Corporate Law and The Legal Aspects of Corporate Guarantee : Supreme Court Explains the Law

Corporate Law and The Legal Aspects of Corporate Guarantee : Supreme Court Explains the Law

In a recent Judgment the law on corporate guarantee has been explained.

It is held that the corporate guarantees executed by the corporate debtor constitute “financial debt” within the meaning of Section 5(8) of the IBC, 2016. 

It is apposite to note that for a debt to become “financial debt” for the purpose of Part II of IBC, the essential elements of disbursal, and that too against the consideration for time value of money, needs to be found in the genesis of any debt before it may be treated as “financial debt” within the meaning of Section 5(8) of IBC. This debt may be of any nature but a part of it is always required to be carried, or corresponding to, or at least having some traces of disbursal against consideration for the time value of money.

Under Section 5(7) of IBC, a person can be categorized as a financial creditor if a financial debt is owed to it. Section 5(8) of IBC stipulates that the essential ingredient of a financial debt is disbursal against consideration for the time value of money.

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 IBC.

It is well settled legal proposition that a guarantor incurs a coextensive liability with that of a principal borrower and such liability is enforceable in law. 

The Reserve Bank of India has issued a master circular dated 01.07.2015, which provides for prudential norms on income recognition or NPA Classification, and provisioning pertaining to advances. The said master circular mandates that in case of restructured assets, its asset classification will be reckoned from the date it became NPA on the first occasion.

In exercise of the powers conferred under IBC, the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 have been framed. Regulation 10 of the Regulations deals with substantiation of claims, whereas Regulation 13 provides for verification of the claims. Regulation 10 of the said Regulations provides that IRP or RP may call for such other evidence or clarification as he deems fit from a creditor for substantiating the whole or part of its claim.

The production of corporate guarantees in a proceeding in New Delhi, does not attract the provisions of Maharashtra Stamp Duty Act, 1958. In any case, the legal position governing the effect of insufficiently stamped document is no longer res integra and the same does not become void or unenforceable merely on that account.

The defect of insufficient stamping of the document is curable in nature and does not go to the root of validity of the instrument. Even otherwise, the Stamp Act is a fiscal measure enacted to secure revenue for the State on certain classes of instrument. It is not intended to be used as a weapon by a litigant to defeat the cause of the opponent.

“Non stamping or improper stamping does not result in the instrument becoming invalid. The Stamp Act does not render such an instrument void. The non-payment of stamp duty is accurately characterized as a curable defect.” Therefore, the contention that the corporate guarantees were not duly stamped as Stamp Duty under the Maharashtra Stamp Duty Act, 1958 was not paid is sans substance.

Case : State Bank of India v. Doha Bank Q.P.S.C. [2026] GCtR 350 (SC)