NCLAT | Whether Corporate Insolvency Resolution Process can be initiated against Principal Borrower and Corporate Guarantor simultaneously for same set of debt and default? Tribunal decides

National Company Appellate Tribunal (NCLAT): The Division Bench of Justice A.I.S Cheena (Judicial Member) and V.P. Singh (Technical Member) reinforced that in the matter of guarantee, CIRP can proceed simultaneously against the Principal Borrower as well as Guarantor.

The instant appeal was filed under Section 61(1) of the Insolvency and Bankruptcy Code, 2016 (IBC) against the impugned order dated 04-03-2020 passed by Adjudicating Authority.

Appellant –State Bank of India filed the Application against Respondent –Athena Energy Ventures Private Limited — Corporate Debtor who was Corporate Guarantor for Athena Chattisgarh Power Ltd.

The application was filed as Borrower committed default in repayment of the financial assistance provided to the Borrower.

It has been stated that the borrower availed financial assistance from the appellant bank and other banks, in the consortium and had executed necessary documents in favour of the appellant and other consortium banks.

When the need for the Borrower increased, the Respondent which is a joint venture and promoter of Borrower came forward and executed corporate guarantee and documents in favour of the Appellant and other consortium of banks.

It has been added that respondent was under the obligation to see that amounts availed under the finance from the appellant was repaid by the borrower.

Due to the default bein committed by the borrower, appellant had filed an application under Section 7 of the IBC against the borrower before the adjudicating authority.

The instant application was filed under Section 7 of IBC to seek initiation of CIRP against Respondent-Corporate Guarantor.

Respondent opposed the application claiming that the application was arising out of the very same transaction and very same common loan agreement as amended by first amendment agreement followed by the Second Amendment Agreement and thus the application filed by the appellant against respondent was duplicating the claim which was not permissible.

Decision of the Adjudicating Authority

Relying on the decision of Vishnu Kumar Agarwal v. Piramal Enterprise Ltd.2019 SCC OnLine NCLAT 81 the Adjudicating Authority declined to admit the Application as it was on the same set of facts, claim and default for which CIRP was already initiated and was in progress and where according to the Adjudicating Authority, the claim of Applicant had already been admitted. Thus, the Application of the Appellant against the Respondent came to be rejected.

Hence, the present appeal was filed against the above Judgment of the Adjudicating Authority.

Analysis and Decision 

The main issue which Bench referred to was:

“Whether the ‘Corporate Insolvency Resolution Process’ can be initiated against two ‘Corporate Guarantors’ simultaneously for the same set of debt and default?”

Bench stated that this Tribunal while dealing with the above-stated issue referred to the Judgment in the matter of Innoventive Industries Ltd. v. ICICI Bank, (2018) 1 SCC 407, where the scheme of the Code was discussed by the Supreme Court. This Court took note of the definition of Financial Creditor and financial debt, and raised the question whether for the same very claim and for same very default, the Application under Section 7 against the other Corporate Debtor (Guarantor 1) can be “initiated”.

Further, adding to the above, Tribunal stated that considering the issues which were before this Tribunal when the matter of Vishnu Kumar Agarwal v. Piramal Enterprise Ltd. was decided, it is clear that the issue was relating to question whether CIRP can be initiated against two Corporate Guarantors simultaneously for the same set of debt and default. The issue was not whether Application can be filed against the Principal Borrower as well as the Corporate Guarantor. The observations made in the Judgement that second application for the same set of claim and default can not be admitted against the Corporate Guarantor or Principal Borrower was not an issue in the matter of Vishnu Kumar Agarwal v. Piramal Enterprise Ltd.

Apart from the above observations, the decision in the matter of Vishnu Kumar Agarwal v. Piramal Enterprise Ltd. did not notice sub-sections 2 and 3 of Section 60 of IBC.

In Sub-Section 2, the earlier words were “bankruptcy of a personal guarantor of such corporate debtor”. These words were later on substituted by the words “liquidation or bankruptcy of a corporate guarantor or personal guarantor as the case may be, of such Corporate Debtor”. These words were substituted by the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018.

In the matter of SBI v. Ramakrishnan, (2018) 17 SCC 394, which was pronounced 3 days before the above-stated amendment, Section 60 (2) and (3) as they stood before the amendment was enforced.

Bench observed that,

If the provisions of Section 60(2) and (3) are kept in view, it can be said that IBC has no aversion to simultaneously proceeding against the Corporate Debtor and Corporate Guarantor.

If two applications can be filed, for the same amount against Principal Borrower and Guarantor keeping in view the above provisions, the Applications can also be maintained.

It is for such reason that Section 60 (3) provides that if insolvency resolution process or liquidation or bankruptcy proceedings of a Corporate Guarantor or Personal Guarantor as the case may be of the Corporate Debtor is pending in any Court or Tribunal, it shall stand transferred to the Adjudicating Authority dealing with insolvency resolution process or liquidation proceeding of such Corporate Debtor.

Tribunal also found substance in the argument placed by the appellant’s counsel in regard to the Report of Insolvency Law Committee. ILC rightly referred to the subsequent Judgment of Edelweiss Asset Reconstruction Company Ltd. v. Sachet Infrastructure Ltd.,2019 SCC OnLine NCLAT 592 which permitted simultaneously initiation of CIRP’s against Principal Borrower and its Corporate Guarantors.

Adding to the above, the Bench also stated that ILC rightly observed that provisions are there in the form of Section 60(2) and (3) and no amendment or legal changes were required at the moment.

Hence Tribunal observed that simultaneously remedy is central to a contract of guarantee and where Principal Borrower and surety are undergoing CIRP, the Creditor should be able to file claims in CIRP of both of them.IBC does not prevent this.

Under the Contract of Guarantee, it is only when the Creditor would receive the amount, the question of no more due or adjustment would arise.

While parting with its decision, Tribunal held that it is clear in the matter of guarantee, CIRP can proceed against the Principal Borrower as well as Guarantor.

Tribunal in view of the above-stated reasons could not interpret the law as interpreted in the matter of “Piramal.”

Hence, the decision of the Adjudicating Authority was upheld. [State Bank of India v. Athena Energy, 2020 SCC OnLine NCLAT 774, decided on 24-11-2020]


Advocates who appeared in the instant case:

For Appellant: Advocates V.M. Kannan, Sambit Panja and Sanjay Kapur.

For Respondent: Ramesh Babu Paluta, Advocate

Join the discussion

Your email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.