2025 (9) TMI 760 - AT - IBC

Corporate guarantor remains liable after revised sanction and demerger; guarantee clause survives, post-renewal letter affirmed, appeal dismissed

NCLAT dismissed the appeal, holding the corporate guarantor's liability subsisted despite a revised sanction and subsequent demerger/amalgamation schemes ... Admissibility of application filed u/s 7 of IBC - existence of debt and default or not - relationship of the FC and the CD - liabilities have been transferred to another company due to a scheme of demerger and a subsequent scheme of amalgamation - HELD THAT:- There is no substance in the argument of the Appellant about the discharge of its liability after execution of the revised sanction on 18.11.2017 because it has specifically been mentioned that all other existing terms and conditions remain applicable which include clause 8 of the guarantee deed. Moreover, there is no evidence brought on record by the CD that at any point of time the liability of the CD as a corporate guarantor was discharged by the FC rather by letter dated 12.12.2017 which was written by the principal borrower to the FC, requests has been made to release the guarantee of the CD which means that post renewal of sanction letter dated 18.11.2017 the guarantee was continuing and there is no evidence brought on record by the CD that the guarantee given by the CD was ever discharged by the FC. There are no error in the impugned order which calls for any interference in this appeal, therefore, the same is hereby dismissed though without any order as to costs. ISSUES PRESENTED AND CONSIDERED 1. Whether admission of an insolvency petition under Section 7 of the Insolvency and Bankruptcy Code is sustainable where the corporate debtor executed a corporate guarantee and mortgage but contends that liabilities were transferred by sanctioned schemes of demerger and amalgamation. 2. Whether a scheme of demerger and subsequent amalgamation that transfers specific assets (including mortgaged land) to related entities operates to extinguish or transfer a corporate guarantee executed by the guarantor company in favour of the financial creditor without the financial creditor's express consent. 3. Whether a subsequent/revised sanction letter that alters the sanctioned quantum and names of mortgagor/guarantor operates to discharge an earlier corporate guarantee when that revised letter contains a savings clause that 'all other existing terms and conditions remain applicable.' 4. What evidentiary threshold is required to establish that a corporate guarantee has been discharged by the financial creditor, and whether unilateral internal reorganizations within a corporate group can effect such discharge by implication. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Admissibility of Section 7 petition where corporate guarantee and mortgage exist and default on principal borrower is admitted Legal framework: Section 7 of the Code permits a financial creditor to initiate insolvency proceedings against a corporate debtor upon existence of debt and default by the corporate debtor. A corporate guarantee and mortgage are security arrangements that inform liability and enforcement rights. Precedent treatment: The Tribunal relied on authoritative decisions of the Apex Court addressing the continued enforceability of guarantees and mortgage-backed obligations despite corporate restructurings. Interpretation and reasoning: The Court observed that the principal borrower admitted the debt and default; the corporate debtor executed both a guarantee deed and mortgage deed to secure the loan. Given admission of debt and default by the borrower and absence of evidence that the guarantor's liability was discharged, the statutory preconditions for admission under Section 7 were satisfied. The Court further noted that internal adjustments within the corporate group (demerger/amalgamation) do not negate the existence of debt or default for purposes of the Code. Ratio vs. Obiter: Ratio - admission under Section 7 was appropriate where debt and default are established and the corporate guarantee remains subsisting. Conclusions: The petition's admission under Section 7 was not erroneous; the Court found no ground to interfere with the admission on these facts. Issue 2 - Effect of demerger/amalgamation on the survivability of a corporate guarantee and mortgage Legal framework: Corporate reorganization by court-approved schemes transfers assets and liabilities as provided in the scheme, but contractual guarantees are governed by their own terms and general principles of contract law, including that a guarantee is an independent contract and cannot be unilaterally revoked or assigned without the creditor's consent. Precedent treatment: The Tribunal treated prior Apex Court rulings as authoritatively establishing that guarantees survive corporate reorganizations unless the guarantee's terms or creditor's conduct effect discharge; such precedents were followed rather than distinguished. Interpretation and reasoning: The guarantee deed contained an