Entity issuing ‘comfort letter’ is not a corporate debtor or guarantor under the law: NCLT Delhi

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The National Company Law Court (“NCLT”), New Delhi Bench, consisting of Sri Prasad NHP (Judicial Member) and Shri Rahul Bhatnagar (Technical Member), while ruling on a motion filed in Ms. Shapoorji Pallonji and Company Pvt. Ltd v M/s. ASF Badges SEZ Pvt. Ltd., ruled that an entity that issues a “comfort letter” to a party cannot be considered a debtor company or a guarantor company under the law.

Background Facts

M/s Black Canyon SEZ Pvt. (“BCSPL”) and Shapoorji Pallonji and Company Pvt. ltd. (“Applicant”) had entered into a contract in which the Applicant was obligated to deliver certain work to BCSPL and BCSPL was to release payments accordingly. Mrs. ASF Insignia SEZ Pvt. ltd. (“Defendant”) had issued a letter of comfort to BCSPL, in which it was stated that if BCSPL does not make payments with respect to the work delivered by the Claimant under the contract, then the Respondent will ensure prompt payment of these contributions by BCSPL.

After BCSPL allegedly defaulted on its payment obligations, the Claimant issued a Notice of Demand to the Respondent under Section 8 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) . The Respondent responded to the notice by stating that under the Letter of Comfort, it had never assumed any reimbursement obligations to the Applicant, not even as a guarantor. In addition, a surety contract is a separate contract in itself by which the guarantor assumes the obligations of reimbursement; however, a letter of comfort cannot be assimilated to a “contract of guarantee”.

Subsequently, the Petitioner filed a petition under Section 9 of the IBC, requesting the initiation of a Corporate Insolvency Resolution Process (“CIRP”) against the Respondent.

NCLT Decision

The bench held that an entity that issues a letter of comfort cannot be treated as a debtor company or a guarantor company under the law. It has been found that the nature of the transactions between the Claimant and the Respondent does not constitute operational debt. The motion was dismissed as inadmissible as there was no operating debt and the respondent was not a corporate debtor or surety.

Case title: Ms. Shapoorji Pallonji and Company Pvt. Ltd v M/s. ASF Badges SEZ Pvt. Ltd., IB-197/ND/2022

Counsel for the Applicant: Ms. Akanksha Kaul, Mr. Manek Singh and Mr. Aman Sahani, lawyers.

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