Corporate guarantee default on demand sustains section 7 admission, with limitation and section 10A objections rejected

In a section 7 proceeding against a corporate guarantor under a demand guarantee, default arose on invocation of the guarantee and failure to pay, so the date of default of the principal borrower was not determinative. On that basis, the limitation objection and the section 10A objection were rejected. The record of disbursal, execution of corporate guarantees, invocation, and non-payment established financial debt and default, and the complete, duly authorised application was admitted. CIRP was initiated against the corporate debtor, moratorium applied, and an interim resolution professional was appointed.

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Issues: (i) Whether the section 7 petition against the corporate guarantor was within limitation and not barred by section 10A of the Insolvency and Bankruptcy Code, 2016; (ii) Whether debt and default were established so as to admit the petition and commence CIRP.

Issue (i): Whether the section 7 petition against the corporate guarantor was within limitation and not barred by section 10A of the Insolvency and Bankruptcy Code, 2016.

Analysis: The guarantee was stated to be payable on demand, and the demand notice was issued on 06.03.2023. In such cases, default by the guarantor arises upon demand and failure to pay, and the date of default of the principal borrower is not determinative for the guarantor. On that basis, the petition was treated as within limitation and outside the section 10A period.

Conclusion: The limitation objection and the section 10A objection were rejected.

Issue (ii): Whether debt and default were established so as to admit the petition and commence CIRP.

Analysis: The records showed disbursal of financial facilities, execution of corporate guarantees, invocation of guarantee, and non-payment after demand. The amount advanced was treated as financial debt, and the application was found complete and properly authorised. Once financial debt and default were proved, admission of a section 7 petition followed.

Conclusion: Debt and default were established and the petition was admitted, with initiation of CIRP against the corporate debtor.

Final Conclusion: The corporate debtor was brought into CIRP, moratorium was triggered, and an interim resolution professional was appointed.

Ratio Decidendi: In a section 7 proceeding against a corporate guarantor under a demand guarantee, default occurs upon invocation of the guarantee and non-payment, and once financial debt and default are established, the petition must be admitted.

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