SC: Company guarantor can face insolvency motion

NEW DELHI: The Supreme Court docket on Friday dominated {that a} financial institution can provoke proceedings beneath the Insolvency and Chapter Code (IBC) towards a company guarantor if the principal borrower defaults on compensation of loans and the debt is said nonperforming asset (NPA).
A bench of Justices A M Khanwilkar, B R Gavai and Krishna Murari rejected the argument that because the principal borrower was not a company individual, the monetary creditor couldn’t have invoked treatment of insolvency decision proceedings beneath Part 7 of the IBC towards the company individual, who had merely supplied assure for such mortgage account.
“That motion can nonetheless proceed towards the guarantor being a company debtor, consequent to the default dedicated by the principal borrower. There isn’t any motive to restrict the width of Part 7 of the IBC, regardless of legislation allowing initiation of company insolvency decision course of (CIRP) towards the company debtor, if and when default is dedicated by the principal borrower. For, the legal responsibility and obligation of the guarantor to pay the excellent dues would get triggered co-extensively,” the bench mentioned.
Writing the judgment for the bench, Justice Khanwilkar mentioned Part 7 of the IBC enabled the monetary creditor to provoke CIRP towards the principal borrower if it was a company individual, together with towards the company individual being a guarantor in respect of loans obtained by an entity not being a company individual.
Explaining the mandate of the availability, the bench mentioned, “Part 7 is an enabling provision which allows the monetary creditor to provoke CIRP towards a company debtor. The company debtor might be the principal borrower. It will also be a company individual assuming the standing of company debtor having supplied assure, if and when the principal borrower/debtor (be it a company individual or in any other case) commits default in cost of its debt.”
The SC mentioned undoubtedly, a proper or explanation for motion could be accessible to the lender (monetary creditor) to proceed towards the principal borrower, in addition to the guarantor, in equal measure in case they commit default in compensation of the quantity of debt performing collectively and severally.

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