The Supreme Court has clarified that corporate guarantees executed by a corporate debtor, even if later challenged on grounds of timing, non-disclosure, or insufficient stamping, constitute valid financial debt under the Insolvency and Bankruptcy Code, 2016. This ruling reaffirms the primacy of substantive creditor rights over procedural technicalities in insolvency proceedings.
Background & Facts
The Dispute
The dispute arose from a complex cross-border lending structure involving Reliance Infratel Limited (RITL), Reliance Communications Limited (RCOM), and Reliance Telecom Limited (RTL), collectively referred to as the Corporate Debtor (CD). The appellants, a consortium of six public sector banks led by State Bank of India, extended rupee loans totaling ₹6,750 crores to RCOM and RTL. To secure these loans, a Security Trustee Agreement was executed on 04.03.2011 with Axis Trustee Services Ltd., and a Deed of Hypothecation was executed by the CD on 20.02.2015, creating a registered charge.
Key Facts
On 19.03.2010, Doha Bank Q.P.S.C. extended a USD 250 million foreign currency loan to RITL.
On 26.08.2016, the accounts of RCOM, RTL, and RITL were classified as Non-Performing Assets (NPA) by the lenders.
Between 05.09.2016 and 04.12.2016, Reinstatement Agreements were executed to restructure repayment obligations, extending the due date to 05.06.2017.
On 03.03.2017, the Corporate Debtor executed Corporate Guarantees in favor of the consortium lenders, securing obligations of its group entities.
On 22.12.2017, RITL’s account was declared NPA with retrospective effect from 26.08.2016.
The guarantees were executed at the New Delhi office of the Security Trustee and stamped under applicable New Delhi stamp duty.
The CD’s counsel admitted execution of the guarantees in a communication dated 19.03.2019, asserting that disclosures were made in public financial statements.
The guarantees were not included in the CD’s financial statements for FY 2016-17 and FY 2017-18.
Procedural History
15.05.2018: NCLT Mumbai initiated Corporate Insolvency Resolution Process (CIRP) against the CD.
18.05.2018: Interim Resolution Professional (IRP) appointed.
21.05.2018: Public announcement issued inviting claims.
17.05.2019: Appellants submitted claim in Form ‘C’ for ₹3,628.67 crores.
28.05.2019: Doha Bank challenged validity of guarantees, seeking derecognition of appellants as financial creditors.
29.05.2019: IRP rejected objections, verifying claims based on legal documents.
10.06.2019: Appellants filed reply citing CD’s counsel’s admission of guarantees.
12.08.2020: Additional affidavit filed confirming guarantees were in custody of Security Trustee and certified.
02.03.2021: NCLT held that guarantees were not properly verified, claims were inadequately documented, and appellants were not financial creditors. Directed reconstitution of Committee of Creditors.
14.10.2022: NCLAT affirmed NCLT’s order, adding that guarantees were executed during default, undisclosed in financials, and insufficiently stamped under Maharashtra Stamp Act, 1958.
28.03.2023: Appeal filed before Supreme Court under Section 62 of IBC.
Relief Sought
The appellants sought: (i) recognition as financial creditors under Section 5(8) of the IBC; (ii) setting aside of NCLT and NCLAT orders dated 02.03.2021 and 14.10.2022; (iii) reconstitution of the Committee of Creditors with their inclusion; and (iv) continuation of CIRP without prejudice to their claims.
The Legal Issue
The central questions were: (i) whether corporate guarantees executed by a corporate debtor constitute "financial debt" under Section 5(8) of the IBC, even if not disclosed in financial statements or executed during financial stress; (ii) whether non-submission or improper verification of guarantee documents justifies rejection of a creditor’s claim; and (iii) whether the concurrent findings of NCLT and NCLAT warrant interference by the Supreme Court.
Arguments Presented
For the Appellant
The appellants contended that the corporate guarantees created a liability arising from a guarantee for money borrowed, squarely falling within the definition of "financial debt" under Section 5(8) of the IBC. They relied on Anuj Jain v. Axis Bank and China Development Bank v. Doha Bank to argue that a guarantor’s liability is coextensive with the principal debtor’s. They emphasized that the CD’s counsel admitted execution of the guarantees in writing on 19.03.2019, and that disclosures were made in public financial statements. They further argued that the guarantees were stamped under New Delhi Stamp Act, not Maharashtra, and that even if stamping was defective, it was a curable fiscal irregularity under Interplay Between Arbitration Agreements... (2024) 6 SCC 1. They asserted that the NCLT’s rejection of claims was based on hyper-technical grounds and ignored substantive evidence.
