Palak Kumar
INTRODUCTION
The contract of guarantee is one of the fundamental concepts of contract law. It provides that as soon as the principal debtor defaults, the liability of the guarantor comes into play. However, with the evolution of Insolvency and Bankruptcy Code, 2016 (“Code”) there have been several decisions by the National Company Law Tribunal (“NCLT”) and National Company Law Appellate Tribunal (“NCLAT”) which have unsettled the law relating to guarantee and have caused a great deal of confusion to the creditors in enforcing their remedies. The confusion has been caused mainly on account of conflicting decisions on the simultaneous proceedings under the Insolvency regime against both the Corporate Debtor (“CD”) as well as the guarantor qua the same debt. There seems to be a legislative lacuna which shall be analyzed during the course of this discussion.
BASIC PRINCIPLE OF GUARANTEE
The principle of guarantee involves three parties, the principal borrower, the guarantor and the creditor. It is an arrangement were the principal borrower promises to pay the amount borrowed from the creditor within a stipulated period and in the event of default by the borrower, the liability of both the borrower and the guarantor arises together. The guarantor can either be a corporate debtor or a natural person. It is recognised that the liability of both the borrower and the guarantor are co-extensive [1] and therefore, the basic idea behind guarantee would be defeated and the interests of the creditor would be prejudiced if the creditor is asked to exhaust its remedy against the borrower first before taking any action against the guarantor. The right of the creditor to move against both the debtor and the guarantor forms the core of the concept of guarantee.
GUARANTEE UNDER THE INSOLVENCY REGIME
While, the Indian Contracts Act pursuant to Section 128 recognises that the liability of both the corporate debtor and the guarantor are co-extensive unless anything contrary is agreed under the contract, with the advent of IBC there has been plethora of debates and discussions about whether a creditor can initiate Corporate Insolvency Resolution Process (“CIRP”) simultaneously against the CD as well as the corporate guarantor as well as the personal guarantor.
Under the Code, a financial debt under Section 5(8) refers to debt along with interest which is disbursed against consideration for time value of money. It also includes payment of interest, any counter indemnity obligation in respect of guarantee, bond, documentary letter of credit or any other instrument issued by a bank or financial institution and any amount of liability with respect to such guarantee or indemnity. [2]
Section 60 clauses 2 and 3 [3] provide for simultaneous filing of CIRP applications against both the debtor as well as the guarantor. Section 14 of the Code [4] which provides for moratorium excludes the assets of the surety from the protection of moratorium thereby providing that action can be taken against the guarantor during the CIRP.
Further, it is pertinent to note the observations of the Insolvency Law Committee report of February 2020 [5] wherein the report in para 7.3 provided that while it is true that a creditor under a contract of guarantee cannot recover more than the amount that is due to it, any action against the debtor cannot be nullified simply because the creditor has an alternative remedy against the guarantor. The creditor must be at a liberty to proceed either against the debtor, guarantor, or against both of them. Any restriction on proceeding against the CD or the guarantor will prejudice the rights of the creditor to initiate CIRP against both of them.
While the law as discussed above seems to be very clear that there can be simultaneous initiation of CIRP against both the CD and the guarantor, the judicial precedents from various NCLTs and NCLATs have caused confusion among the creditors with respect to initiation of CIRP thereby creating uncertainty in the revival of the CD.
ANALYSIS OF CONFLICTING PRECEDENTS
The NCLAT in as recent as March 2021 in the order of State Bank of India v. Mr. Animesh Mukhopadhyay (“SBI judgment”) [6] held that till payment is received in one CIRP, the claim of the lender for the same amount can be maintained in the insolvency proceeding against both the CD and the corporate guarantor.
It is pertinent to mention at this juncture that this judgment holds a lot of relevance under the insolvency regime because it is contrary to the NCLAT decision in the case of Dr. Vishnu Kumar Agarwal v. M/s. Piramal Enterprises Ltd. (“Piramal Judgment”) [7]. The NCLAT in the Piramal judgment noted that “Admittedly, for same set of debts, claim cannot be filed by same ‘Financial Creditor’ in two separate ‘Corporate Insolvency Resolution Processes’.” This position as provided by the Piramal judgment has lead to the murky waters in the settled position of law with respect to the CIRP in cases involving contracts of guarantee. The judgment paved the way for an absurd conclusion that the creditor would be left high and dry if the claim against the CD could not be raised. This goes against the fundamental principal of co-extensive rights of the CD and the guarantor.
For the purposes of appreciating the decision of the NCLAT in the recent SBI judgment it is relevant to trace the jurisprudence in this regard.
The question with respect to whether simultaneous CIRP against the CD and the corporate guarantor can be initiated arose before the NCLT as early as 2018 in the case of ICICI Bank Limited v. CA Ritu Rastogi [8], wherein the NCLT affirmed that there can be such a remedy against both the CD and the guarantor. Later came the Supreme Court (“SC”) decision in the case of State Bank of India v. Ramakrishnan & Anr (“Ramakrishnan Judgment”) [9]. The issue that cropped up before the SC was that whether moratorium under Section 14 of the Code applies not only to the CD but also to the guarantor. The SC observed that the moratorium does not apply to the guarantor and that the liability of the CD and the guarantor is co-extensive and it is for the creditor to decide as to who he initiates action against. It can proceed against the assets of the CD, the guarantor or both and there lies no particular order for taking action against either of them. The SC also relied on the provisions of Section 60(2) and (3) of the Code and observed that based on these provisions it is clear that an application filed for CIRP against the CD, post the admission, any bankruptcy proceeding against the personal guarantor which is initiated shall be transferred to NCLT. This makes it clear that the Code provides for simultaneous initiation of CIRP against the CD and the guarantor.
