CHAPTER 1 – INTRODUCTION
The most important change that happened in the field of law in the year 2016 was the introduction of the Insolvency and Bankruptcy Code, 2016 (IBC) which was a necessity for the Indian Corporate governance since a very long period and it became the first comprehensive act for insolvency and bankruptcy. The code is applied to any company which has been incorporated under the Companies Act, 2013 or any previous company law, any company which is governed by a Special Act, any Limited Liability Partnership (LLP) which is incorporated under Limited Liability Partnership Act, 2008, personal guarantors to corporate debtors, partnership firms, individuals. It brought transformation in the insolvency and bankruptcy act by introducing a new structure, which consists of Committee of Creditors (COC) and committed adjudicating authorities for liquidation as well as insolvency resolution and even judicial discipline which is the important aspect. Each of these elements was intended to solve the problems which had affected bankruptcy regime in India. Even though the Companies Act 1956 and 2013 were having the provisions for winding up of companies they were found insufficient and resolutions took unduly long period of time.
When there is a default by the principal debtor during the time of repaying the loan the role of guarantor takes place. Further, when Corporate Insolvency Resolution Process (CIRP) is initiated against the corporate debtor the liability of a guarantor also arises. The guarantor as well as the corporate debtor will be open for litigation or demand for repaying the loan by the creditors. This research paper will help to understand that insolvency proceedings can also be initiated against corporate guarantor with the corporate debtor by understanding the cases of Dr. Vishnu Kumar Agarwal vs. M/s. Piramal Enterprises Limited and Laxmi Pat Surana vs. Union of India and Ors.
1.2 CONCEPTUAL DEFINITION
a. Corporate Debtor (CD)
Corporate Debtor is defined under Section 3(8) of the IBC which means a corporate person who owes a debt to any person.
b. Corporate Guarantor (CG)
Corporate Guarantor is defined under Section 5(5A) of the IBC which means a corporate person who is the surety in a contract of guarantee to a corporate debtor.
c. Financial Creditor (FC)
Financial Creditor is defined under Section 5(7) of the IBC which means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to.
d. Surety’s Liability
Surety’s Liability is defined under Section 128 of the Indian Contract Act, 1872 which means the liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract.
1.3 REVIEW OF LITERATURE
Insolvency and Bankruptcy Code, 2016
IBC was commenced in the year 2016. It defines and gives various laws relating to insolvency and bankruptcy proceedings. Further, for consolidating and amending laws relating to re-organisation and insolvency resolution of corporate person, partnership firms and individuals and also in a time bound manner. It extends to the whole of India. In the cases of Dr. Vishnu Kumar Agarwal vs. M/s. Piramal Enterprises Limited and Laxmi Pat Surana vs. Union of India and Ors., Section 7 of the code which states about the initiation of CIRP by the financial creditor has played a very important role throughout and how it was held that CIRP can be against a corporate guarantor will be explained in detail.
1.4 STATEMENT OF PROBLEM
Once a process is started under the Insolvency and Bankruptcy Code, 2016 by the creditors i.e. financial creditors and operational creditors or by corporate debtors they have different rights as per the code. During the time of such process, it is to be verified whether the Adjudicating Authority or the code has kept a proper balancing between the rights of corporate debtors and financial creditors or/and operational creditors. When a company offers a guarantee for the loan accounts of the principal borrower and afterwards it is declared as Non-Performing Asset (NPA). Can the FC file a case under IBC on such corporate guarantor who was offering guarantee to the accounts of the principal borrower.
The purpose of this research is to examine whether the corporate guarantor who is offering guarantee towards the loan accounts of a proprietary firm (not a corporate person) and if default is made by the principal borrower, can CIRP on the corporate guarantor be initiated by a FC. Also, to understand that whether CIRP can be initiated against two CDs since were same set of debt obligations which arise out of same loan agreements under the ambit of the code.
Whether the financial creditor can file an application under Section 7 of the code for initiating corporate insolvency resolution process against the corporate guarantor?
1.7 RESEARCH METHODOLOGY
This research is a doctrinal study of Insolvency and Bankruptcy Code, 2016 and understanding the proceedings of CG with CD. This project is based from various readings, observation from different authors, journal as well as research articles and analysing statutory provisions. The Library-based Research method will be followed for deriving the Hypothesis. The search will be conducted on the basis of primary sources such as statutes and secondary sources such as books, online articles available freely as well as on legal databases. The paper is based on pure theoretical research.
