2024 INSC 548

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 4565 OF 2021

BRS Ventures Investments Ltd. … Appellant

versus

SREI Infrastructure Finance Ltd. & Anr. … Respondents

JUDGMENT
ABHAY S. OKA, J.
FACTUAL ASPECTS

1. The 2nd respondent–Gujarat Hydrocarbon and Power

SEZ Limited, is a corporate debtor. The corporate debtor
approached the 1st respondent–SREI Infrastructure Finance
Limited (the financial creditor), for a grant of a loan. Under
the agreement dated 5th January 2011, the financial creditor
granted the corporate debtor a loan of Rs.100 crores for setting
up a SEZ project. The corporate debtor is a subsidiary of M/s.
Assam Company India Limited (ACIL). The loan granted by
the financial creditor to the corporate debtor was secured by a
Signature Not Verified
mortgage made by the corporate debtor of its leasehold land
Digitally signed by
ASHISH KONDLE
Date: 2024.07.23
18:44:24 IST
Reason:
and a pledge of shares of the corporate debtor and ACIL. The
loan was also secured by the corporate guarantee dated 5th

Civil Appeal No.4565 of 2021 Page 1 of 42

 January 2011 furnished by ACIL. The financial creditor filed
an Original Application before the Debt Recovery Tribunal-I,
Kolkata (for short, ‘the DRT’) to recover the outstanding loan
amount. On 24th March 2015, a “debt repayment and
settlement agreement” was executed to which the financial
creditor, the corporate debtor and ACIL (the guarantor) were
parties. On account of the default committed by the corporate
debtor, the financial creditor invoked the corporate guarantee
of ACIL. Thereafter, an application under Section 7 of the
Insolvency and Bankruptcy Code, 2016 (for short, ‘the IBC’)
was filed concerning ACIL as the guarantee was not honoured.
The adjudicating authority vide order dated 26th October 2017
admitted the said application. Thus, the Corporate Insolvency
Resolution Process (for short, ‘CIRP’) of ACIL commenced. The
1st respondent-financial creditor filed a claim of Rs.648.81
crores, out of which the claim of Rs.357.29 crores was
admitted towards the claim by the Interim Resolution
Professional (for short, ‘IRP’). After the appointment of the
Resolution Professional (RP), the claim amount of the 1st
respondent financial creditor was reassessed at Rs.241.27
crores inclusive of the principal amount of Rs.100 crores. The
appellant is the successful Resolution Applicant of ACIL. The
appellant submitted a resolution plan. The resolution plan
was approved on 13th August 2018 by the Committee of
Creditors (for short, ‘the COC’), which was approved by the
adjudicating authority by the order dated 20th September
2018. The order of the adjudicating authority was confirmed
in appeal by the National Company Law Appellate Tribunal (for
short, ‘the NCLAT’). The appellant paid Rs.38.87 crores to the

Civil Appeal No.4565 of 2021 Page 2 of 42

 1st respondent-financial creditor, against the admitted claim
of Rs.241.27 crores in full and final settlement of all its dues
and demands submitted in the resolution plan.

2. On 10th February 2020, the 1st respondent financial

creditor filed an application under Section 7 of the IBC against
the 2nd respondent corporate debtor. The claim of the 1st
respondent-financial creditor was of Rs.1428 crores, which is
claimed to be the balance amount payable to the financial
creditor under the loan facility of Rs.100 crores. By the order
dated 18th November 2020, the adjudicating authority
admitted the application under Section 7 of the IBC. Aggrieved
by the said order, the appellant preferred an appeal before the
NCLAT. A suspended Director of the corporate debtor also
preferred an appeal against the said order of the adjudicating
authority. By the impugned judgment of the NCLAT, both
appeals have been dismissed.

3. M/s. Zaveri & Co. Pvt. Ltd. has filed I.A. No.11685 of
2023 for intervention. It is stated in the application that the
applicant and other interested parties had submitted the
resolution plan of the 2nd respondent-corporate debtor. A final
resolution plan was submitted by the applicant on 23rd August
2021, proposing to pay a sum of Rs.135 crores within a period
of 15 months to the creditors of the 2nd respondent-corporate
debtor. The COC of the 2nd respondent-corporate debtor
approved the resolution plan of the applicant on 30th August
2021. As required by the approved resolution plan, the
applicant has furnished a bank guarantee of Rs.2 crores on
3rd September 2021.

Civil Appeal No.4565 of 2021 Page 3 of 42

 SUBMISSIONS OF THE APPELLANT

4. Mr. Jaideep Gupta, the learned senior counsel appearing

for the appellant, submitted that in the CIRP of ACIL, the
appellant’s resolution plan was duly approved. As per the
resolution plan, a sum of Rs.38.87 crores was paid to the 1st
respondent-financial creditor, which was in full and final
settlement of the dues of the 1st respondent-financial creditor.
He submitted that upon such payment being made by the
appellant, Section 140 of the Indian Contract Act, 1872 (for
short, ‘the Contract Act’) would squarely apply as the rights of
the 1st respondent-financial creditor shall stand subrogated in
favour of the appellant. Therefore, through ACIL, the
appellant would step into the shoes of the 1st respondent-
financial creditor. He would, thus, submit that the appellant
has the right of subrogation over the right of the financial
creditor over the principal borrower (corporate debtor) in
respect of its dues as well as the security provided to the
financial creditor of the mortgage in respect of SEZ land. He
submitted that upon payment of Rs.38.87 crores to the 1st
respondent-financial creditor, as a full and final settlement of
its total dues of Rs.241.27 crores, the appellant has now
stepped into the shoes of the 1st respondent-financial creditor.
He relied on this Court's decision in the case of Amit Lal
Goverdhan Lalan v. State Bank of Travancore & Ors1.

5. The learned senior counsel further submitted that for

attracting Section 140 of the Contract Act, the payment by the

1
(1968) 3 SCR 724

Civil Appeal No.4565 of 2021 Page 4 of 42

 guarantor does not have to be of the entire amount due from
the principal debtor. Even a partial payment made in the full
and final settlement is sufficient to trigger the principle of
subrogation. He placed reliance on a decision of the Allahabad
High Court in the case of Shib Charan Das v. Muqaddam &
Ors2. He submitted that the High Court of Karnataka, in the
case of Kadamba Sugar Industries Pvt. Ltd. v. Devru
Ganapathi Hegde Bhairi3 has held that acceptance of the
lesser amount by the creditor under the complete satisfaction
of the dues paid by the surety, entitled surety to the right of
subrogation. The surety is entitled to all the rights of the
creditor against the principal debtor. He also relied upon a
decision of this Court in the case of Economic Transport
Organization, Delhi v. Charan Spinning Mills Pvt. Ltd. &
Anr.4.

