NCLAT upholds insolvency case on Tulip Hotels over default of guarantees

The National Company Law Appellate Tribunal (NCLAT) has upheld the insolvency proceedings against Tulip Hotels, which had defaulted on Rs 450 crore corporate guarantees given for Cox & Kings and EzeeGo One Travel & Tours each.

On May 16, 2023, the Mumbai bench of National Company Law Tribunal (NCLT) had directed initiation of a Corporate Insolvency Resolution Process (CIRP) against Tulip Hotels over a plea filed by Yes Bank, claiming a default of Rs 900 crore for two corporate guarantees issued by it.

The order was challenged before appellate body NCLAT, which upheld the earlier order by NCLT, saying when a corporate debtor gives a guarantee for a loan transaction, the right of the financial creditor to initiate action against it gets trigger the moment the principal borrower commits a default.

Tulip Hotels was a corporate guarantor for two loans disbursed by Yes Bank to Cox & Kings and EzeeGo One Travel and Tours Ltd.

After they defaulted, the financial creditor Yes Bank invoked the guarantee of Rs 450 crore each given for both loans.

"When default is committed by the principal borrower, the amount becomes due against both the principal borrower and the Corporate Guarantor and hence both become liable to pay the amount when the default is committed," said NCLAT in its order on Tuesday while dismissing the appeal.

The appellate insolvency tribunal further said, "the default by the principal borrower and the guarantor arises on the same date," unless, the terms of the contract of guarantee provide that the liability of the guarantor would arise in terms of the agreement.

In the present case, Yes Bank had invoked the guarantee, therefore, the defaults had arisen on the issue of the demand notice as contemplated in the guarantee.

"In the present case, notice has been duly served upon the Corporate Guarantor demanding payment and there being a clear default on the part of the Corporate Guarantor to clear the outstanding due, the Adjudicating Authority has rightly admitted the Corporate Debtor in its capacity as Corporate Guarantor into CIRP," said NCLAT.

It further said there is a clear default on the part of the Corporate Guarantor (Tulip Hotels) to clear the outstanding due.

"We are of the view that the Adjudicating Authority has rightly admitted the Section 7 application for initiation of the CIRP process after coming to the correct conclusion that Respondent No 1 (financial creditor) has successfully proved the financial debt and default on part of the Corporate Debtor as Corporate Guarantor.

" We see no reason to interfere in the impugned order passed by the Adjudicating Authority. The appeal is accordingly dismissed," said the NCLAT order.

Tulip Hotels had contended that it was not related to both the defaulters and have not received any funds from them.