India: Corporate Guarantors Of A Non-Corporate Debtor: NCLAT Lays Down Ground Rules

Last Updated: 4 February 2019
Article by Shreyash Taparia and Ashay Shah

In a recent judgment, the National Company Law Appellate Tribunal ("NCLAT"), New Delhi provided a clarification with regard to Section 5(8) and Section 7 of the Insolvency & Bankruptcy Code, 2016 ("the Code"). This judgment in Dr. Vishnu Kumar Agarwal Vs. M/s. Piramal Enterprises Ltd.1 throws light upon the following:

  1. Whether the 'Corporate Insolvency Resolution Process' can be initiated against a 'Corporate Guarantor', if the 'Principal Borrower' is not a 'Corporate Debtor' or 'Corporate Person'? ; and
  2. Whether the 'Corporate Insolvency Resolution Process' can be initiated against two 'Corporate Guarantors' simultaneously for the same set of debt and default.

Background of the case:

  • A Deed of Agreement was entered into by and between 'All India Society for Advance Education and Research' ("Principal Borrower") and Piramal Enterprises Limited ("Financial Creditor") for grant of Rs. 38,00,00,000/- (Rupees Thirty-Eight Crores Only).
  • The loan was guaranteed by two companies namely, 'Sunrise Naturopathy and Resorts Pvt. Ltd.' ("Corporate Guarantor 1") and 'Sunsystem Institute of Information Technology Pvt. Ltd.' ("Corporate Guarantor 2")
  • The Financial Creditor filed an application under Section 7 of the 'Insolvency & Bankruptcy Code, 2016' ("the Code") for initiation of the 'Corporate Insolvency Resolution Process' against the Corporate Guarantor 1 which was admitted vide order of the National Company Law Tribunal ("NCLT") dated 24th May, 2018;
  • Another application under Section 7 of the Code was filed for initiation of the 'Corporate Insolvency Resolution Process' against the Corporate Guarantor 2 which was admitted vide order of the NCLT dated 31st May, 2018;

The Guarantors argued that that no Corporate Insolvency Resolution Process can be initiated against the Corporate Guarantors, without initiating Corporate Insolvency Resolution Process against the 'Principal Borrower'. The NCLAT observed that clause 'h' which forms a part of the definition of 'financial debt' under Section 5 (8) of the Code, inter-alia, includes any counter-indemnity obligation in respect of a guarantee. Reliance was also placed on Section 128 of the Indian Contract Act, 1872 which inter-alia states that the guarantor's liability is co-extensive with that of the principal debtor2. The NCLAT held that it was not necessary to initiate 'Corporate Insolvency Resolution Process' against the 'Principal Borrower' before initiating 'Corporate Insolvency Resolution Process' against the 'Corporate Guarantors'.

However, in respect of two simultaneous applications under Section 7 of the Code being filed by the same Financial Creditor against both corporate guarantors, the NCLAT held that the second application by the same Financial Creditor, for the same set of claim and default cannot be admitted against Corporate Guarantor 2 after admission of the claim against Corporate Guarantor 1. The NCLAT upheld initiation of the 'Corporate Insolvency Resolution Process' initiated under Section 7 of the Code against Corporate Guarantor 1. 

Conclusion:

A financial creditor is at liberty to initiate 'Corporate Insolvency Resolution Process' against a corporate guarantor under Section 7 of the Code without first initiating a Section 7 application against the principal borrower with regard to the same debt/claim or default. Also, a financial creditor can file multiple applications under Section 7 of the Code for initiation of 'Corporate Insolvency Resolution Process' in respect of the same debt and default. However, upon admission of any one of such applications by the adjudicating authority, the other applications cannot be admitted and are liable to be set aside. Hence, multiple applications for initiation of a 'Corporate Insolvency Resolution Process' in respect of the same claim/debt cannot be proceeded with.

Footnotes:

1. Company Appeal (AT) (Insolvency) No. 346 of 2018 and Company Appeal (AT) (Insolvency) No. 347 of 2018

2. State Bank of India v. Indexport Registered and Ors.− (1992) 3 SCC 159 and Bank of Bihar v. Damodar Prasad and Anr.- (1969) 1 SCR 620

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