6. He submitted that upon receipt of Rs.38.87 crores from

the guarantor, the debt repayable to the 1st respondent
financial creditor has been discharged. The 1st respondent
financial creditor is now estopped from enforcing the
remaining part of the debt from the 2nd respondent-corporate
debtor in view of Section 63 read with Section 41 of the
Contract Act. The 1st respondent financial creditor applied
Section 7 of the IBC against the 2nd respondent corporate
debtor, though the entire debt of the 1st respondent financial
creditor has been discharged. Moreover, there is a right of
subrogation. He relied upon a decision of this Court in the

2
AIR 1936 ALL 62
3
1993 SCC Online KAR 7
4
(2010) 4 SCC 114

Civil Appeal No.4565 of 2021 Page 5 of 42

 case of Lala Kapurchand Godha & Ors. v. Mir Nawab
Himayatalikhan Azamjah5.

SUBMISSIONS OF THE 1ST RESPONDENT – FINANCIAL

CREDITOR

7. Mr Abhimanyu Bhandari, the learned counsel appearing

for the 1st respondent-financial creditor, has taken us through
the impugned orders. He pointed out that the resolution plan
of the 2nd respondent-corporate debtor has been approved by
the adjudicating authority by the order dated 19th September
2023. He submitted that no payment was made against the
claim raised by ACIL as it was an unsecured financial creditor
primarily because the liquidation value of the 2nd respondent-
corporate debtor is much lower than the total claim amount of
the secured financial creditors. He pointed out that the main
grievance of the appellant is that the institution of corporate
insolvency has been upheld against the 2nd respondent-
corporate debtor, for the assets allegedly part of the CIRP of
ACIL, which is the holding company of the 2nd respondent-
corporate debtor. He pointed out that under Section 36(4) of
the IBC, the assets of the subsidiary of the corporate debtor
cannot be included in the liquidation estate assets. He invited
our attention to Section 18 of the IBC, which contains the
duties of IRPs. He submitted that if there is a resolution of a
corporate debtor, the assets of any of its subsidiaries will not
be included in the scope of the resolution process. He
submitted that the holding company and its subsidiaries are
distinct legal persons, and the holding company does not own

5
(1963) 2 SCR 168

Civil Appeal No.4565 of 2021 Page 6 of 42

 the subsidiary's assets. The learned counsel relied upon a
decision of this Court in the case of Vodafone International
Holdings BV v. Union of India & Anr6. He also relied upon
a decision of this Court in the case of Jaypee Kensington
Boulevard Apartments Welfare Association & Ors. v.
NBCC (India) Ltd. & Ors7. Inviting our attention to the
information memorandum in the CIRP of ACIL, he submitted
that the same did not contain the particulars of the assets of
the 2nd respondent-corporate debtor. It was specifically stated
therein that the 2nd respondent-corporate debtor was still to
unlock the value of the land, that is, the value of the
investment made by ACIL. It was disclosed that the 2nd
respondent-corporate debtor was a 51% subsidiary of ACIL.
The assets and liabilities of ACIL, disclosed in the information
memorandum, did not include the assets and liabilities of the
subsidiaries. Therefore, the assets and liabilities of the 2nd
respondent-corporate debtor were not part of CIRP of ACIL.
He also pointed out the definition clause in the resolution
plan. The liquidation value of ACIL was shown as Rs.360
crores, and the financial value did not include its subsidiaries'
income. It is expressly provided in clauses 13.1 and 13.3 of
the resolution plan that all the assets of ACIL shall stand
extinguished, and the corporate guarantee of ACIL would also
be extinguished. There is a specific clause that no right of
subrogation shall be available to the existing guarantors. He
submitted that only a sum of Rs.38.87 crores was given to the
1st respondent-financial creditor. Therefore, the liability of the

6
(2012) 6 SCC 613
7
(2022) 1 SCC 401

Civil Appeal No.4565 of 2021 Page 7 of 42

 2nd respondent-corporate debtor concerning the balance
amount continued to exist.

8. He invited our attention to the decision of this Court

dated 21st May 2021 in the case of Lalit Kumar Jain v. Union
of India & Ors8. This judgment lays down that it is open for
the creditors to move against personal guarantors under the
IBC. He submitted that because the liability of the guarantor
is co-extensive with the corporate debtor, this Court held that
the approval of a resolution plan of the corporate debtor does
not ipso facto discharge guarantors of the corporate debtor of
their liabilities under the contract of guarantee. It was held
that by involuntary process or due to liquidation or insolvency
proceedings, corporate guarantors are not absolved of their
liability, which arises out of an independent contract. In this
case, the entire outstanding amount payable by the 2nd
respondent-corporate debtor has not been recovered from
ACIL. Therefore, there is no bar on the 1st respondent-financial
creditor to proceed against the 2nd respondent-corporate
debtor for the remaining amount. In this case, the 1st
respondent-financial creditor first moved against the
guarantor and, after exhausting the remedies against the
guarantor, filed an application under Section 7 against the 2nd
respondent-corporate debtor. Merely because the creditor has
made a partial recovery from the guarantor, it does not absolve
the corporate debtor of his financial obligations. Reliance was

8
(2021) 9 SCC 321

Civil Appeal No.4565 of 2021 Page 8 of 42

 placed upon a decision of this Court in the case of Maitreya
Doshi v. Anand Rathi Global Finance Ltd. & Anr9.

9. Regarding the plea of subrogation, the learned counsel

pointed out that the plea was never raised before the
adjudicating authority and the NCLAT. The ground of
subrogation was made by way of an amendment to the
memorandum of this appeal; therefore, the contention not
raised earlier cannot be considered at this stage. He pointed
out that the COC and the adjudicating authority have already
approved the resolution plan for the 2nd respondent-corporate
debtor. He submitted that this Court had settled this issue in
the case of Committee of Creditors of Essar Steel India Ltd.
v. Satish Kumar Gupta & Ors10. He relied upon a decision
of the Hyderabad Bench of the NCLT in the case of State Bank
of India v. Ghanshyam Surajbali Kurmi11, which covered
the issue.

