On January 16, 2019, the National Company Law Appellate Tribunal (“NCLAT”) in the matter of Export Import Bank of India v. CHL Limited, (Company Appeal (AT) (Insolvency) No. 51 of 2018) dismissed an appeal against the order of the National Company Law Tribunal, Principal Bench (“Adjudicating Authority”) rejecting an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”).

Issue

Whether an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) can be admitted against a guarantor when the loan agreements executed by the principal borrower have been suspended pending consideration by court? 

Facts in brief :

The Export Import Bank of India (“Appellant”) filed an application under Section 7 of the IBC against CHL Limited (“Guarantor”) on the ground of default by the Respondent in discharging its obligation under a Deed of Guarantee. The Adjudicating Authority held that the liability of the Guarantor in the present case was not co-extensive with that of the Principal Borrower as Clause 4 of the Deed of Guarantee executed between the Appellant and the Respondent was contrary to the general law provided under Section 128 of the Indian Contract Act, 1872.

It was noted that the loan and mortgage agreements between the Appellant and CJSC CHL International (“Principal Borrower”) had been suspended by the Economic Court at Dushanbe at Tajikistan until further reconciliation which had not taken place in spite of representation made to the Appellant by Principal Borrower. It was also noted that the Appellant recalled the loan issued in favour of the principal borrower and thereafter invoked the guarantee clause without adhering to the order of the Economic Court at Dushanbe.

NCLAT observations and findings:

The NCLAT held that as the loan agreement between the Principal Borrower and the Appellant was suspended by the Economic Court at Dushanbe, there could not be any ‘default’ by the Principal Borrower and there is no debt due and payable by the Principal Borrower. It was held that liability of the Guarantor arises only when the Principal Borrower defaults in repayment of the demand made by the Lender and therefore the application under Section 7 of the IBC had been filed by the Appellant at premature stage.

The NCLAT further observed that as the proceeding under IBC is irreversible and leads to exceptional and serious consequences, allowing this appeal would be detrimental to the running business of the Respondent/Guarantor. On such grounds, the appeal was dismissed by the Learned NCLAT.