CHAPTER 2 – CONCEPT OF CORPORATE GUARANTORS
The framework of insolvency in India has taken an important forward with the enactment of the Insolvency and Bankruptcy Code, 2016. From re-prioritizing a market-based as well as creditor-controlled valuation of revival prospects over a painful liquidation, the IBC ensured that a proper insolvency framework has finally taken shape in India. As per the recent changes, now insolvency proceedings can also be initiated against guarantors i.e. personal and corporate guarantors of the CD in the same bench of the NCLT, where the insolvency or liquidation proceedings of the CD is taking place. The uncertainty can also be attributed towards the twist in jurisprudence that has emerged on the corporate guarantors under the code. The new law that evolved in this area is with respect to simultaneous proceedings and treatment of claims against the CD and guarantor.
2.2 SIMULTANEOUS PROCEEDINGS AGAINST GUARANTORS AND PRINCIPAL BORROWERS
It is first necessary to understand about the treatment of guarantors and guarantees under the code. Guarantee is treated as a financial debt under Section 5 (8) (i) which states that the amount of any liability with respect of the indemnity or guarantee for any of the items that is referred in sub-clauses a to h of this clause. Further, Corporate Guarantor is defined under the code which means a corporate person who is the surety of the contract of guarantee to a CD. The benefit will be taken by the FC to whom the guarantee is given because during the time of repayment if the principal borrower fails to repay, guarantors shall be liable to pay the money. Also, the treatment of guarantee stems from the fact that is as per Section 128 of the Indian Contract Act, 1872, which states that, the surety’s or the guarantor’s liability is coextensive with and independent of the liability of the principal borrower. It means if the principal borrower defaults, a creditor may proceed against the guarantor without first exhausting its remedies against the principal borrower.
The IBC (Second Amendment) Act, 2018 on the recommendations of the Insolvency Law Committee also clarified that during the time of moratorium under Section 14 of the IBC, the assets of the guarantor are not protected which means that separate enforcement actions can be taken against guarantors which also includes initiation of CIRP during the CIRP of CD. Also, according to Section 60 (2) of the code, the application for CIRP or liquidation of a guarantor i.e. personal or corporate guarantor of such CD shall be filed before the same bench of NCLT, where the CIRP or liquidation against the CD is going on. Further, if the CIRP or liquidation process of a guarantor is pending before different bench of the NCLT, must be transferred to the NCLT Bench dealing with the CIRP or liquidation of the CD.
Therefore, the framework of IBC relating to the treatment of guarantors reflects that the guarantor’s liability is independent from the liability of the principal borrower and the FCs can proceed against the guarantor in the same manner as against the principal borrower. This grants the creditors for filing simultaneous proceedings against the principal borrower and guarantor. On this issue, various benches of the NCLT as well as the NCLAT held that a FC may commence a proceeding under Section 7 against a guarantor without first commencing a proceeding against the principal borrower and may also, if it wants, to initiate proceedings against the principal borrower and guarantor in parallel. Even though it clears the fact that a creditor can initiate simultaneous proceedings, it still brought changes as per the recent judgment of Dr. Vishnu Kumar Agarwal vs. M/s. Piramal Enterprises Ltd. which states that once an application is admitted under Section 7 of the code against one guarantors, it is not maintainable against the other guarantors for the same claim. Also, in the judgment of Laxmi Pat Surana vs. Union of India & Ors. states that the principal borrower is not required to be a corporate person for initiating CIRP against a corporate guarantor under the IBC.
CHAPTER 3 – IMPORTANT JUDGMENTS
3.1 DR. VISHNU KUMAR AGARWAL VS. M/S. PIRAMAL ENTERPRISES LTD.
FACTS OF THE CASE
Case decided by – S.J. Mukhopadhaya, Bansi Lal Bhat, JJ.
