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NCLT Kochi Settlement in CIRP Does Not Extinguish Cherupushpam Films Liability
The has delivered a significant ruling clarifying the interplay between a settlement reached during the of a and the liability of its . In a judgment that reinforces the , the Tribunal held that unless the settlement expressly releases the guarantor, the guarantee remains enforceable. The decision came on a petition filed by , as trustee of , seeking to initiate CIRP against , which had stood as guarantor for loans taken by the .
Background: The Loan and Guarantee Arrangement
The dispute traces back to credit facilities totalling ₹8.60 crore sanctioned by to KCCI for the construction of the Kerala Trade Centre. The building was to be erected on land owned by Cherupushpam Films, which executed guarantee agreements and created an over 43.95 cents of land along with the building to secure the debt. When the loan accounts were classified as on , the bank assigned the debt—along with the underlying securities and rights—to Phoenix ARC in . The amount claimed in the insolvency petition stood at ₹14.50 crore, reflecting accumulated interest and costs.
By , CIRP had already been initiated against KCCI, the . Phoenix ARC then turned to the , arguing that proceedings against Cherupushpam Films were necessary because the land on which the Kerala Trade Centre stood remained in the guarantor's name and was essential for recovery.
The Petition and Preliminary Objections
Cherupushpam Films raised multiple defences to resist the admission of the insolvency petition. First, it alleged that the signatures of its then managing director on documents relating to subsequent loan facilities had been forged, and that KCCI had diverted the loan proceeds for purposes unrelated to the project. Second, it contended that the petition was barred by limitation. Third, it pointed to a settlement recorded by the among the members of KCCI's Committee of Creditors, arguing that this settlement precluded further proceedings against it as guarantor. Additionally, the company cited ongoing arbitration proceedings between itself and KCCI, as well as an investigation into alleged diversion and misappropriation of funds under the . Finally, it argued that admitting the petition would result in , since Phoenix ARC was already a participant in KCCI's CIRP.
Forgery Allegations Dismissed as Afterthought
The Tribunal examined the forgery claim closely but found it lacking in substance. It noted that during the hearing, Cherupushpam Films did not advance any substantive argument or evidence to support the allegation. Moreover, the defence did not appear to have been raised at the relevant stage—when the loan documents were executed or when the assignment took place—and therefore appeared to be an afterthought. The Tribunal thus rejected this line of defence.
Limitation Objection Rejected
On the limitation issue, the Tribunal applied the provisions of . It observed that KCCI had acknowledged the debt in its financial statements for the years ending , , and . Such written acknowledgements, made before the expiry of the limitation period, give rise to a . The Tribunal also excluded the period of the COVID-19 pandemic in accordance with the 's orders, and held that the petition was well within the prescribed limitation period. This finding effectively neutralised the corporate debtor's primary procedural defence.
Settlement Does Not Release Guarantor
The most significant part of the ruling concerned the effect of the settlement recorded in the among the members of KCCI's Committee of Creditors. Cherupushpam Films argued that the settlement amounted to a full and final resolution of all claims, thereby extinguishing its own liability as guarantor. The Tribunal rejected this contention, emphasising that the settlement dealt only with and obligations among the creditors and did not specifically release the guarantor.
In a key observation, the Tribunal stated: “Any arrangement or settlement among the members of the Committee of Creditors concerning their and obligations cannot, by itself, affect the rights of the Financial Creditor or extinguish the obligations of the Respondent under the Guarantee Agreements. Unless the settlement expressly releases the Corporate Debtor from its , it cannot bar the present proceedings.”
The Tribunal further noted that the property of Cherupushpam Films remained mortgaged with Phoenix ARC as security for the debt, and that the settlement did not address or modify that security interest. This reasoning underscores the principle that a guarantor's liability is independent and co-extensive with that of the principal debtor, and cannot be wiped out by a creditor-side arrangement without explicit language to that effect.
Simultaneous Proceedings Permitted
Cherupushpam Films also argued that since CIRP was already ongoing against KCCI, initiating parallel proceedings against it would lead to . The Tribunal dismissed this concern, holding that insolvency proceedings against the and the guarantor can proceed simultaneously. It clarified that any amount recovered through KCCI's CIRP would have to be accounted for while determining the ultimate liability of Cherupushpam Films, thereby preventing any . This approach aligns with the settled position under the , which permits concurrent actions against the debtor and guarantor.
Conclusion and Order
Having found that Phoenix ARC had established the existence of a financial debt and a default, and that all requirements under were satisfied, the Tribunal admitted the petition. It declared a under , prohibiting any further legal proceedings against Cherupushpam Films, and appointed as the Interim Resolution Professional to conduct the CIRP. The IRP was directed to make the required public announcement and to take charge of the company's assets and records.
The ruling sends a clear message to financial creditors and guarantors alike: a in the 's CIRP does not automatically discharge the guarantor. Only an , clearly documented, will have that effect. For legal professionals, this decision reaffirms the robustness of guarantee arrangements and the importance of precise drafting in settlement agreements. It also highlights the NCLT's willingness to look beyond procedural objections and examine the substance of the guarantor's defences.
As the insolvency ecosystem continues to evolve, this judgment will serve as a useful precedent in cases where creditors seek to enforce guarantees despite a resolution in the 's proceedings.