SUBMISSIONS OF INTERVENORS

10. Mr. Darius Khambata, the learned senior counsel

appearing for the intervenor, also made detailed submissions.
He pointed out that under Section 128 of the Contract Act, the
liability of a surety is co-extensive with that of the principal
debtor unless there is something contrary to that in the
contract. He relied upon a decision of this Court in the case
of Laxmi Pat Surana v. Union of India & Anr12 on this

9
2022 SCC Online SC 1276
10
2019 SCC Online SC 1478
11
2022 SCC Online NCLT 14567
12
(2021) 8 SCC 481

Civil Appeal No.4565 of 2021 Page 9 of 42

 behalf. He submitted that the guarantor's liability is separate
and distinct from the principal debtor as held by this Court in
the case of Punjab National Bank Ltd. v. Shri Vikram
Cotton Mills & Anr.13 This Court held that a binding
obligation created under a composition under Section 391 of
the Companies Act, 1956, between the company and its
creditors, did not affect the liability of surety. He submitted
that any variation in the contract between the creditor and
guarantor does not discharge the principal debtor. If there is
a variance made without the guarantor’s consent in the
contract between the corporate debtor and the creditor, it
amounts to the discharge of the guarantor as regards the
transactions subsequent to the variance. He pointed out
various provisions of the Contract Act regarding the discharge
of a guarantor. Relying upon Section 60(2) of the IBC and a
decision of this Court in the case of Lalit Kumar Jain8, he
urged that the IBC permits simultaneous petitions against the
corporate debtor and corporate guarantor. He also invited our
attention to Section 60(2) of the IBC. He relied upon a decision
of this Court in the case of State Bank of India v. V.
Ramakrishnan & Anr14. He submitted that Section 140 of
the Contract Act will be applicable only when the guarantor
pays all that he is liable for under the contract of guarantee.
He submitted that if the guarantor makes only a part payment
of the debt, Section 140 will not have any application. He
relied upon a decision of the Allahabad High Court in the case

13
(1970) 1 SCC 60
14
(2018) 17 SCC 394

Civil Appeal No.4565 of 2021 Page 10 of 42

 of Darbari Lal & Anr. v. Mahbub Ali Mian & Ors15. He
submitted that this proposition finds support even in the
decision of the Allahabad High Court in the case of Shib
Charan Das2 relied upon by the appellant. He pointed out
that in the information memorandum of ACIL, the assets and
liabilities of the 2nd respondent-corporate debtor were not
included. The assets of the 2nd respondent-corporate debtor
cannot be treated as a part of ACIL’s assets. He submitted
that the resolution plan of ACIL has been prepared based on
the information memorandum. He submitted that the
information memorandum and the resolution plan must be
consistent with Section 36(4)(d) of the IBC.

REPLY OF THE APPELLANT

11. Replying to the submissions made by the learned

counsel appearing for the 1st respondent-financial creditor,
the learned senior counsel appearing for the appellant
reiterated his submissions on the applicability of Section 140
of the Contract Act. His submission is that the information
memorandum indicates taking over the business of ACIL and
the 2nd respondent-corporate debtor. He submitted that the
business of the 2nd respondent-corporate debtor was included
in the insolvency plan. He submitted that by the admission of
an application under Section 7 against the 2nd respondent-
corporate debtor, a valuable asset of ACIL has been taken
away.

15
(1927) SCC Online ALL 121

Civil Appeal No.4565 of 2021 Page 11 of 42

 CONSIDERATION

12. Before we deal with the submissions canvassed across

the Bar, we must note the issues formulated in the impugned
judgment of the NCLAT. Based on the submissions made
before it, two issues were framed, which read thus:
“13. Following issues arise in this
appeal for our consideration:
(i) Whether the application under
Section 7 of IBC is barred by
limitation?
(ii) Whether the second Application
under Section 7 of IBC is not
maintainable against the Corporate
Debtor as for the same debt and
default, CIRP has already been taken
place against the Corporate
Guarantor and the Financial
Creditor has accepted the amount in
full and final settlement of all its
dues?”

13. The present appellant did not canvas the issue of

subrogation before the NCLAT. It is also not urged in the
memorandum of appeal before the NCLAT. We may note here
that the appellant has not seriously pressed the issue of the
bar of limitation in this appeal. The NCLAT rendered the
findings on both issues in favour of the respondents. There is
no dispute that the 1st respondent financial creditor had
granted a loan of Rs.100 crores to the 2nd respondent
corporate debtor. The loan was secured by the corporate
guarantee furnished by ACIL, which is the holding company of
the corporate debtor. There is no dispute that the 2nd
respondent-corporate debtor committed a default in payment

Civil Appeal No.4565 of 2021 Page 12 of 42

 of the loan amount. Therefore, the guarantee was invoked by
the 1st respondent-financial creditor, which led to the filing of
an application under Section 7 of the IBC against ACIL. The
CIRP of ACIL was completed, and the resolution plan was
approved. The claim lodged by the 1st respondent-financial
creditor was of Rs.241.27 crores. However, as per the
resolution plan, the 1st respondent-financial creditor had to
accept a haircut as it was provided therein that the 1st
respondent-financial creditor would get only a sum of
Rs.38.87 crores from the resolution applicant.

LIABILITY OF GUARANTOR / SURETY

14. As far as the guarantee is concerned, the law is very well

settled. The liability of the surety and the principal debtor is
co-extensive. The creditor has remedies available to recover
the amount payable by the principal borrower by proceeding
against both or any of them. The creditor can proceed against
the guarantor first without exhausting its remedies against the
principal borrower. Chapter VIII of the Contract Act contains
provisions regarding indemnity and guarantee. Section 126 is
relevant for our purposes, which reads thus:

“126. “Contract of guarantee”,

“surety”, “principal debtor” and
“creditor”.— A “contract of guarantee”
is a contract to perform the promise, or
discharge the liability, of a third person
in case of his default. The person who
gives the guarantee is called the
“surety”; the person in respect of whose
default the guarantee is given is called
the “principal debtor”, and the person to
whom the guarantee is given is called

Civil Appeal No.4565 of 2021 Page 13 of 42

 the “creditor”. A guarantee may be either
oral or written.”

A surety is also known as a guarantor. Section 128 reads

thus:

“128. Surety’s liability.— The liability

of the surety is co- extensive with that of
the principal debtor, unless it is
otherwise provided by the contract.”

It lays down the fundamental principle that the liability of the

surety is co-extensive with that of the principal debtor unless
otherwise provided by the contract. Sections 133 to 139 deal
with the discharge of surety, which read thus:
“133.Discharge of surety by variance
in terms of contract.— Any variance,
made without the surety’s consent, in
the terms of the contract between the
principal debtor and the creditor,
discharges the surety as to transactions
subsequent to the variance.

134.Discharge of surety by release or

discharge of principal debtor.— The
surety is discharged by any contract
between the creditor and the principal
debtor, by which the principal debtor is
released, or by any act or omission of the
creditor, the legal consequence of which
is the discharge of the principal debtor.

135. Discharge of surety when

creditor compounds with, gives time
to, or agrees not to sue, principal
debtor.— A contract between the
creditor and the principal debtor, by
which the creditor makes a composition
with, or promises to give time to, or not
to sue, the principal debtor, discharges

Civil Appeal No.4565 of 2021 Page 14 of 42

 the surety, unless the surety assents to
such contract.

136. Surety not discharged when

agreement made with third person to
give time to principal debtor.— Where
a contract to give time to the principal
debtor is made by the creditor with a
third person, and not with the principal
debtor, the surety is not discharged.

