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AI Drafter ✕ Generate professional replies, appeals, opinions to Show Cause Notices, assessment orders, audit objections, and other legal communications using TaxTMI's AI Drafter.
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Issues: (i) Whether an asset reconstruction company acquiring financial assets under section 5 of the SARFAESI Act could be treated as the lender and invoke section 7 of the IBC on the basis of an unregistered assignment agreement. (ii) Whether, after admission of a section 7 application against the principal borrower, a separate section 7 application against the corporate guarantor for the same debt and default was maintainable.
Issue (i): Whether an asset reconstruction company acquiring financial assets under section 5 of the SARFAESI Act could be treated as the lender and invoke section 7 of the IBC on the basis of an unregistered assignment agreement.
Analysis: The assignment was made in the statutory mode contemplated by section 5(1)(b) of the SARFAESI Act. On such acquisition, section 5(2) operates by deeming the asset reconstruction company to be the lender and vesting in it all rights of the bank or financial institution in relation to the financial assets. The deeming fiction had to be given full effect. The challenge based only on absence of registration did not defeat the statutory consequence flowing from a valid acquisition under the special enactment.
Conclusion: The asset reconstruction company was entitled to be treated as lender and to maintain the section 7 application.
Issue (ii): Whether, after admission of a section 7 application against the principal borrower, a separate section 7 application against the corporate guarantor for the same debt and default was maintainable.
Analysis: The obligation of a corporate guarantor is coextensive with that of the principal borrower under section 128 of the Contract Act. In view of the later Supreme Court authority relied upon, the financial creditor could proceed against the principal borrower as well as the guarantor in equal measure. The earlier view restricting a second admission on the same claim could not be applied to defeat the proceeding against the guarantor in the facts of the case. The admitted debt and default were not in dispute.
Conclusion: The section 7 proceeding against the corporate guarantor was maintainable.
Final Conclusion: The impugned order admitting the insolvency application was upheld and the challenge failed.
Ratio Decidendi: A financial asset validly acquired by an asset reconstruction company under section 5 of the SARFAESI Act vests lender status in the assignee by statutory deeming fiction, and a financial creditor may also proceed under section 7 of the IBC against a corporate guarantor notwithstanding an admitted proceeding against the principal borrower, because the guarantor's liability is coextensive with that of the borrower.
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