By Dhiraj Yadav and Barkha Dwivedi
It is a well settled principle that the liability of a Principal Debtor and a Guarantor is coextensive. The same is enshrined under section 128 of the Indian Contract Act, 1872. Despite this, the act of initiating simultaneous proceedings against Principal Debtor and Guarantor for the same amount of debt has remained controversial. The question first arose before the Hon’ble NCLT Delhi in the case ICICI Bank Ltd. v. CA Ritu Rastogi, wherein it allowed the application of ICICI bank to proceed simultaneously against the Principal Debtor and Guarantor. However, recently the Hon’ble NCLAT, in the case of Dr Vishnu Kumar Aggarwal v. M/s Piramal Enterprises Limited took a contrary stand by restraining the initiation of insolvency proceedings against the Principal Debtor and the Corporate Guarantor simultaneously. The Hon’ble NCLAT also made the position clear that an insolvency proceeding cannot be initiated against two corporate Guarantors either for the same amount of debt.
In the case of Piramal Enterprises, a ‘Deed of Agreement’ was entered into by All India Society for Advance Education and Research with Piramal Enterprises Limited for the grant of rupees 38 crore. The same was guaranteed by two corporate Guarantors namely Sunrise Naturopathy & Resorts Pvt. Ltd. and Sunsystem Institute of Information Technology Pvt. Ltd. On default by the borrower, Piramal Enterprises filed two separate applications for the initiation of Corporate Insolvency Resolution Process [“CIRP”] against the Corporate Guarantors for the same amount of debt under Section 7 of the Insolvency and Bankruptcy Code, 2016 [“IBC”]. The Hon’ble NCLT by the impugned Order dated 24.05.2018 and 31.05.2018, admitted both the applications for the initiation of the CIRP. However, NCLAT reversed the same vide its Order dated 8.01.2019. It reasoned that for the same amount of debt, a claim cannot be filed in two separate CIRP by the same ‘Financial Creditor’. Similarly, if the same amount of debt cannot be claimed from two resolution professionals of separate CIRP, two applications under Section 7 of the IBC cannot be admitted simultaneously for the same.
It is pertinent to note that the Hon’ble Apex Court in the case of State Bank of India vs. V. Ramakrishnan & Anr stated that moratorium referred to in Section 14 of the IBC can have no manner of application to a Guarantor of a Corporate Debtor. The court was satisfied with the argument of the appellant that Corporate Debtor and Guarantor are separate legal entities. If a Corporate Debtor is undergoing insolvency, it cannot be construed that the Guarantor is also undergoing the same. Going by this premise, there should be no restriction for initiating a parallel proceeding against a Guarantor along with the Corporate Debtor. Therefore, it can be concluded that there can be simultaneous insolvency proceedings against both the Corporate Debtor and the Guarantor for the same amount of debt.
It may be observed that the Hon’ble NCLAT in the case of Piramal Enterprise has failed to take into consideration the viewpoint of the Hon’ble Supreme Court, thereby giving a contradictory decision. The decision has also failed to give due consideration to Section 14(3) of the IBC. The same has left the issue unsettled and open for further deliberation.
However, this is just the tip of the iceberg and the issue is more complex than it appears. As allowing the simultaneous proceedings against the Principal Debtor and Guarantor would still not completely resolve the issue. Reason being that there is no clarity on the interpretation of the right of subrogation expounded under Section 140 of the Indian Contract Act, 1872 with respect to the same. The right of subrogation means that there vests a right with the Guarantor to recover the amount paid on behalf of the Debtor. However, in a situation where a resolution plan has been approved for the Principal Debtor, any prudent Resolution Applicant, while submitting the resolution plan, will pray for the extinguishment of all the liabilities, including the ones arising out of the exercise of right of subrogation. The same, in case of simultaneous proceedings against a Guarantor and a Debtor will prevent the Guarantor from recovering his dues. It has been observed that time and again the claims of Corporate Guarantors, while invoking right of subrogation, have been discarded. In the case of Lalit Mishra & Ors. v. Sharon Bio Medicine Ltd, it was held by the Appellate Tribunal that right of subrogation of Guarantor can be taken away after implementation of the resolution plan as proceedings under IBC are not recovery proceedings. The core objective is to revive the company and not to ensure that the credit of all the stakeholders is settled.
Besides this, there also exists a conundrum concerning the liability of the Guarantor after the conclusion of CIRP against the Principal Debtor. Under IBC, the corporate Debtor is discharged of liabilities upon the approval of the resolution plan by the Adjudicating Authority. However, since IBC does not have any exclusive provision that preclude lenders from proceeding against the Guarantors for the remaining dues, the question that arises is whether or not partial satisfaction of claim of the Financial Creditor by the committee of creditors of the Principal Debtor, would amount to relinquishment of liability of the Guarantor from the outstanding debt. The same still remains unanswered, thereby creating a grey area under the code.
The lenders will now have to make an arduous choice between Principal Debtor and Corporate Guarantor while initiating CIRP. Moreover, the decision of the Appellate Tribunal has opened a window for challenging the previous cases wherein the Adjudicating Authority has permitted simultaneous proceedings. No doubt that simultaneous proceeding for the same debt can be a fly in the ointment, precisely when the proceeding against one of the parties is concluded while the other is ongoing. However, refusing the right of lenders to simultaneously proceed cannot completely resolve the issue. The ideal situation would be to initiate one consolidated CIRP against the Principal Debtor and Guarantor. Therefore, with a view to addressing such concerns, it is imperative to have a comprehensive framework for consolidation of proceeding.
The authors are both 4th year students pursuing their law degree from Dr. Ram Manohar Lohiya National Law University (RMLNLU), Lucknow.