137. Creditor’s forbearance to sue

does not discharge surety.— Mere
forbearance on the part of the creditor to
sue the principal debtor or to enforce
any other remedy against him does not,
in the absence of any provision in the
guarantee to the contrary, discharge the
surety.

138.Release of one co-surety does not

discharge others.— Where there are co-
sureties, a release by the creditor of one
of them does not discharge the others;
neither does it free the surety so released
from his responsibility to the other
sureties.

139. Discharge of surety by creditor’s

act or omission impairing surety’s
eventual remedy.— If the creditor does
any act which is inconsistent with the
rights of the surety, or omits to do any
act which his duty to the surety requires
him to do, and the eventual remedy of
the surety himself against the principal
debtor is thereby impaired, the surety is
discharged.”

Thus, the law provides that if any variance is made without

surety’s consent in the terms of the contract between the
principal debtor and the creditor, it amounts to discharge of

Civil Appeal No.4565 of 2021 Page 15 of 42

 the surety as to the transactions subsequent to the variance.
Under the provisions of Section 133, surety can be discharged
only when there is a variance made in the terms of the contract
between the principal debtor and the creditor. Section 134
contemplates a situation where the principal debtor is
released by a contract between the creditor and the principal
debtor. In such a case, the surety is discharged. If by any act
or omission on the part of the creditor, the legal consequence
of which is the discharge of the principal debtor, the surety
stands discharged. Section 135 is based on the same principle
on which Section 133 is based. If there is a contract between
the creditor and the principal debtor by which the creditor
makes a composition or promise with the principal debtor, or
gives time to the principal debtor or agrees not to sue the
principal debtor, it amounts to discharge of the surety
provided the surety has not assented to such a contract. If
the creditor contracts with a third party to give time to the
principal debtor, and when the principal debtor is not a party
to such a contract, the surety is not discharged. Section 137
lays down a settled principle that it is not necessary for the
creditor to first sue the principal debtor or adopt a remedy
against him. If the creditor omits to do that, unless there is a
contract to the contrary, it will not amount to discharge of the
surety. This means that without proceeding to recover the
debt against the principal debtor, the creditor can proceed
against the surety unless there is a contract to the contrary.
Even if the creditor discharges one surety, it will not amount
to the discharge of the other surety. There are two other
contingencies provided under Sections 138 and 139. We are

Civil Appeal No.4565 of 2021 Page 16 of 42

 not concerned with these two contingencies in the present
case.

15. If the creditor recovers a part of the amount guaranteed

by the surety from the surety and agrees not to proceed
against the surety for the balance amount, that will not
extinguish the remaining debt payable by the principal
borrower. In such a case, the creditor can proceed against the
principal borrower to recover the balance amount. Similarly,
if there is a compromise or settlement between the creditor
and the surety to which the principal borrower is not a
consenting party, the liability of the borrower qua the creditor
will remain unaffected. The provisions regarding the
discharge of the surety discussed above show that involuntary
acts of the principal borrower or creditor do not result in the
discharge of surety.

16. In the case of Lalit Kumar Jain8, this Court dealt with
the legal effect of approving the resolution plan in CIRP of the
corporate debtor on the liability of the surety. This is in the
context of Section 135 of the Contract Act, which provides that
if the creditor compounds with or gives time or agrees not to
sue the principal debtor, it amounts to discharge of the surety.
In paragraphs 122 to 125 of the said decision, this Court held
thus:
“122. It is therefore, clear that the
sanction of a resolution plan and finality
imparted to it by Section 31 does not per
se operate as a discharge of the
guarantor's liability. As to the nature
and extent of the liability, much would
depend on the terms of the guarantee

Civil Appeal No.4565 of 2021 Page 17 of 42

 itself. However, this Court has
indicated, time and again, that an
involuntary act of the principal
debtor leading to loss of security,
would not absolve a guarantor of its
liability. In Maharashtra
SEB [Maharashtra SEB v. Official
Liquidator, (1982) 3 SCC 358] the
liability of the guarantor (in a case
where liability of the principal debtor
was discharged under the Insolvency
law or the Company law), was
considered. It was held that in view of
the unequivocal guarantee, such
liability of the guarantor continues
and the creditor can realise the same
from the guarantor in view of the
language of Section 128 of the
Contract Act, 1872 as there is no
discharge under Section 134 of that
Act. This Court observed as follows :
(SCC pp. 362-63, para 7)

“7. Under the bank guarantee in

question the Bank has undertaken
to pay the Electricity Board any
sum up to Rs 50,000 and in order
to realise it all that the Electricity
Board has to do is to make a
demand. Within forty-eight hours of
such demand the Bank has to pay
the amount to the Electricity Board
which is not under any obligation to
prove any default on the part of the
Company in liquidation before the
amount demanded is paid. The
Bank cannot raise the plea that it is
liable only to the extent of any loss
that may have been sustained by
the Electricity Board owing to any
default on the part of the supplier of
goods i.e. the Company in
liquidation. The liability is absolute

Civil Appeal No.4565 of 2021 Page 18 of 42

 and unconditional. The fact that the
Company in liquidation i.e. the
principal debtor has gone into
liquidation also would not have any
effect on the liability of the Bank i.e.
the guarantor. Under Section 128 of
the Contract Act, 1872, the liability
of the surety is coextensive with
that of the principal debtor unless it
is otherwise provided by the
contract. A surety is no doubt
discharged under Section 134 of the
Contract Act, 1872 by any contract
between the creditor and the
principal debtor by which the
principal debtor is released or by
any act or omission of the creditor,
the legal consequence of which is
the discharge of the principal
debtor. But a discharge which the
principal debtor may secure by
operation of law in bankruptcy (or
in liquidation proceedings in the
case of a company) does not
absolve the surety of his liability
(see Jagannath Ganeshram
Agarwale v. Shivnarayan
Bhagirath [Jagannath Ganeshram
Agarwale v. Shivnarayan
Bhagirath, 1939 SCC OnLine Bom
65:AIR 1940 Bom
247]; see also Fitzgeorge, In
re [Fitzgeorge, In re,(1905)1KB462]
).”

123. This legal position was noticed and

approved later in Industrial Finance
Corpn. of India Ltd. v. Cannanore Spg.
& Wvg. Mills Ltd. [Industrial Finance
Corpn. of India Ltd. v. Cannanore Spg.
& Wvg. Mills Ltd., (2002) 5 SCC 54] An
earlier decision of three Judges
in Punjab National Bank v. State of

Civil Appeal No.4565 of 2021 Page 19 of 42

 U.P. [Punjab National Bank v. State of
U.P., (2002) 5 SCC 80] pertains to the
issues regarding a guarantor and the
principal debtor. The Court observed as
follows : (Punjab National Bank
case [Punjab National Bank v. State of
U.P., (2002) 5 SCC 80] , SCC p. 80-81,
paras 1-6)

“1. The appellant had, after

Respondent 4's management was
taken over by U.P. State Textile
Corporation Ltd. (Respondent 3)
under the Industries (Development
and Regulation) Act, advanced some
money to the said Respondent 4. In
respect of the advance so made,
Respondents 1, 2 and 3 executed
deeds of guarantee undertaking to
pay the amount due to the Bank as
guarantors in the event of the
principal borrower being unable to
pay the same.