This understanding further came to be reiterated in the NCLAT decision of Edelweiss Asset Reconstruction Company Ltd. v. Sachet Infrastructure Ltd. and Ors (“Edelweiss”) [10] in the year 2019 wherein, it was held that such simultaneous initiation of CIRP against the guarantor and the CD in no particular order does not cause duplicity of claims. It provided that if the claim of the creditor is satisfied in one proceeding, the same can be adjusted/cancelled in another proceeding.
However, this settled position was conveniently overlooked by the NCLAT in the Piramal Judgment thereby unsettling the position as has been followed by courts. In the Piramal judgment, the facts were such that two separate section 7 applications for initiation of CIRP against two corporate guarantors were filed by the financial creditor (“FC”). The application against the second corporate guarantor was admitted 7 days before the admission of the application against the first corporate guarantor. The admission of the second application was challenged before the NCLAT. The NCLAT was faced with the question as to whether two applications can be filed against two corporate guarantors for the same debt and default. The NCLAT even though relied on the Ramakrishnan case, gave a contrary view holding that two CIRP applications cannot be admitted against two corporate guarantors for the same debt and default. This case has deviated from the myriads of previous decisions thereby causing confusion in the insolvency arena with respect to CIRP initiation against the CD and the guarantors. On account of the hue and cry caused due to this judgment, the matter was brought before the SC, the SC ordered a stay on the application of the NCLAT order and the matter is pending adjudication before the SC.
Now, while the matter is pending, another judgment which came in November 2020 needs attention which further added bits to the controversy. It is the case of State Bank of India v. Athena Energy Ventures Pvt. Ltd (“Athena Judgment”) [11]. In this case a Section 7 application was filed by the SBI (financial creditor) against the principal borrower. Later, another Section 7 application was filed against the guarantor of the CD. The second application was challenged on the ground that the two applications against the same claim under the same loan agreement cannot be entertained. The NCLT after referring to the Piramal judgment refused to admit two applications against the same claim. The matter was challenged before the NCLAT, where the NCLAT reversed the order of the NCLT after relying on the Insolvency Committee Report and Section 60(3) of the Code. The Court ruled that an application against the borrower and the guarantor can continue simultaneously and there appears no bar on such proceedings.
The Athena judgment seems to uphold the correct principal with respect to the co-extensive liability of both the CD and the guarantor.
From the perusal of the above cases, it can be seen that the Court’s stance with respect to such simultaneous initiation of CIRPs against the CD and the guarantor has been positive barring the Piramal judgment wherein the court ruled in negative. It is pertinent to note at this juncture that all the Piramal judgment, the Edelweiss judgment, Athena Judgment and the SBI judgment are two judge bench decisions of the NCLAT and therefore none of them overrides the other. The decision of the SC over the pending Piramal judgment is likely to settle the murkiness around the simultaneous CIRP initiation against the CD and the guarantors.
WAY FORWARD
One of the ways to get rid of such conundrum is to allow simultaneous applications for CIRPS against both the CD and the guarantor and whichever applications get resolved first the other can be cancelled later on. Another alternative can be to set off the amount of claim that has been satisfied from one application against the second application.
Another way to deal with this problem can be to bring about an amendment with a categoric permission to allow simultaneous initiation of CIRP against both CD and the guarantor. This will prevent unnecessary delay in the completion of CIRP and the revival of the CD. The Code is an economic legislation which was brought in to maximize the assets of the corporate debtor as well as protection of the interests of all the stakeholders. Such delay in deciding whether the claim should be admitted or not only causes erosion of the assets of the CD thereby affecting the revival of the CD. Thus, clarity with respect to the position of simultaneous initiation of CIRP against the CD and the guarantor is the need to of the hour to bring about efficacy in the resolution of the stressed CD and protecting the interests of creditors.
References
[1] Section 128 Indian Contracts Act, 1872.
[2] Section 5(8) of Insolvency and Bankruptcy Code. 2016
[3] Section 60(2) & (3) Insolvency and Bankruptcy Code, 2016
[4] Section 14 Insolvency and Bankruptcy Code, 2016
[5] Report of the Insolvency Law Committee, February 2020. Last accessed on 30 April, 2021 and can be accessed at http://www.mca.gov.in/Ministry/pdf/ICLReport_05032020.pdf
[6] Company Appeal (AT) (Ins.) No. 186 of 2021
[7] Company Appeal (AT) (Insolvency) No. 346 of 2018
[8] CA366(PB/2017)
[9] CIVIL APPEAL NO. 3595 OF 2018
[10] Company Appeal (AT) (Insolvency) No. 377 of 2019
[11] Company Appeal (AT) (Ins) No.633 of 2020
In case of any queries with regards to the present article, Palak can be reached at palakkumar756@gmail.com
Indian Corporate & Finance Law Review 