2026 (1) TMI 429 - AT - IBC

Corporate guarantee capped at Rs. 75 lakh vs Rs. 1 crore IBC s.7 default threshold; admission set aside, CIRP ended.

A dominant issue was whether a s.7 IBC application against a corporate guarantor was maintainable despite s.4 IBC's Rs. 1 crore default threshold, given a ... Jurisdictional defect in admission of the Section 7 application - threshold limit - capped the liability of the Corporate Guarantor - CIRP - suspended director of the Corporate Guarantor-Appellant - Interpretation of the two Clauses 1 and 2 of the Guarantee Deed - definition Of the word “aggregate” - Whether the Section 7 application as admitted by the Adjudicating Authority qua the Corporate Guarantor in terms of the Guarantee Deed which has been invoked by the Respondent is hit by maintainability in the context of the threshold limit of Rs. 1 Cr set out by Section 4 of IBC. - HELD THAT:- It is well settled that the liability of the Guarantor has to depend on the terms of the Guarantee Deed and in interpreting the terms of a Guarantee Deed, a plain and simple meaning as derived from the express provisions of the Guarantee Deed requires to be read into the same. A Guarantee Deed being a contractual document, its interpretation needs to be based strictly on its written terms. We also hasten to add here that there is no role for equity jurisdiction in looking at a Guarantee Deed for applying the principles of equity would lead to the vulnerability of rewriting or modifying or varying the express agreement of the parties which is beyond the jurisdiction of this Tribunal. Term “aggregate” appearing at Clause1 of the Guarantee deed - The word “aggregate” implies a sum or entity formed by accumulating and assembling of distinct units to create one composite unit. As the word “aggregate” refers to a sum or total, formed by combining multiple elements or items, extending the same meaning to the word “aggregate” in the context of quantifying any liability would cover the liability in its entirety. Applying this derivative to the facts of the present case, the “aggregate” sum would mean a complete whole including both the principal and interest amount. If the liability arising out of this Guarantee Deed was to be restricted only to the principal amount of Rs. 75 lakhs which was already a known and determinate amount, the usage of the word “aggregate” would not have been required to be inserted in the Guarantee Deed. Thus, we are inclined to agree with the Appellant that the word “aggregate” also included other elements i.e. interest and other charges apart from the principal amount within the amount of Rs. 75 lakhs. We further find that in Clause 1, two phrases have been used viz. “not exceeding in the aggregate the sum of Rs. 75 lakhs only” and “and also of all moneys”. - the aggregate ceiling limit of Rs. 75 lakhs was equally applicable to the term “all moneys”. Hence, the use of the term “all moneys” cannot be read to mean monies independent of the capped liability. When we read the expression “and also of all moneys” alongwith the phrase “upto but not exceeding in the aggregate” it clearly signifies that the ceiling of Rs. 75 lakhs was the upper limit for which the guarantee could be invoked and that this ceiling was sacrosanct and impenetrable. Moreover, the usage of the phrase “as aforesaid the said sum” in Clause 2 is a clear reference to the cap of Rs. 75 lakhs as spelt out in Clause 1. The term “as aforesaid” makes it clear that the same outer ceiling limit governed both the clauses. The express language of both Clause 1 and Clause 2 complement and affirm each other and are mutually explanatory and this aspect cannot be overlooked. In the present case, when Clause 1 and Clause 2 are read together, it is clear that the intent of the Guarantee Deed clearly espoused that the ceiling of Rs. 75 lakhs was on the wholesome due together with interest and charges thereon. We have therefore no hesitation in concluding that the aggregation of the wholesome due in terms of the Guarantee Deed amounted to merging of the various components of principal, interest and charges into one unified entity which cumulatively fell within the overarching ceiling of Rs. 75 lakhs. Thus, the entire liability fell within the capped sum of Rs. 75 lakhs and the Guarantee Deed precluded any scope for addition, expansion or enlargement of the said sum. The cap limit of Rs. 75 lakh provided in Clause 1 embraced the entire basket of liabilities including principal, interest, charges and even default interest. Since fulfilment of the condition of threshold of Rs. 1 Cr is a condition precedent for initiation of Section 7 proceedings and in the present case the default amount does not exceed Rs. 75 lakhs in terms of the Guarantee Deed, the Section 7 application clearly suffers from jurisdictional effect and cannot be entertained against the Corporate Guarantor. We find merit in IA and are of the considered view that the Section 7 application is not maintainable as it fails to meet the threshold level of default amount of Rs. 1 Cr. Accordingly the Appeal is allowed. The impugned order admitting the Section 7 application is set aside. The Corporate Guarantor is freed from the rigours of CIRP. Issues: Whether the Section 7 application admitted against the Corporate Guarantor is maintainable in view of Section 4 of the Insolvency and Bankruptcy Code, 2016 given that the Guarantee Deed capped the guarantor's liability at Rs. 75 lakhs (i.e., whether the default meets the Rs. 1 crore threshold).Analysis: The issue requires interpretation of Clauses 1 and 2 of the Guarantee Deed to determine whether the capped sum of Rs. 75 lakhs includes principal, interest and other charges or whether interest and charges are over and above the Rs. 75 lakhs cap. The relevant contractual language uses the phrases 'upto but not exceeding in the aggregate the sum of Rupees Seventy Five Lacs only' and 'and also of all moneys, which term shall include all the interest due or to become due', and Clause 2 refers to the 'wholesome due on the said account/s together with interest and charges thereon' and 'not exceeding as aforesaid the said sum'. Applying plain-meaning principles of contractual interpretation to these provisions, the wording imports an aggregate or unified ceiling: the term 'aggregate' and the conjunctive linkage indicate that principal, interest and charges are merged into one composite liability capped at Rs. 75 lakhs. The clauses are mutually explanatory and, read together, demonstrate that the ceiling governs the entire liability. Since fulfillment of the Section 4 threshold (Rs. 1 crore) is a condition precedent for initiating Section 7 proceedings, the admitted default must be measured as per the contractual cap; the claim shown in the Section 7 application (Rs. 1,37,71,961.38) cannot be sustained against the Corporate Guarantor where the Guarantee Deed limits liability to Rs. 75 lakhs.Conclusion: The Section 7 application is not maintainable against the Corporate Guarantor because the default amount, as limited by the Guarantee Deed, does not meet the Rs. 1 crore threshold; decision is in favour of the Appellant.