2. Subsequently, Respondent 3
which had taken over the
management of Respondent 4
became sick and proceedings were
initiated under the Sick Textile
Undertakings (Nationalisation) Act,
1974 (for short “the Act”). The
appellant filed suit for recovery
against the guarantors and the
principal debtor of the amount
claimed by it.

3. The following preliminary issue

was, on the pleadings of the parties,
framed:

‘Whether the claim of the plaintiff is

not maintainable in view of the
provisions of Act 57 of 1974 as

Civil Appeal No.4565 of 2021 Page 20 of 42

 alleged in Para 25 of the written
statement of Defendant 2?’

4. The trial court as well as the High

Court, both came to the conclusion
that in view of the provisions of
Section 29 of the Act, the suit of the
appellant was not maintainable.

5. We have gone through the

provisions of the said Act and in our
opinion the decision of the courts
below is not correct. Section 5 of the
said Act provides for the owner to be
liable for certain prior liabilities and
Section 29 states that the said Act
will have an overriding effect over all
other enactments. This Act only
deals with the liabilities of a
company which is nationalised and
there is no provision therein which
in any way affects the liability of a
guarantor who is bound by the deed
of guarantee executed by it. The
High Court has referred to a
decision of this Court
in Maharashtra SEB v. Official
Liquidator [Maharashtra
SEB v. Official Liquidator, (1982) 3
SCC 358] where the liability of the
guarantor in a case where liability of
the principal debtor was discharged
under the Insolvency law or the
Company law, was considered. It
was held in this case that in view
of the unequivocal guarantee,
such liability of the guarantor
continues and the creditor can
realise the same from the
guarantor in view of the language
of Section 128 of the Contract
Act, 1872 as there is no discharge
under Section 134 of that Act.

Civil Appeal No.4565 of 2021 Page 21 of 42

 6. In our opinion, the principle of
the aforesaid decision of this Court
is equally applicable in the present
case. The right of the appellant to
recover money from Respondents 1,
2 and 3 who stood guarantors arises
out of the terms of the deeds of
guarantee which are not in any way
superseded or brought to a naught
merely because the appellant may
not have been able to recover money
from the principal borrower. It may
here be added that even as a result
of the Nationalisation Act the
liability of the principal borrower
does not come to an end. It is only
the mode of recovery which is
referred to in the said Act.”

124. In Kaupthing Singer & Friedlander

Ltd. [Kaupthing Singer & Friedlander
Ltd. (No. 2), In re, (2012) 1 AC 804 :
(2011) 3 WLR 939 : (2012) 1 All ER 883,
paras 11, 12, 53-54] the UK Supreme
Court reviewed a large number of
previous authorities on the concept of
double proof i.e. recovery from
guarantors in the context of insolvency
proceedings. The Court held that: (AC p.
814, para 11)

“11. The function of the rule is not

to prevent a double proof of the
same debt against two separate
estates (that is what insolvency
practitioners call “double dip”). The
rule prevents a double proof of what
is in substance the same debt being
made against the same estate,
leading to the payment of a double
dividend out of one estate. It is for
that reason sometimes called the
rule against double dividend. In the

Civil Appeal No.4565 of 2021 Page 22 of 42

 simplest case of suretyship (where
the surety has neither given nor
been provided with security, and
has an unlimited liability) there is a
triangle of rights and liabilities
between the principal debtor (“PD”),
the surety (“S”) and the creditor
(“C”). PD has the primary obligation
to C and a secondary obligation to
indemnify S if and so far as S
discharges PD's liability, but if PD is
insolvent S may not enforce that
right in competition with C. S has
an obligation to C to answer for PD's
liability, and the secondary right of
obtaining an indemnity from PD. C
can (after due notice) proceed
against either or both of PD and S.
If both PD and S are in insolvent
liquidation, C can prove against
each for 100p in the pound but may
not recover more than 100p in the
pound in all.”

125. In view of the above discussion, it

is held that approval of a resolution
plan does not ipso facto discharge a
personal guarantor (of a corporate
debtor) of her or his liabilities under
the contract of guarantee. As held by
this Court, the release or discharge of
a principal borrower from the debt
owed by it to its creditor, by an
involuntary process i.e. by operation
of law, or due to liquidation or
insolvency proceeding, does not
absolve the surety/guarantor of his or
her liability, which arises out of an
independent contract.”
(emphasis added)

This Court dealt with a situation where a resolution plan for

the principal borrower was approved in CIRP, and the

Civil Appeal No.4565 of 2021 Page 23 of 42

 principal borrower was discharged from the debt by operation
of law through an involuntary process. It was held that the
contract between the creditor and the surety is independent;
therefore, the approval of the resolution plan of the principal
borrower will not amount to the discharge of the surety. The
same principles will apply when the resolution plan is
approved in CIRP of the surety. In such a case, the surety gets
a discharge from his liability under the guarantee by operation
of law or by involuntary process. It will not amount to the
discharge of the principal borrower.

17. Section 31 of the IBC reads thus:

“31.Approval of resolution plan.–

(1) If the Adjudicating Authority is

satisfied that the resolution plan as
approved by the committee of creditors
under sub-section (4) of section 30
meets the requirements as referred to in
sub-section (2) of section 30, it shall by
order approve the resolution plan
which shall be binding on the
corporate debtor and its employees,
members, creditors, including the
Central Government, any State
Government or any local authority to
whom a debt in respect of the
payment of dues arising under any
law for the time being in force, such
as authorities to whom statutory dues
are owed, guarantors and other
stakeholders involved in the
resolution plan.

Provided that the Adjudicating Authority

shall, before passing an order for
approval of resolution plan under this

Civil Appeal No.4565 of 2021 Page 24 of 42

 sub-section, satisfy that the resolution
plan has provisions for its effective
implementation.

(2) Where the Adjudicating Authority is

satisfied that the resolution plan does
not confirm to the requirements referred
to in sub-section (1), it may, by an order,
reject the resolution plan.

(3) After the order of approval under sub-

section (1),-

(a) the moratorium order passed by

the Adjudicating Authority under
section 14 shall cease to have effect;
and

(b) the resolution professional shall

forward all records relating to the
conduct of the corporate insolvency
resolution process and the
resolution plan to the Board to be
recorded on its database.

