NCLAT: Corporate Debtor’s Guarantee Liability Persists Despite Merger Or Demerger Within Group Companies
Pranav B Prem
The National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi, has held that internal corporate adjustments among financial creditors — such as merger, demerger, or amalgamation — do not affect the liability of a corporate debtor acting as guarantor, particularly when the terms of the guarantee deed remain unchanged. The bench comprising Justice Rakesh Kumar Jain, Justice Mohammad Faiz Alam Khan, and Technical Member Naresh Salecha made the observation while dismissing an appeal filed by Pooja Ramesh Singh, suspended director of Essel Infraprojects Ltd. (EIL), challenging the admission of a Section 7 application filed by Jammu and Kashmir Bank Ltd. before the National Company Law Tribunal (NCLT), Mumbai.
Background
The case arose out of a financial facility of ₹200 crore sanctioned by Jammu and Kashmir Bank to Pan India Utilities Distribution Company Ltd. (PIUDCL) on December 17, 2013. The loan was secured by a corporate guarantee executed by Essel Infraprojects Ltd. (EIL) and a mortgage over 196.16 acres of land in Gorai, Borivali (West), Mumbai, owned by EIL. The borrower defaulted in repayment, leading the bank to issue demand notices in January and March 2019. In response, PIUDCL acknowledged the debt and sought time to repay. However, the corporate guarantor failed to respond to a subsequent notice dated October 29, 2019, seeking repayment under its guarantee obligations.
The NCLT admitted the Section 7 application for a total default amount of ₹87.43 crore (including interest and expenses) and appointed Hemant J. Mehta as Interim Resolution Professional (IRP). The appellant, a suspended director of the corporate debtor, challenged the order before NCLAT, contending that EIL’s liability as a guarantor had ceased due to a scheme of demerger and subsequent merger within the Essel Group.
Appellant’s Contentions
The appellant argued that pursuant to a demerger scheme approved by the Bombay High Court on April 4, 2014, the Gorai land and related project were transferred from EIL to Essel Urban Infraprojects Ltd. (EUIL), and later, EUIL was amalgamated with Pan India Infraprojects Pvt. Ltd. (PIIPL) through another scheme sanctioned on June 20, 2014. It was contended that all liabilities, including those under the corporate guarantee, stood transferred to the successor entity, and hence EIL could not be subjected to insolvency proceedings. The appellant also pointed out that a revised sanction letter dated November 18, 2017, issued by the bank, did not expressly mention the guarantee, suggesting its relinquishment. It was further submitted that since both the schemes of demerger and amalgamation had attained finality and were never challenged, they bound all stakeholders, including the financial creditor.
Respondent’s Arguments
Appearing for the bank, counsel submitted that the corporate guarantee and mortgage executed by EIL continued to be valid and binding. It was argued that the demerger related only to specific project assets and did not extinguish the guarantee obligations. The respondent relied on Clause 8 of the Guarantee Deed, which clearly stated that the guarantee “shall not be determined and not in any way prejudiced by any absorption or amalgamation of the guarantor company.”
Further, the bank pointed out that PIUDCL’s letter dated December 12, 2017, addressed to the bank, acknowledged the continued subsistence of the corporate guarantee and requested its release — indicating that the guarantee remained operative even after the merger and renewal of the sanction letter. It was also emphasized that the corporate guarantee cannot be unilaterally revoked or transferred to another entity without the express consent of the financial creditor and that the revised sanction letter of 2017 preserved all existing terms and conditions, including Clause 8 of the original guarantee deed.
Findings and Decision
The NCLAT, after examining the record, held that internal adjustments within the Essel Group through merger, demerger, or amalgamation had no bearing on the liability of the corporate debtor as guarantor. The bench noted that the revised sanction letter dated November 18, 2017 specifically stated that all other existing terms and conditions would continue to apply, thus preserving the validity of the guarantee deed.
Referring to Clause 8 of the guarantee, the tribunal held that the corporate debtor’s guarantee remained in force until the loan account was fully adjusted in the bank’s records. It further found that no evidence had been produced by EIL to show that the bank had ever discharged it from its guarantee obligations. On the contrary, the letter dated December 12, 2017, seeking release of the guarantee, clearly demonstrated that the liability continued post-renewal. The NCLAT concluded that there was no error in the NCLT’s order admitting the insolvency application and accordingly dismissed the appeal, holding that the corporate debtor’s liability as guarantor subsisted despite the internal group restructuring.
Appearance
For Appellant: Mr. Gautam Narayan, Mr. Vishesh Kalra, Ms. Smriti Churiwal & Mr. Jaiveer Kant, Advocates.
For Respondents: Mr. Sumesh Dhawan, Mr. Jaskaran S. Bhatia, Mr. Shaurya Shyam, for R-1.
Cause Title: Pooja Ramesh Singh Versus Jammu and Kashmir Bank Ltd. & Anr.
Case No: Comp. App. (AT) (Ins) No. 1808 of 2024 & I.A. No. 6593 of 2024
Coram: Justice Rakesh Kumar Jain, Justice Mohammad Faiz Alam Khan,Technical Member Naresh Salecha
