2024 (11) TMI 1287 - AT - IBC

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, ... Financial creditor - Committee of Creditors (CoC) - financial debt as a liability in respect of a guarantee under Section 5(8)(i) of the IBC - claim as right to payment under Section 3(6) of the IBC - rights of surety upon payment or performance under Section 140 of the Indian Contract Act, 1872Financial creditor - Committee of Creditors (CoC) - financial debt as a liability in respect of a guarantee under Section 5(8)(i) of the IBC - claim as right to payment under Section 3(6) of the IBC - rights of surety upon payment or performance under Section 140 of the Indian Contract Act, 1872 - Personal guarantors who have not made payment in discharge of their guarantee are not Financial Creditors and are not entitled to voting shares or membership of the CoC. - HELD THAT: - The statutory scheme of the IBC requires a 'claim' to be a right to payment (Section 3(6)) and defines 'financial debt' to include the amount of any liability in respect of a guarantee only when such liability has arisen (Section 5(8)(i)). A mere guarantee, without an amount becoming payable or having been paid by the surety, does not by itself give rise to a Financial Debt. Section 140 of the Indian Contract Act vests in a surety the creditor's rights against the principal debtor only upon payment or performance by the surety. Therefore, until the guarantor has paid or performed what he is liable for, he does not acquire the creditor's rights necessary to constitute a claim under the IBC. Applying these principles, personal guarantors who have not discharged their liability cannot be treated as Financial Creditors for the purposes of CIRP and cannot be allocated voting shares in the CoC; the Adjudicating Authority rightly directed reconstitution of the CoC by excluding such guarantors. The appellants remain free, if any amount is recovered from them before closure of CIRP, to present such material to the RP for consideration as a contingent claim. [Paras 8, 13, 14, 15, 21]The Adjudicating Authority's order reconstituting the CoC by excluding the appellants (personal guarantors who had not paid) is upheld and the appeal is dismissed.Final Conclusion: The appeal is dismissed: personal guarantors who have not paid or performed their liability under the guarantee do not qualify as Financial Creditors entitled to membership or voting rights in the CoC; the reconstitution of the CoC excluding such guarantors was lawful. 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.