(4) The resolution applicant shall,

pursuant to the resolution plan
approved under sub-section (1), obtain
the necessary approval required under
any law for the time being in force within
a period of one year from the date of
approval of the resolution plan by the
Adjudicating Authority under sub-
section (1) or within such period as
provided for in such law, whichever is
later:

Provided that where the resolution plan

contains a provision for combination, as
referred to in section 5 of the
Competition Act, 2002, the resolution
applicant shall obtain the approval of
the Competition Commission of India
under that Act prior to the approval of

Civil Appeal No.4565 of 2021 Page 25 of 42

 such resolution plan by the committee of
creditors.”
(emphasis added)

The resolution plan of the corporate debtor approved by the

adjudicating authority binds the corporate debtor, its
employees, members, creditors, guarantor and other
stakeholders. Therefore, where a company furnishes a
corporate guarantee for securing a loan taken by another
company and if the CIRP of the corporate guarantor ends in a
resolution plan, it will bind the creditor of the corporate
guarantor. The corporate guarantor's liability may end in
such a case by operation of law. However, such a resolution
plan of the corporate guarantor will not affect the liability of
the principal borrower to repay the loan amount to the creditor
after deducting the amount recovered from the corporate
guarantor or the amount paid by the resolution applicant on
behalf of the corporate guarantor as per the resolution plan.

18. As observed earlier, in such a loan transaction secured

by a guarantee, the guarantor has an obligation to repay the
loan amount to the creditor, and there is a separate and
distinct obligation on the borrower to pay the amount to the
creditor. Such a transaction creates a right in favour of the
creditor to proceed against the guarantor and borrower for
recovery. However, he has the right to recover the amount
only to the extent of the loan amount payable by the borrower.

Civil Appeal No.4565 of 2021 Page 26 of 42

 SIMULTANEOUS PROCEEDINGS UNDER THE IBC AGAINST
THE CORPORATE DEBTOR AND GUARANTOR

19. Now, we turn to the provisions of the IBC. Sub-section

(8) of Section 5 defines ‘financial debt’. Clauses (a) and (i) of
sub-section (8) show that the money borrowed against the
payment of interest and the amount of any liability in respect
of any guarantee for repayment of the loan covered by clause
(a) have been put under separate headings. Thus, the liability
of the guarantor or surety is a financial debt, and even the
money borrowed against the payment of interest is also a
financial debt. In the light of these provisions, Section 60 of
the IBC is relevant, which reads thus:
“60. Adjudicating Authority for
corporate persons. -

(1) The Adjudicating Authority, in

relation to insolvency resolution and
liquidation for corporate persons
including corporate debtors and
personal guarantors thereof shall be the
National Company Law Tribunal having
territorial jurisdiction over the place
where the registered office of a corporate
person is located.

(2) Without prejudice to sub-section (1)

and notwithstanding anything to the
contrary contained in this Code, where
a corporate insolvency resolution
process or liquidation proceeding of a
corporate debtor is pending before a
National Company Law Tribunal, an
application relating to the insolvency
resolution or liquidation or
bankruptcy of a corporate guarantor
or personal guarantor, as the case
may be, of such corporate debtor shall

Civil Appeal No.4565 of 2021 Page 27 of 42

 be filed before the National Company
Law Tribunal.

(3) An insolvency resolution process

or liquidation or bankruptcy
proceeding of a corporate guarantor
or personal guarantor, as the case
may be, of the corporate debtor
pending in any court or tribunal shall
stand transferred to the Adjudicating
Authority dealing with insolvency
resolution process or liquidation
proceeding of such corporate debtor.

(4) The National Company Law Tribunal

shall be vested with all the powers of the
Debt Recovery Tribunal as contemplated
under Part III of this Code for the
purpose of sub-section (2).

(5) Notwithstanding anything to the

contrary contained in any other law for
the time being in force, the National
Company Law Tribunal shall have
jurisdiction to entertain or dispose of –

(a) any application or proceeding by

or against the corporate debtor or
corporate person;

(b) any claim made by or against the

corporate debtor or corporate
person, including claims by or
against any of its subsidiaries
situated in India; and

(c) any question of priorities or any

question of law or facts, arising out
of or in relation to the insolvency
resolution or liquidation
proceedings of the corporate debtor
or corporate person under this
Code.

Civil Appeal No.4565 of 2021 Page 28 of 42

 (6) Notwithstanding anything contained
in the Limitation Act, 1963 or in any
other law for the time being in force, in
computing the period of limitation
specified for any suit or application by or
against a corporate debtor for which an
order of moratorium has been made
under this Part, the period during which
such moratorium is in place shall be
excluded.”
(emphasis added)

Sub-section (2) of Section 60 contemplates separate or

simultaneous insolvency proceedings against the corporate
debtor and guarantor. Therefore, sub-section (3) of Section 60
provides that if CIRP in respect of the corporate guarantor is
pending before an adjudicating authority and if the CIRP
against the corporate debtor is pending before another
adjudicating authority, CIRP proceedings against the
corporate guarantor must be transferred to the adjudicating
authority before whom CIRP in respect of the corporate debtor
is pending. Thus, consistent with the basic principles of the
Contract Act that the liability of the principal borrower and
surety is co-extensive, the IBC permits separate or
simultaneous proceedings to be initiated under Section 7 by a
financial creditor against the corporate debtor and the
corporate guarantor.

WHETHER THE ASSETS OF THE CORPORATE DEBTOR

WERE PART OF CIRP IN RESPECT OF ACIL – CORPORATE
GUARANTOR

20. Now, we will deal with the submissions made by the

appellant that the assets of the 2nd respondent-corporate
debtor were also a part of the CIRP in respect of ACIL. This

Civil Appeal No.4565 of 2021 Page 29 of 42

 submission was made on the ground that according to the
appellant, the information memorandum published in
accordance with Section 29 of the IBC indicates taking over of
the business of ACIL and the 2nd respondent-corporate debtor.
Clause 3, under the heading “SEZ Business” in the
information memorandum, specifically mentions that ACIL
has acquired, through its subsidiary (2nd respondent-
corporate debtor), 296 hectares of land for setting up the SEZ
project. It is further stated that the entire project cost of SEZ,
inclusive of land acquisition, was financed through equity and
unsecured loans contributed by ACIL. It further records that
SEZ is a separate company. However, it is stated that the
financial obligations of the SEZ units are on ACIL. As SEZ is
stated to be a separate company, it is not included in the
resolution plan, which was duly approved. As rightly found
by the NCLAT, the resolution plan takes care only of the
investments of ACIL in the subsidiaries and not the assets of
subsidiaries. As indicated in the subsequent paragraphs,
considering the scheme of the IBC, assets of a subsidiary
company cannot be part of the resolution plan of the holding
company.