express clause preserving the guarantee 'till such time the loan accounts of the borrower company is adjusted in the books of accounts of the bank' and stated it would not be determined or prejudiced by absorption or amalgamation. The Court held that clause 8 explicitly negated the contention that internal reorganizations extinguished the guarantor's obligations. The scheme orders transferring the mortgaged land were found to effect transfer of the asset but, on the contractual terms and without creditor discharge, did not amount to transfer or extinction of the guarantor's contractual liability. The Tribunal emphasized that a scheme transferring an undertaking cannot, by itself and in the absence of the creditor's acceptance, alter the guarantor's contractual position when the guarantee expressly contemplates survivability through reorganizations. Ratio vs. Obiter: Ratio - a court-approved demerger/amalgamation does not extinguish a corporate guarantee where the guarantee contains a clause preserving liability through absorption/amalgamation and there is no evidence of discharge by the creditor. Conclusions: The demerger and amalgamation did not discharge or transfer the corporate guarantee; the guarantor remained liable under the guarantee. Issue 3 - Effect of a revised sanction letter on an existing corporate guarantee where the revised letter reduces facility amount and changes named mortgagor/guarantor but preserves 'all other existing terms and conditions' Legal framework: Contractual amendment principles: a later instrument may modify prior terms to the extent it does so expressly or by necessary implication; a savings clause preserves existing terms unless expressly superseded. Precedent treatment: The Court applied established contract law principles and followed high-court/Apex Court decisions recognizing that preserved clauses continue to govern when expressly saved in later instruments. Interpretation and reasoning: The revised sanction letter reduced the sanctioned quantum and named a different mortgagor/guarantor; however, it expressly stated that all other existing terms and conditions remain applicable. The Tribunal interpreted that clause to mean that the earlier guarantee provision (clause 8) continued to operate. The presence of a contemporaneous letter from the borrower requesting release of the guarantee was construed as an application for relief, not evidence of discharge; no communication by the creditor discharging the guarantee was produced. The Court therefore rejected the contention that the revised sanction impliedly extinguished the guarantee. Ratio vs. Obiter: Ratio - where a revised sanction expressly preserves existing terms, an earlier corporate guarantee continues to subsist unless there is clear evidence of discharge by the creditor. Conclusions: The revised sanction letter did not discharge the earlier corporate guarantee; the guarantee remained enforceable. Issue 4 - Evidentiary requirement to prove discharge or transfer of a corporate guarantee and the effect of unilateral corporate group reorganizations Legal framework: A guarantor's liability can be discharged by agreement, novation, release by the creditor, or by operation of law where the contract so provides; the party asserting discharge bears evidentiary burden to show creditor's acceptance or an effective legal event extinguishing liability. Precedent treatment: The Court followed precedents holding that a guarantee cannot be unilaterally revoked or assigned without the creditor's consent and that absence of documentary proof of discharge is fatal to such a contention. Interpretation and reasoning: The corporate debtor produced no document evidencing discharge of the guarantee by the financial creditor. The only contemporaneous document was a letter from the borrower requesting release of the guarantee, which was insufficient to prove discharge. The Tribunal reiterated that internal group restructurings do not substitute for the creditor's express act of discharge and that contractual language preserving guarantee through amalgamation reinforced the need for creditor consent to any discharge or assignment. Ratio vs. Obiter: Ratio - absence of explicit discharge by the creditor (or other lawful extinguishment) means the guarantor remains liable; mere group reorganizations or borrower requests are insufficient proof of discharge. Conclusions: The appellant failed to meet the evidentiary burden of showing discharge of the corporate guarantee; therefore, the guarantee remained subsisting and supported the insolvency admission. Overall Conclusion The Court concluded that the corporate guarantee and mortgage remained enforceable despite the demerger and amalgamation and despite the revised sanction letter, because the guarantee expressly survived absorption/amalgamation, no evidence of discharge by the financial creditor was produced, and the principal borrower admitted debt and default. Consequently, the impugned order admitting the insolvency petition under Section 7 was upheld and the appeal was dismissed.