IBC : Creditor Can Proceed Against Guarantor Even Without Proceeding Against Borrower

In Company Appeal (AT) (Insolvency) No. 346 of 2018, Dr. Vishnu Kumar Agarwal vs M/s. Piramal Enterprises Ltd., the borrowing by All India Society for Advance Education and Research was guaranteed by 2 corporate guarantors. On default, the lender raised notice on both the guarantors for exactly the same amount, then went to NCLT by filling 2 separate applications against the guarantors .The Adjudicating Authority admitted the application against both the guarantors. The Appellants raised questions on maintainability on two important issues:-

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’?

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

The NCLAT, referring to the judgements of the Supreme Court in Bank of Bihar v. Damodar Prasad and Anr., Ram Bahadur Thakur vs. Sabu Jain Limited, State Bank of India v. Indexport Registered and Ors., held that it is not necessary to initiate ‘Corporate Insolvency Resolution Process’ against the ‘Principal Borrower’ before initiating ‘Corporate Insolvency Resolution Process’ against the ‘Corporate Guarantors’. Without initiating any ‘Corporate Insolvency Resolution Process’ against the ‘Principal Borrower’, it is always open to the ‘Financial Creditor’ to initiate ‘Corporate Insolvency Resolution Process’ under Section 7 against the ‘Corporate Guarantors’, as the creditor is also the ‘Financial Creditor’ qua ‘Corporate Guarantor’.

For the second question, the NCLAT referring to the judgements of the Supreme Court in Innoventive Industries Ltd. v. ICICI Bank and Ors., decided that the moment the Adjudicating Authority admits an application against one guarantor, it is open to the other guarantor to say that the debt in question is not due as it is not payable in law, having shown the same debt payable by the another guarantor and ‘Corporate Insolvency Resolution Process’ having already been initiated against the said guarantor.

The NCLAT went on the opine that for same set of debt, claim cannot be filed by same ‘Financial Creditor’ in two separate ‘Corporate Insolvency Resolution Processes’. If same claim cannot be claimed from ‘Resolution Professionals’ of separate ‘Corporate Insolvency Resolution Processes’, for same claim amount and default, two applications under Section 7 cannot be admitted simultaneously. Once for same claim the ‘Corporate Insolvency Resolution Process’ is initiated against one of the ‘Corporate Debtor’ after such initiation, the ‘Financial Creditor’ cannot trigger ‘Corporate Insolvency

Resolution Process’ against the other ‘Corporate Debtor(s)’, for the same claim amount (debt). There is no bar in the ‘I&B Code’ for filing simultaneously two applications under Section 7 against the ‘Principal Borrower’ as well as the ‘Corporate Guarantor(s)’ or against both the ‘Guarantors’. However, once for same set of claim application under Section 7 filed by the ‘Financial Creditor’ is admitted against one of the ‘Corporate Debtor’ (‘Principal Borrower’ or ‘Corporate Guarantor(s)’), second application by the same ‘Financial Creditor’ for same set of claim and default cannot be admitted against the other ‘Corporate Debtor’ (the ‘Corporate Guarantor(s)’ or the ‘Principal Borrower’). Further, though there is a provision to file joint application under Section 7 by the ‘Financial Creditors’, no application can be filed by the ‘Financial Creditor’ against two or more ‘Corporate Debtors’ on the ground of joint liability (‘Principal Borrower’ and one ‘Corporate Guarantor’, or ‘Principal Borrower’ or two ‘Corporate Guarantors’ or one ‘Corporate Guarantor’ and other ‘Corporate Guarantor’), till it is shown that the ‘Corporate Debtors’ combinedly are joint venture company.