21. It is necessary to take notice of the two critical provisions

of the IBC, which are Sections 18 and 36. Section 18 and
Section 36 read thus:
“18. Duties of interim resolution
professional.-

The interim resolution professional shall

perform the following duties, namely: -

Civil Appeal No.4565 of 2021 Page 30 of 42

 (a) collect all information relating to the
assets, finances and operations of the
corporate debtor for determining the
financial position of the corporate
debtor, including information relating
to-

(i) business operations for the

previous two years;

(ii) financial and operational

payments for the previous two
years;

(iii) list of assets and liabilities as on

the initiation date; and

(iv) such other matters as may be

specified;

(b) receive and collate all the claims

submitted by creditors to him, pursuant
to the public announcement made
under sections 13 and 15;

(c) constitute a committee of creditors;

(d) monitor the assets of the corporate

debtor and manage its operations until
a resolution professional is appointed by
the committee of creditors;

(e) file information collected with the

information utility, if necessary; and

(f) take control and custody of any asset

over which the corporate debtor has
ownership rights as recorded in the
balance sheet of the corporate debtor, or
with information utility or the depository
of securities or any other registry that
records the ownership of assets
including –

Civil Appeal No.4565 of 2021 Page 31 of 42

 (i) assets over which the corporate
debtor has ownership rights which
may be located in a foreign country;

(ii) assets that may or may not be in

possession of the corporate debtor;

(iii) tangible assets, whether

movable or immovable;

(iv) intangible assets including

intellectual property;

(v) securities including shares held

in any subsidiary of the corporate
debtor, financial instruments,
insurance policies;

(vi) assets subject to the

determination of ownership by a
court or authority;

(g) to perform such other duties as may

be specified by the Board.

Explanation. – For the purposes of

this, the term “assets” shall not
include the following, namely: -

(a) assets owned by a third party

in possession of the corporate
debtor held under trust or under
contractual arrangements
including bailment;

(b) assets of any Indian or foreign

subsidiary of the corporate
debtor; and

(c) such other assets as may be

notified by the Central Government
in consultation with any financial
sector regulator.
.. .. .. .. .. .. .. .. .. ..
(emphasis added)

Civil Appeal No.4565 of 2021 Page 32 of 42

 36. Liquidation estate. –

(1) For the purposes of liquidation, the

liquidator shall form an estate of the
assets mentioned in sub-section (3),
which will be called the liquidation
estate in relation to the corporate debtor.

(2) The liquidator shall hold the

liquidation estate as a fiduciary for the
benefit of all the creditors.

(3) Subject to sub-section (4), the

liquidation estate shall comprise all
liquidation estate assets which shall
include the following: -

(a) any assets over which the

corporate debtor has ownership
rights, including all rights and
interests therein as evidenced in the
balance sheet of the corporate
debtor or an information utility or
records in the registry or any
depository recording securities of
the corporate debtor or by any other
means as may be specified by the
Board, including shares held in any
subsidiary of the corporate debtor;

(b) assets that may or may not be in

possession of the corporate debtor
including but not limited to
encumbered assets;

(c) tangible assets, whether movable

or immovable;

(d) intangible assets including but

not limited to intellectual property,
securities (including shares held in
a subsidiary of the corporate debtor)
and financial instruments,

Civil Appeal No.4565 of 2021 Page 33 of 42

 insurance policies, contractual
rights;

(e) assets subject to the

determination of ownership by the
court or authority;

(f) any assets or their value

recovered through proceedings for
avoidance of transactions in
accordance with this Chapter;

(g) any asset of the corporate debtor

in respect of which a secured
creditor has relinquished security
interest;

(h) any other property belonging to

or vested in the corporate debtor at
the insolvency commencement
date; and

(i) all proceeds of liquidation as and

when they are realised.

(4) The following shall not be included

in the liquidation estate assets and
shall not be used for recovery in the
liquidation: -

(a) assets owned by a third party

which are in possession of the
corporate debtor, including –

(i) assets held in trust for any third

party;

(ii) bailment contracts;

(iii) all sums due to any workmen or

employee from the provident fund,
the pension fund and the gratuity
fund;

Civil Appeal No.4565 of 2021 Page 34 of 42

 (iv) other contractual arrangements
which do not stipulate transfer of
title but only use of the assets; and

(v) such other assets as may be

notified by the Central Government
in consultation with any financial
sector regulator;

(b) assets in security collateral held by

financial services providers and are
subject to netting and set-off in multi-
lateral trading or clearing
transactions;

(c) personal assets of any shareholder

or partner of a corporate debtor as the
case may be provided such assets are
not held on account of avoidance
transactions that may be avoided
under this Chapter;

(d) assets of any Indian or foreign

subsidiary of the corporate debtor;
or

(e) any other assets as may be

specified by the Board, including
assets which could be subject to set-
off on account of mutual dealings
between the corporate debtor and any
creditor.”
(emphasis added)

There is a mandate of clause (d) of sub-section (4) of Section

36 of the IBC that the assets of an Indian subsidiary of the
corporate debtor shall not be included in the liquidation estate
assets and shall not be used for the recovery in liquidation.
Section 18 entrusts several duties to the IRPs concerning the
corporate debtor's assets. Consistent with the provisions of
Section 36(4)(d), the explanation (b) to Section 18(1) provides

Civil Appeal No.4565 of 2021 Page 35 of 42

 that the term ‘assets’ used in Section 18 shall not include the
assets of any Indian subsidiary of the corporate debtor.
Perhaps the reason for including these two provisions is that
it is well-settled that a shareholder has no interest in the
company's assets. This view has been taken by this Court in
paragraph 10 of its decision in the case of Bacha F. Guzdar
v. Commissioner of Income Tax, Bombay16, which reads
thus:
“10. The interest of a shareholder vis-à-
vis the company was explained
in Charanjit Lal Chowdhury v.Union of
India [CharanjitLal Chowdhury v. Union
of India, 1950 SCC 833 at p. 862 : 1950
SCR 869 at p. 904]. That judgment
negatives the position taken up on
behalf of the appellant that a
shareholder has got a right in the
property of the company. It is true that
the shareholders of the company have
the sole determining voice in
administering the affairs of the
company and are entitled, as provided
by the articles of association, to
declare that dividends should be
distributed out of the profits of the
company to the shareholders but the
interest of the shareholder either
individually or collectively does not
amount to more than a right to
participate in the profits of the
company. The company is a juristic
person and is distinct from the
shareholders. It is the company which
owns the property and not the
shareholders. The dividend is a share
of the profits declared by the

16
(1955) 1 SCR 876

Civil Appeal No.4565 of 2021 Page 36 of 42

 company as liable to be distributed
among the shareholders.”
(emphasis added)

A holding company and its subsidiary are always distinct legal

entities. The holding company would own shares of the
subsidiary company. That does not make the holding
company the owner of the subsidiary's assets. In the case of
Vodafone International Holdings BV6, this Court took the
view that if a subsidiary company is wound up, its assets do
not belong to the holding company but to the liquidator. As
mentioned in the decision, the reason is that a company is a
separate legal persona and the fact that the parent company
owns all its share has nothing to do with its separate legal
existence. Therefore, the assets of the subsidiary company of
the corporate debtor cannot be part of the resolution plan of the
corporate debtor.

