Corporate guarantee and consortium financing rights upheld for Section 7 insolvency initiation despite trustee structure challenges.

A corporate guarantee given for consortium financing was held not to be void merely because of alleged non-compliance with Section 186 of the Companies Act, 2013; at most, such breach would attract the statutory penalty. The absence of a direct bilateral contract between the lead lender and the corporate debtor did not defeat enforcement, because the security trustee structure and guarantee deed preserved the lenders' rights as beneficiaries. The lead lender was found competent to initiate Section 7 proceedings without a formal unanimous consortium meeting, since the other lenders supported the action. Alleged financial viability and going-concern status did not bar insolvency initiation on these facts, and CIRP admission was sustained.

---

---

Issues: (i) Whether the corporate guarantee dated 10.06.2016 was void for alleged violation of Section 186 of the Companies Act, 2013; (ii) whether there was no privity of contract between the lead lender and the corporate debtor; (iii) whether only the security trustee could initiate proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016, and not the lender; (iv) whether the lender could file the Section 7 application without a formal meeting and authorisation of all consortium lenders; and (v) whether the corporate debtor's alleged financial viability and going-concern status barred initiation of insolvency proceedings.

Issue (i): Whether the corporate guarantee dated 10.06.2016 was void for alleged violation of Section 186 of the Companies Act, 2013.

Analysis: The guarantee was executed by the corporate debtor for financial facilities extended to a closely held group concern controlled by the same family members. The Tribunal noted that the corporate debtor had signed the guarantee after a board resolution and that the lending structure was part of a group financing arrangement. It held that any non-compliance with Section 186 did not wipe out the guarantee or the lender's rights, and at most attracted the statutory penalty prescribed for contravention.

Conclusion: The plea that the guarantee was void was rejected.

Issue (ii): Whether there was no privity of contract between the lead lender and the corporate debtor.

Analysis: The Tribunal held that the transaction was structured through a security trustee for the benefit of the entire consortium. It relied on the guarantee deed and security trustee arrangement to hold that the lenders were beneficiaries of the trust created under the contractual documents and could enforce their rights. The absence of a direct bilateral contract between the lead lender and the corporate debtor did not defeat enforcement.

Conclusion: The objection based on lack of privity of contract failed.

Issue (iii): Whether only the security trustee could initiate proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016, and not the lender.

Analysis: Reading the inter se agreement, security trustee agreement and guarantee deed together, the Tribunal found that the lenders' rights to proceed against the guarantor were preserved. It held that where the trustee acts for the benefit of the consortium, the lead lender is entitled to initiate insolvency proceedings on the basis of the debt and the guarantee, despite the interposed trustee structure.

Conclusion: The lender was competent to file the Section 7 application.

Issue (iv): Whether the lender could file the Section 7 application without a formal meeting and authorisation of all consortium lenders.

Analysis: The Tribunal found that the other lenders supported the insolvency action and had intervened in the proceedings. It accepted that the lead bank's action was not unilateral in the relevant sense and that the consortium members had not opposed the initiation of proceedings.

Conclusion: The challenge based on absence of formal consortium authorisation was rejected.

Issue (v): Whether the corporate debtor's alleged financial viability and going-concern status barred initiation of insolvency proceedings.

Analysis: The Tribunal held that the offer of a very small settlement amount against a large admitted liability did not establish a viable ground to resist CIRP. It also held that the cited going-concern principle did not assist the corporate debtor on the facts, especially when the debt and guarantee obligations remained enforceable.

Conclusion: The plea based on viability and going-concern status was rejected.

Final Conclusion: The Tribunal found no merit in any of the challenges to the admission of insolvency proceedings and sustained the initiation of CIRP against the corporate debtor.

---