Creditor’s Partial Recovery From Surety Under an Agreement Doesn’t Extinguish Remaining Debt Owed by Borrower | SC

Case Details: BRS Ventures V. SREI Infrastructure Finance Ltd. & Anr.m [2024] 165 taxmann.com 157 (SC)[22-07-2024]

Judiciary and Counsel Details

• Abhay S. Oka & Pankaj Mithal, JJ.
• Abhijeet Sinha, Divij Kumar & Varun Tandon, Advs. for the Appellant.
• Ms Supriyo Gole, Rishav Banerjee, Ms Nattasha Garg, Abhimanyu Bhandari & Arav Pandit, Advs. for the Respondent.

Facts of the Case

In the instant case, the corporate debtor secured a loan of Rs. 100 crores from a financial creditor (Respondent No.1) for a SEZ project. The said loan was secured by a mortgage made by the corporate debtor of its leasehold land and a corporate guarantee from its parent company i.e., ACIL.

Due to the default committed by the corporate debtor, the financial creditor invoked ACIL’s guarantee and initiated the Corporate Insolvency Resolution Process (CIRP) against ACIL.

Thereafter, a claim filed by the financial creditor was reassessed to Rs.241.27 crores but the appellant had paid only Rs. 38.87 crores in settlement. Subsequently, the financial creditor filed another application under section 7 against the corporate debtor based on the same debt, which the corporate debtor resisted, arguing it was barred by estoppel and limitation laws.

Consequently, the NCLT rejected the corporate debtor’s plea and initiated the CIRP. Later, the corporate debtor’s appeal to NCLAT was also dismissed. Subsequently, an appeal was preferred before the Supreme Court.

Supreme Court Held

The Supreme Court observed that the contract between creditor and surety is independent and approval of resolution plan of principal borrower will not amount to discharge of surety and, thus, surety gets a discharge from his liability under guarantee by operation of law or by involuntary process would not amount to discharge of principal borrower.

Additionally, it was observed that through the CIRP process of ACIL, the corporate debtor did not receive a discharge, and its liability to repay the loan amount, to the extent that it was not recovered from the corporate guarantor, was not extinguished.

The Supreme Court held that if the creditor recovers a part of the amount guaranteed by a surety from surety and agrees not to proceed against the surety for the balance amount, that will not extinguish remaining debt payable by principal borrower and, therefore, the creditor can proceed against the principal borrower to recover balance amount.

List of Cases Reviewed

• Kanwar Raj Bhagat v. Gujarat Hydrocarbons and Power SEZ Ltd. [2024] 165 taxmann.com 156 (NCLAT -New Delhi) (para 29) affirmed, see Annex.