For the Respondent
Doha Bank contended that the guarantees were executed when the CD was already in default (NPA since 26.08.2016), making them suspect and potentially fraudulent under Sections 43 and 66 of the IBC. It argued that the guarantees were not disclosed in financial statements for FY 2016-17 and FY 2017-18, and were introduced only at the appellate stage, violating procedural fairness. It further claimed the guarantees were insufficiently stamped under the Maharashtra Stamp Act, 1958, rendering them inadmissible. It relied on Ram Narain v. Lt. Col. Hari Singh and Dr. Anupam Jain v. CS Chhaya Gupta to argue that concurrent findings of fact by tribunals should not be disturbed absent perversity.
The Court's Analysis
The Court began by reaffirming the definition of "financial debt" under Section 5(8) of the IBC: a liability arising from a transaction involving disbursal against consideration for the time value of money. It held that a corporate guarantee, by its nature, creates such a liability, as it secures repayment of a loan with interest. The Court emphasized that the guarantor’s liability is coextensive with the principal debtor’s, and such liability qualifies as financial debt irrespective of the timing of execution.
"A liability arising from the corporate guarantee squarely falls within the ambit of financial debt as defined under Section 5(8) of the Code. The amount of any liability in respect of any of the guarantees for money borrowed against the payment of interest is a ‘financial debt’ within Section 5(8) of the Code."
The Court rejected the argument that execution during financial stress invalidated the guarantee. It noted that the CD’s account was restructured in 2016-17, and the guarantee was executed in March 2017, after restructuring but before the second NPA declaration in December 2017. The RBI’s 01.07.2015 circular mandates that asset classification for restructured loans is reckoned from the first NPA date, meaning the CD was not in default at the time of guarantee execution.
Regarding non-disclosure in financial statements, the Court held that mere omission does not negate the existence or enforceability of a guarantee. At best, it may constitute a default by the corporate debtor, but it cannot deprive a creditor of its statutory rights under the IBC.
On verification, the Court found the NCLAT’s conclusion perverse. The IRP had inspected the original guarantees in New Delhi, and the Security Trustee had certified their custody. The CD’s counsel had also admitted execution. The Court held that Regulation 10 and 13 of the CIRP Regulations allow for additional evidence and verification through physical inspection, which was done.
"The finding recorded by the NCLAT that there is no pleading on record to establish that guarantees were verified by IRP/RP is perverse."
On stamping, the Court relied on its Constitution Bench ruling in Interplay Between Arbitration Agreements... (2024) 6 SCC 1, holding that insufficient stamping is a curable defect under the Stamp Act and does not render an instrument void. The guarantees were executed in New Delhi, and stamp duty paid under applicable New Delhi rates. The Maharashtra Stamp Act was inapplicable.
Finally, the Court held that the NCLT and NCLAT’s findings were perverse, as they ignored admissions, physical verification, and binding precedents. The Court emphasized that appellate jurisdiction under Section 62 permits interference where findings are manifestly erroneous.
The Verdict
The appeal was allowed. The orders dated 02.03.2021 of the NCLT and 14.10.2022 of the NCLAT were quashed and set aside. The appellants are recognized as financial creditors of the Corporate Debtor. The Resolution Professional is directed to reconstitute the Committee of Creditors by including the appellants and to proceed with the Corporate Insolvency Resolution Process in accordance with law. There shall be no order as to costs.
What This Means For Similar Cases
Financial Debt Is Not Dependent on Disclosure
Practitioners must now argue that non-disclosure of guarantees in financial statements cannot be grounds to deny creditor status under Section 5(8) of the IBC.
The focus must shift to the existence of the guarantee instrument and its linkage to a loan with time value of money.
Verification Is Functional, Not Formalistic
Physical inspection by the IRP/RP, even if not documented in a formal report, satisfies Regulation 13 if corroborated by credible evidence (e.g., trustee certification, counsel admission).
Claims cannot be rejected solely for lack of Form-C annexures if the underlying instrument is admitted or verified.
Stamp Defects Are Not Jurisdictional Barriers
Challenges based on stamping under state laws (e.g., Maharashtra Stamp Act) are irrelevant if the instrument was executed and stamped in another jurisdiction.
The Supreme Court has now firmly established that stamping defects are curable and cannot be weaponized to defeat insolvency claims.
Timing of Guarantee Execution Is Irrelevant
A guarantee executed after initial NPA classification but before a second default remains valid if the restructuring process was ongoing.
The RBI’s master circular on asset classification provides the legal framework for determining the true default date, not the date of guarantee execution.
Concurrent Findings Are Not Absolute
The Court reaffirmed that perversity in findings - ignoring admissions, misapplying law, or rejecting unchallenged evidence - justifies interference even in second appeals.
Practitioners must now plead perversity with precision, citing specific contradictions or omissions in tribunal reasoning.
