Pending Civil Suit and ‘Contingent’ Liability No Bar to CIRP Against Corporate Guarantor: NCLAT

Pending Civil Suit and ‘Contingent’ Liability No Bar to CIRP Against Corporate Guarantor: NCLAT

Introduction

The National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi, has dismissed an appeal filed by a suspended director of a corporate guarantor, reaffirming that once default by the principal borrower is established, insolvency proceedings against the corporate guarantor can be validly initiated under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC). The Tribunal held that disputes regarding enforceability of guarantees, pendency of civil suits, and characterisation of liability as “contingent” in balance sheets do not, by themselves, bar the initiation of the Corporate Insolvency Resolution Process (CIRP).

Factual Background

Vivek Brothers Pvt. Ltd., the corporate debtor, had stood as a corporate guarantor for working capital facilities amounting to ₹20 crore extended by a consortium of banks led by Central Bank of India to M/s Eastern Gases Ltd. in November 2012. As part of the security package, the corporate debtor executed a deed of corporate guarantee on 5 February 2013 and also mortgaged nine residential flats.

In January 2016, a supplemental working capital agreement was executed, pursuant to which a second deed of guarantee was signed. The principal borrower’s account was classified as a Non-Performing Asset (NPA) on 2 May 2017, followed by initiation of CIRP against the principal borrower, which ultimately culminated in liquidation in August 2018. Although the bank recovered a portion of its dues during liquidation, a substantial shortfall remained unpaid.

The bank thereafter issued multiple demand notices to the corporate guarantor, including under SARFAESI. In response, the corporate debtor instituted a civil suit in 2022 seeking cancellation of the guarantee and release of mortgaged properties. Subsequently, in March 2024, Central Bank of India filed a Section 7 application under the IBC against the corporate guarantor for recovery of the remaining dues with interest.

Procedural Background

The National Company Law Tribunal (NCLT), Kolkata Bench, admitted the Section 7 application and initiated CIRP against the corporate guarantor. The suspended director of the corporate debtor challenged this order before the NCLAT, contending that the guarantee was unenforceable, time-barred, and discharged by subsequent events, including a sanction letter dated 30 June 2016 and restructuring of the loan facilities.

Issues

1. Whether a valid and enforceable financial debt existed against the corporate guarantor.

2. Whether the corporate guarantees stood discharged or were unenforceable.

3. Whether the Section 7 application was barred by limitation.

4. Whether pendency of a civil suit challenging the guarantee barred initiation of CIRP.

5. Whether disclosure of liability as “contingent” in balance sheets constituted acknowledgment of debt.

Contentions of the Parties

The appellant contended that a corporate guarantee does not create a debt in praesenti but only a contingent obligation, which becomes enforceable only upon proper invocation within limitation. It was argued that the first guarantee was time-bound and stood discharged due to restructuring and variation of loan terms without the guarantor’s consent, attracting Section 133 of the Indian Contract Act. The second guarantee, according to the appellant, was only a draft with blank spaces and never crystallised into a binding contract.

The appellant further relied on a sanction letter dated 30 June 2016, claiming that the bank had relinquished the guarantee and security interests, thereby discharging the guarantor. It was also argued that the Section 7 application was barred by limitation, as the principal borrower’s account had become NPA in 2017 and the petition was filed only in 2024. The balance sheet disclosures, the appellant argued, reflected only a contingent liability and could not amount to acknowledgment.

The respondent bank countered that both guarantees were valid, continuing, and duly executed. It submitted that the sanction letter of 30 June 2016 was merely a proposal that never fructified into a binding arrangement. The bank contended that invocation of the guarantee was duly effected through statutory demand notices and that limitation was saved by repeated acknowledgments in the corporate debtor’s audited balance sheets. The pendency of a civil suit, it was argued, had no bearing on admission of a Section 7 application.

Reasoning and Analysis

The bench of Justice N.Seshasayee (Judicial Member) and Indevar Pandey (Technical Member) examined each defence raised by the appellant and found them unsustainable. It held that the recital in the second guarantee could not discharge obligations under the first guarantee, especially when both guarantees involved the same guarantor. The Tribunal observed that recitals merely set the background and do not override operative contractual terms.

On the alleged unenforceability of the second guarantee, the Tribunal held that the presence of blank spaces in non-operative portions of a standard-form guarantee did not render it void. The appellant failed to demonstrate how such omissions created material ambiguity affecting enforceability.

The argument that the first guarantee was time-bound was rejected outright, with the Tribunal noting that the guarantee expressly described itself as a “continuing guarantee” with co-extensive liability, consistent with settled law.

With respect to the sanction letter dated 30 June 2016, the Tribunal found that it was a conditional proposal that never matured into a concluded contract. There was no evidence of compliance by the principal borrower or issuance of any release or no-objection certificate by the bank. Consequently, no discharge of the guarantee could be inferred.

The Tribunal also rejected the argument under Section 133 of the Contract Act, holding that no material alteration of the contract affecting the guarantor’s liability was established.

On limitation, the NCLAT clarified that a guarantor’s liability is co-extensive and not contingent in law. Merely describing it as “contingent” in balance sheets does not alter its legal character. The consistent reflection of liability in audited balance sheets constituted acknowledgment under Section 18 of the Limitation Act, thereby extending the limitation period.

Finally, the Tribunal reiterated that pendency of a civil suit does not bar proceedings under Section 7 of the IBC, which are summary in nature and concerned only with existence of debt and default, not adjudication of complex contractual disputes.

Decision

The NCLAT found no infirmity in the order of the NCLT admitting the Section 7 application. It held that the financial debt and default were duly established, the guarantees were valid and enforceable, and the application was within limitation. Accordingly, the appeal was dismissed, and the initiation of CIRP against the corporate guarantor was upheld.

In this case the appellant was represented by Mr. Dwaiyapan Banerjee and Mr. Vishesh Kalra, Advocates. Meanwhile the respondent was represented by Mr. Vaibhav Gaggar, Sr. Advocate with Mr. Tushar Singh, Ms. Aastha Kaushik, Ms. Ambika Singh, Mr. Vansh Shrivastav and Ms. Akshara Arshi, Advocates.