Shareholder locus and corporate guarantee liability under the Insolvency Code: derivative interest does not confer standing, and default can trigger Section 7.

A shareholder or preference shareholder whose interest is merely derivative, and who shows no direct legal injury, lacks locus standi as a "person aggrieved" to challenge CIRP admission under Section 61 of the Insolvency and Bankruptcy Code. Preference shareholding, without a debt-creating agreement or contractual conversion into financial debt, does not by itself confer creditor status. The discussion also notes that a corporate guarantor may be proceeded against under Section 7 on default of the guaranteed debt, because liability under a corporate guarantee is coextensive with that of the principal debtor, and the creditor need not first exhaust remedies against the borrower.

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Issues: (i) Whether the appeal under Section 61 of the Insolvency and Bankruptcy Code, 2016, filed by a shareholder and preference shareholder of the corporate debtor, was maintainable in law. (ii) Whether the order admitting the corporate debtor into CIRP under Section 7 of the Insolvency and Bankruptcy Code, 2016, suffered from any legal infirmity.

Issue (i): Whether the appeal under Section 61 of the Insolvency and Bankruptcy Code, 2016, filed by a shareholder and preference shareholder of the corporate debtor, was maintainable in law.

Analysis: The appeal was filed by the appellant in its capacity as a shareholder, with pleadings showing that it was a passive investor with no independent business, assets, employees, or operational role. The Tribunal held that shareholder interest is only reflective or derivative and does not amount to a direct legal injury for the purposes of being a person aggrieved under Section 61. The plea that preference shares conferred creditor status was rejected in the absence of any debt-creating agreement or contractual clause converting the investment into financial debt. The Tribunal relied on the principle that shareholders, even majority shareholders, do not acquire appellate locus merely because CIRP may affect the value of their investment.

Conclusion: The appeal was not maintainable, and the appellant was not a person aggrieved under Section 61.

Issue (ii): Whether the order admitting the corporate debtor into CIRP under Section 7 of the Insolvency and Bankruptcy Code, 2016, suffered from any legal infirmity.

Analysis: The Tribunal found that the financial creditor had extended facilities to the borrower and that the corporate debtor had executed a corporate guarantee securing those facilities. On default by the borrower, the guarantor's liability crystallised, and such liability was coextensive with that of the principal debtor under the law of suretyship. The scope of Section 7 inquiry was confined to the existence of financial debt and default, both of which stood established. The Tribunal held that the creditor was not required to exhaust remedies first against the principal borrower and that the corporate debtor's description as a passive entity or its participation in an AOP did not negate the legal effect of the guarantee.

Conclusion: The admission order disclosed no legal infirmity and was under Section 7.

Final Conclusion: The challenge to the CIRP admission failed on both maintainability and merits, and the insolvency proceedings against the corporate debtor were upheld.

Ratio Decidendi: A shareholder whose interest is merely reflective or derivative, without direct legal injury, has no locus under Section 61 to challenge CIRP admission, and a corporate guarantor may be proceeded against under Section 7 on default of the guaranteed debt because its liability is coextensive with that of the principal debtor.

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