Insolvency & Banking Code

Initiating Corporate Insolvency against Guarantors

without involving the Principal Borrower

by SANDEEP SURI  Advocate

Chandigarh

20 January, 2019

 

Article deals with Whether the Corporate Insolvency Process can be initiated against a Corporate Guarantor without initiating process against the Principal Borrower who is neither a ‘Corporate Debtor’ nor ‘Corporate Person’. The NCLATs view on whether the Corporate Insolvency Resolution Process can be initiated against two ‘Corporate Guarantors’ simultaneously for the same set of debt and default has also been addressed.

The NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI in a judgment of far reaching consequences has dealt with 2 questions:

i. 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’?

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

Facts for consideration:

The issue which arose was whether the ‘Financial Creditor’- can claim same amount from the ‘Resolution Professional’ appointed pursuant to the ‘Corporate Insolvency Resolution Process’ against the ‘Corporate Guarantor No.1’, as also from the ‘Resolution Professional’ appointed pursuant to ‘Corporate Insolvency Resolution Process’ initiated against “Corporate Guarantor No.2”? 

A ‘Deed of Agreement’ was entered into by “Principal Borrower” with “Financial Creditor” for grant of a loan facility which was guaranteed by two ‘Corporate Guarantors’ namely — “Corporate Guarantor No.1” and “Corporate Guarantor No.2”.

 The ‘Financial Creditor’ had already filed a Civil Suit before the Court against the ‘Principal Borrower’ and both the ‘Corporate Guarantors’, which was pending adjudication.

‘Financial Creditor’ issued separate demand notices to both the ‘Corporate Guarantors’ calling upon each of the ‘Corporate Guarantors’ to make payment of the outstanding amount due from the ‘Principal Borrower’ within 15 days of receipt of such notice, failing which, the ‘Financial Creditor’ may take all remedial measures including the initiation of the ‘Corporate Insolvency Resolution Process’ in terms of the ‘Insolvency and Bankruptcy Code, 2016’ (“I&B Code” ).

On failure to clear the debt the ‘Financial Creditor’- thereafter, filed 2 applications under Section 7 of the ‘I&B Code’ for initiation of the ‘Corporate Insolvency Resolution Process’ against “Corporate Guarantor No.1” and a second application under Section 7 of the ‘I&B Code’ for initiation of the ‘Corporate Insolvency Resolution Process’ against “Corporate Guarantor No.2”.

Vide order dated 24th May, 2018 the Adjudicating Authority (National Company Law Tribunal) admitted the application and initiated ‘Corporate Insolvency Resolution Process’ against “Corporate Guarantor No.2”. By another order dated 31st May, 2018, the Adjudicating Authority (National Company Law Tribunal), admitted the second application also and initiated ‘Corporate Insolvency Resolution Process’ against “Corporate Guarantor No.1”.

From the perusal of records, including the Form-1 filed by the ‘Financial Creditor’- against both the ‘Corporate Guarantors No. 1 & 2’ (shown as ‘Corporate Debtors’) it was clear that same claim amount has been shown in both the Form-1, and reliance was placed on the same agreement. Debt amount and the amount of default, date of default etc. were also same. The Adjudicating Authority noticed the similarity in two separate impugned orders and used same language and reasoning and passed two orders one on 24th May, 2018 and the other on 31st May, 2018. On comparison of relevant portions of both Form-1, it was be evident that the total amount of debt granted; date(s) of disbursement; the amount claimed to be in default and the date of default occurred shown and other details including the demand notice etc. were the same in both cases i.e for the same cause of action two separate applications were filed under Section 7 of the ‘I&B Code’.

Question 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’?

It is not necessary to initiate ‘Corporate Insolvency Resolution Process’ against the ‘Principal Borrower’ before initiating ‘Corporate Insolvency Resolution Process’ against the ‘Corporate Guarantors’. Even 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’. The appellate tribunal has held that ‘Corporate Insolvency Resolution Process’ can be initiated against the ‘Corporate Guarantors’, without initiating ‘Corporate Insolvency Resolution Process’ against the ‘Principal Borrower’ even if ‘Principal Borrower’ not being a Company, no application under Sections 7 or 9 could be filed against it.     

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

For the 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).

Though there is no bar in the ‘I&B Code’ for simultaneously filing 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’).

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.

Finding

The tribunal upheld the initiation of the ‘Corporate Insolvency Resolution Process’ initiated under Section 7 of the ‘I&B Code’ against the “Corporate Guarantor No.2” by order dated 24th May, 2018 (first order), however held the order dated 31st May, 2018 initiating ‘Corporate Insolvency Resolution Process’ under Section 7 against the ‘Corporate Guarantor No.1’ for same very claim/debt as not permissible and held the application under Section 7 as not maintainable.

However the issue whether Corporate Insolvency Resolution Processes can be continued against the corporate guarantor even during the pendency of civil suit for recovery has not been addressed.

(Judgement passed in Dr. Vishnu Kumar Agarwal v. M/s. Piramal Enterprises Ltd. 8th January, 2019) 

About the authors: View Law firm Profile

SANDEEP SURI, (B.E. (Electronics), LLB, Chevening Scholar. (UK))

Rohit Suri, (B. Com., LLB)

Are seasoned lawyers with immense experience in the DRAT, NCLT, DRT and High court. (Chandigarh and New Delhi).