22. In the impugned judgment, the NCLAT has referred to

various clauses in the revised resolution plan of ACIL,
including clauses 12.3 and 13.3 and held that these clauses
do not suggest that the 1st respondent-financial creditor
accepted the amount as full and final settlement of all its dues.
It was held that the effect of approval of the resolution plan is
that the right to recover the loan amount from the corporate
guarantor stands extinguished. Chapter VI, under the
heading ‘financial, value and projections’ in the approved
resolution plan, records as follows:
“The projections have been made on the
basis that ACIL shall continue to operate
all the businesses. Provided that the
investments of ACIL in the subsidiaries

Civil Appeal No.4565 of 2021 Page 37 of 42

 may be discontinued/liquidated sold
depending a business exigency.
Therefore, the business plan financial
projections do not include income
that the subsidiaries.”
(emphasis added)

Clause 13.3 of the approved resolution plan reads thus:

“13.3 All corporate guarantees,
indemnities, letters of comfort,
undertakings provided by ACIL., in
respect of any third party liability
(including of subsidiaries) shall stand
revoked and extinguished on the
effective date pursuant to approval of the
resolution plan by the order of the NCLT,
without the requirement of any further
act or deed by the Resolution Applicant
and/or ACIL.”

The effect of the said clause is that the liabilities of ACIL in

respect of the third parties including the subsidiaries shall
stand revoked and extinguished with effect from the effective
date.

23. Thus, by virtue of the CIRP process of ACIL (corporate

guarantor), the 2nd respondent-corporate debtor does not get
a discharge, and its liability to repay the loan amount to the
extent to which it is not recovered from the corporate
guarantor is not extinguished.

SUBROGATION UNDER SECTION 140 OF THE CONTRACT

ACT

24. Now, we come to the argument based on subrogation as

provided under Section 140 of the Contract Act. Reliance was
placed by both parties on conflicting decisions of different High

Civil Appeal No.4565 of 2021 Page 38 of 42

 Courts. Therefore, this issue will have to be resolved. Section
140 is relevant which reads thus:
“140.Rights of surety on payment or
performance.— Where a guaranteed
debt has become due, or default of the
principal debtor to perform a guaranteed
duty has taken place, the surety upon
payment or performance of all that he is
liable for is invested with all the rights
which the creditor had against the
principal debtor.”

The words used in Section 140 are “upon payment or

performance of all that he is liable for”. When the principal
debtor commits a default and when the liability under the deed
of guarantee of the surety is not limited to a particular
amount, its liability is in respect of the entire amount
repayable by the principal debtor to the creditor. The words
‘all that he is liable’ used under Section 140 cannot be ignored.
The principal borrower must continuously indemnify the
surety. Section 140 of the Contract Act may be founded on the
said obligation. The 1st respondent-financial creditor relied
upon a decision of this Court in the case of Economic
Transport Corporation, Delhi4, which holds that the
doctrine of subrogation is a creature of equity. Therefore, the
Section will have to be interpreted having regard to the
equitable principles. If the surety pays the entirety of the
amount payable under guarantee to the creditor, Section 140
provides a remedy to the surety to recover the entire amount
paid by him in the discharge of his obligations. Therefore, the
surety gets invested with the rights of the creditor to recover
from the principal debtor the amount which was paid as per

Civil Appeal No.4565 of 2021 Page 39 of 42

 the guarantee. If the surety pays only a part of the amount
payable to the creditor, the equitable right the surety gets
under Section 140 will be confined to the debt he cleared.

25. Under the corporate guarantee, in the facts of this case,

the liability of ACIL was to the extent of the entire amount
repayable by the 2nd respondent-corporate debtor to the
corporate creditor. In the CIRP of ACIL, the appellant paid a
sum of Rs.38.87 crores only to the 1st respondent-financial
creditor. The amount was paid by the appellant on behalf of
ACIL, the corporate guarantor. For the rest of the amount
payable as per the guarantee, the 1st respondent-financial
creditor had to take a haircut because of the involuntary
process by operation of law. Only the liability of ACIL under
the corporate guarantee to repay the loan to the 1st
respondent-financial creditor has been extinguished on the
payment of Rs.38.87 crores. By the involuntary act of the
creditor of accepting part of the amount from the surety in the
discharge of the entire liability of the surety, even if Section
140 is attracted, it will confer on the guarantor or the
appellant the right to recover only the amount mentioned
above from the corporate debtor. The subrogation will be only
to the extent of the amount recovered by the creditor from the
surety. Notwithstanding the subrogation to the extent of the
amount paid on behalf of the corporate guarantor by the
resolution applicant, the right of the financial creditor to
recover the balance debt payable by the corporate debtor is in
no way extinguished.

Civil Appeal No.4565 of 2021 Page 40 of 42

 26. In the circumstances, we cannot accept the submissions
made by the learned counsel appearing for the appellant based
on Section 140 of the Contract Act. As stated earlier, the issue
of the subrogation canvassed before us has not been pressed
into service by the appellant, as can be seen even from the
written submissions.

27. The last argument sought to be canvassed was that by

the admission of an application under Section 7 of the IBC
against the 2nd respondent-corporate debtor, the valuable
assets of ACIL have been taken away. As observed earlier, the
assets of the subsidiary company of ACIL cannot form part of
the CIRP process of ACIL, and factually, the assets of the 2nd
respondent-corporate debtor were not part of the resolution
plan approved in the CIRP of ACIL.

28. Hence, we summarize some of our conclusions as under:

a. Payment of the sum of Rs.38.87 crores to the 1st

respondent-financial creditor under the resolution
plan of the corporate guarantor-ACIL will not
extinguish the liability of the 2nd respondent-
principal borrower/corporate debtor to pay the entire
amount payable under the loan transaction after
deducting the amount paid on behalf of the corporate
guarantor in terms of its resolution plan;

b. A holding company is not the owner of the assets of

its subsidiary. Therefore, the assets of the
subsidiaries cannot be included in the resolution
plan of the holding company, and

Civil Appeal No.4565 of 2021 Page 41 of 42

 c. The financial creditor can always file separate
applications under Section 7 of the IBC against the
corporate debtor and the corporate guarantor. The
applications can be filed simultaneously as well;

29. Thus, the view taken by NCLAT cannot be faulted.

Accordingly, the appeal is hereby dismissed with no order as
to costs.

……………………..J.
(Abhay S. Oka)

……………………..J.
(Pankaj Mithal)
New Delhi;
July 23, 2024.

Civil Appeal No.4565 of 2021 Page 42 of 42