Not Necessary to Start Insolvency Against Principal Borrower First: NCLAT

A financial creditor can seek to first initiate insolvency proceedings against a corporate guarantor of a company, instead of the company itself, in case the guarantee fails, the National Company Law Appellate Tribunal (NCLAT) has held, Business Standard reported. The corporate insolvency resolution process, thus, can go ahead against the guarantor under Section 7 of the Insolvency and Bankruptcy Code (IBC), even without having proceeded with and exhausted all legal remedies against the principal debtor, it has said. The appellate tribunal reasoned that any corporate guarantee given by a parent company for a subsidiary becomes debt as soon it is invoked; subsequently, the corporate guarantor becomes a debtor under the terms of the IBC. “Guarantee of such nature is included within the definition of financial debt. There is, therefore, no reason why a financial creditor cannot invoke Section 7 against the corporate guarantors, once the guarantee is invoked. Read more

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