Corporate Guarantees Backed By Loans Fall Under ‘Financial Debt’ Under IBC: Supreme Court

New Delhi, Apr 29 (KNN) The Supreme Court has held that a corporate guarantee furnished by a company to secure another company’s borrowing, when backed by arrangements such as hypothecation, qualifies as a “financial debt” under the Insolvency and Bankruptcy Code, 2016 (IBC).

A Bench comprising Justices Pamidighantam Sri Narasimha and Alok Aradhe delivered the ruling while hearing a dispute involving a State Bank of India (SBI)-led consortium and Reliance Infratel Ltd (RITL).

The consortium had sought recognition of its claims in the corporate insolvency resolution process (CIRP) of RITL, the corporate debtor, arguing that the company had issued guarantees for loans extended to group firms such as Reliance Communications (RCOM) and Reliance Telecom, the classification of its account as an NPA entitled the banks to invoke those guarantees and file claims in the insolvency proceedings.

Lower Tribunal Orders Set Aside

Both the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) had rejected the lenders’ claims, prompting an appeal before the apex court.

The key issue before the court was whether such corporate guarantees, issued against loans involving the time value of money, fall within the definition of “financial debt” under Section 5(8) of the Code.

Court Affirms Lenders’ Status

Setting aside the tribunal rulings, the Court held that liabilities arising from corporate guarantees are squarely covered under “financial debt.” It reaffirmed the legal principle that a guarantor’s liability is coextensive with that of the principal borrower and is enforceable in law.

The judgment clarified that guarantees backing loans disbursed for consideration of time value of money meet the requirements under the IBC.

Implications

With this ruling, the SBI-led consortium will be recognised as financial creditors in RITL’s insolvency proceedings, enabling them to participate in the resolution process and recover dues in accordance with the Code.

(KNN Bureau)