Personal guarantors excluded from Committee of Creditors as they lack financial creditor status under Section 5(8)(i) IBC

NCLAT dismissed appeal challenging exclusion of personal guarantors from Committee of Creditors. The tribunal held that under Section 5(8)(i) of IBC, guarantors cannot be considered financial creditors merely by providing guarantee unless actual liability has arisen and payment made in discharge of guarantee. Personal guarantors who had not made any payment to discharge their guarantee to the bank could not be treated as financial creditors of corporate debtor nor allocated voting shares in CIRP. The adjudicating authority's order excluding appellants from CoC was upheld as guarantors' liability was only to the bank, not the corporate debtor.

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Issues Involved:

1. Whether the Appellants, as Personal Guarantors, can be considered Financial Creditors of the Corporate Debtor.
2. Interpretation of Section 140 of the Indian Contract Act regarding the rights of surety.
3. The legality of the reconstitution of the Committee of Creditors (CoC) excluding the Appellants.
4. Whether the Appellants' claim should be treated as a contingent claim.

Detailed Analysis:

1. Whether the Appellants, as Personal Guarantors, can be considered Financial Creditors of the Corporate Debtor:

The primary issue revolves around whether the Appellants, who are Personal Guarantors for the Corporate Debtor's loan, can be considered as Financial Creditors in the Corporate Insolvency Resolution Process (CIRP). The Adjudicating Authority had excluded the Appellants from the CoC on the grounds that they had not made any payments towards the discharge of their guarantee. The Tribunal examined the statutory scheme under the Insolvency and Bankruptcy Code (IBC), specifically Section 5(8)(i), which defines "financial debt" to include liabilities in respect of guarantees. The Tribunal concluded that a Financial Debt arises only when there is an actual liability in respect of the guarantee. Since the Appellants had not made any payment, they did not have a right to payment against the Corporate Debtor, and thus could not be considered Financial Creditors.

2. Interpretation of Section 140 of the Indian Contract Act regarding the rights of surety:

The Appellants argued that under Section 140 of the Indian Contract Act, a surety is invested with the rights of the creditor upon payment or performance of the guaranteed obligation. They contended that their mortgage of immovable assets to secure the loan constituted performance. However, the Tribunal emphasized that the statutory language requires actual payment or performance of the obligation for the surety to assume the creditor's rights. The Tribunal referred to precedents, including a Supreme Court judgment, to affirm that mere provision of a guarantee does not entitle the guarantor to creditor rights unless a liability has been discharged.

3. The legality of the reconstitution of the Committee of Creditors (CoC) excluding the Appellants:

The Tribunal upheld the Adjudicating Authority's decision to reconstitute the CoC by excluding the Appellants. The Authority had found that the inclusion of the Appellants, who had not paid any amount towards the debt, was improper. The Tribunal supported this view, noting that the inclusion of guarantors without actual payment would lead to an inequitable reduction of the voting share of the Central Bank of India, the primary creditor. This would contradict the statutory scheme of the IBC, which aims to maintain the integrity of the CoC's composition and voting power.

4. Whether the Appellants' claim should be treated as a contingent claim:

The Appellants argued that their claims should be recognized as contingent claims. The Tribunal observed that if any amount is recovered from the Appellants before the conclusion of the CIRP, they could present this information to the Resolution Professional for consideration. However, as of the Tribunal's judgment, no such payment had been made, and thus the Appellants' claims could not be recognized as contingent claims.

In conclusion, the Tribunal dismissed the appeal, affirming the Adjudicating Authority's decision to exclude the Appellants from the CoC and rejecting their claims as Financial Creditors. The Tribunal clarified the statutory interpretation of financial debt and the rights of sureties under the IBC and the Indian Contract Act, reinforcing the requirement for actual payment or liability discharge for claims to be recognized in insolvency proceedings.

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