NCLAT Overturns NCLT Decision, Upholds Union Bank's Claim in CIRP Without Guarantee Invocation

Resolution Professional Ordered to Reconstitute CoC and Reconsider Resolution Plan

In a significant ruling, the National Company Law Appellate Tribunal (NCLAT) has overturned a previous decision by the National Company Law Tribunal (NCLT), allowing Union Bank of India to maintain its claim in the Corporate Insolvency Resolution Process (CIRP) of KSL & Industries Ltd. This decision came despite the bank not having invoked the corporate guarantee provided by the debtor. The tribunal directed the Resolution Professional (RP) to admit the bank's claim and reconstitute the Committee of Creditors (CoC) to reconsider the resolution plan.

The appeal was filed by Union Bank of India against the order of the NCLT Ahmedabad, which had dismissed the bank's claim on the grounds that the corporate guarantee had not been invoked. The NCLAT bench, comprising Justice Mohd. Faiz Alam Khan and Indevar Pandey, clarified the distinction between "claim," "debt," and "default," asserting that the invocation of a corporate guarantee is not a prerequisite for maintaining a claim in CIRP.

The bank had extended loans to Krishna Knitwear Technology Ltd. and Eskay Knit India Ltd., with KSL & Industries Ltd. standing as a corporate guarantor. Although the guarantee was not invoked, the NCLAT emphasized that a financial debt includes the liability in respect of a guarantee for money borrowed, as per Section 5(8) of the Insolvency and Bankruptcy Code, 2016. The tribunal cited the Supreme Court's judgment in the China Development Bank case, which held that a claim exists even if the right to enforce payment is hindered by moratorium, thus reinforcing that the occurrence of default is not necessary for claim submission.

The NCLAT's decision mandates the RP to verify and admit Union Bank's claim without the need for proof of guarantee invocation. It further instructed the RP to reconstitute the CoC, allowing Union Bank to be part of the creditor's committee, and to conduct a fresh meeting for the reconsideration of the resolution plan.

This judgment not only underscores the legal interpretation of financial claims and guarantees in insolvency proceedings but also sets a precedent for future cases where financial creditors can submit claims in the absence of invoked guarantees. The NCLAT's ruling is a vital reference for financial creditors navigating the complexities of insolvency and bankruptcy procedures.

Bottom Line:

Insolvency and Bankruptcy Code - Claim of a financial creditor maintainable in CIRP even without invocation of corporate guarantee - Difference between "claim", "debt", and "default" reiterated - Resolution Professional directed to reconstitute Committee of Creditors and reconsider resolution plan.

Statutory provision(s): Insolvency and Bankruptcy Code, 2016 Sections 5(8), 61

Union Bank of India v. Mr. Kiran Shah, Resolution Professional Of KSL & Industries Ltd., (NCLAT)(Principal Bench)(New Delhi) : Law Finder Doc Id # 2819719