CD for financial years 2016-17 and 2017-18, cannot deprive the appellants from making a claim on the basis of the said guarantees. At best, it could be treated as default committed by the CD.”

Accordingly, finding the orders to be perverse, the court set them aside, recognised the consortium as financial creditors and directed the Resolution Professional to reconstitute the Committee of Creditors.