CIRP u/s 7 IBC Not Maintainable Where Corporate Guarantee Is Capped Below ₹1 Cr: NCLAT [Read Order]

In a recent decision, the Principal Bench of the National Company Law Appellate Tribunal (NCLAT), New Delhi held that the initiation of Corporate Insolvency Resolution Process (CIRP) under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) is not maintainable if the corporate guarantee expressly caps the liability below the statutory threshold of ₹1 crore as prescribed under Section 4.

The appeal was preferred against the order of the NCLT, Indore Bench, which had admitted a Section 7 application filed by Bank of Baroda against C-Net Infotech Pvt. Ltd.the corporate guarantor.

The suspended director had challenged the admission of the Section 7 application on the ground that the invoked guarantee was limited to ₹75 lakh.

The bank relied on a corporate guarantee of ₹75 lakh and claimed total default of ₹1.37 crore including interest and charges. The appellant argued that Clauses 1 and 2 of the Guarantee Deed explicitly fixed the aggregate liability at ₹75 lakh, inclusive of interest and other charges, thereby falling short of the ₹1 crore benchmark.

The bank submitted that the interest and charges were payable in addition to the principal amount and that the claim exceeded the statutory ceiling.

Allowing the appeal, the NCLAT observed that a reading of the Guarantee Deed revealed that the ceiling of ₹75 lakh covered the entire amount, including interest and charges. As the default did not exceed ₹1 crore the Section 7 petition was beset with a jurisdictional flaw.

The Bench headed by Justice Ashok Bhushan (Chairperson) and Barun Mitra (Technical Member) set aside the admission order and released the corporate guarantor from CIRP.

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