Case decided on – January 1, 2019
a. This case was brought before the National Company Law Appellate Tribunal (NCLAT) where the Appellants filed a Company Appeal against the order of National Company Law Tribunal (NCLT), New Delhi dated 24th May, 2018. The Appellant is a shareholder who preferred appeals against the two different orders of initiation of CIRP against the Corporate Guarantors. Both orders have a common questions of law and also based on same facts, they were heard together by the NCLAT.
b. ‘All India Society for Advance Education and Research’ (Principal Borrower) entered into a ‘Deed of Agreement’ with ‘M/s. Piramal Enterprises Ltd.’ (FC) for grant of Rs. 38,00,00,000/- and was guaranteed by two Corporate Guarantors i.e. ‘Sunrise Naturopathy and Resorts Pvt. Ltd.’ (Corporate Guarantor No. 1) and ‘Sunsystem Institute of Information Technology Pvt. Ltd.’ (Corporate Guarantor No. 2). The said loan amount was paid partly on two different dates to the Principal Borrower which is on 28th October, 2013 Rs. 31,17,00,000/- and 1st November,2013 Rs. 6,83,00,000/-. From January, 2014 to July, 2017 the Principal Borrower repaid more than Rs. 22 crores of the loan.
c. On 15th September, 2017 FC filed a civil suit against the Principal Borrower and both the Corporate Guarantors before the Court of Additional District Judge-I, Alwar, Rajasthan. FC issued two separate demand notices during the pendency of the suit to both the Corporate Guarantors for making payment of the outstanding amount of Rs. 40,28,76,461/- from the Principal Borrower within a period of 15 days of receipt of notice and failing which the FC may initiate the CIRP under IBC. Since notices were issued individually to respective Corporate Guarantors the outstanding amount was shown similar i.e. Rs. 40,28,76,461/- to both.
d. Thereafter, the FC filed two separate application under Section 7 of the code against both the Corporate Guarantors. The Adjudicating Authority (AA) admitted the application against the Corporate Guarantor No. 2 on 24th May, 2018 and on 31st May, 2018 against the Corporate Guarantor No. 1 and initiated CIRP. On perusal of the records, it became clear that the same claim amount was shown in both the Form-1. Also, default date and the default amount were also same in terms of the agreement.
i. Whether the CIRP can be initiated against a Corporate Guarantor, if the Principal Borrower is not a CD or a corporate person?
ii. Whether the CIRP can be initiated against two Corporate Guarantors simultaneously for the same set of default?
1. By Adv. Anup Kumar, Adv. Amit George and Adv. Bhaskar Aditya (Appellant)
a. The Learned counsel argued that no CIRP can be initiated against the Corporate Guarantors without initiating CIRP against the Principal Borrower. Since, Principal Borrower is not a company, no application can be filed against it under Section 7 or Section 9 of the code and if no application can be filed against the Principal Borrower, the application also cannot be filed under Section 7 or 9 for the same claim against the Corporate Guarantors.
b. For same set of claims two CIRP cannot be initiated against two different Corporate Guarantors.
2. By Adv. Misha, Adv. Vaijayant Paliwal, Adv. Charu (Respondent)
The Learned counsel argued that both the Corporate Guarantors are separate legal entity and since both guaranteed for the same set of amount, then even in the absence of initiating CIRP against the Principal Borrower, two separate applications can be filed under Section 7 against respective Corporate Guarantors.
Judgment passed by the National Company Law Appellate Tribunal
The case has tried to bring some loopholes with the decision of the NCLAT, since it cannot be forgotten IBC is a debtor-friendly legislation. It brought the whole burden on the Corporate Guarantor No. 2. Further, it can also be seen that the amount of the creditors can be recovered from the guarantors and if not paid proceedings is initiated and it discharges the borrower in its insolvency against the entire debt, after taking the whole amount. Courts are required for considering that whether principles under the Contract Act should be applicable under such situations for determining coextensive liability and the extent of liability of the guarantors or any other guidelines may be framed. It is rightly justified that because Corporate Guarantors are separate entities, simultaneous proceedings cannot be allowed for the same claim. The appeal was filed before the Supreme Court and the decision is pending. It is something to watch out for because necessary amendment is needed in the code and also issues arising out of such linked proceedings might also be addressed.
FACTS OF THE CASE
Case decided by – A.M. Khanwilkar, B.R. Gavai and Krishna Murari, JJ.
Case decided on – March 26, 2021
This case was brought before the Supreme Court where the Appellants filed a Civil Appeal against the judgment of NCLAT dated 19th March, 2020.
a. Bank i.e. Respondent No. 1 gave credit facility to M/s. Mahaveer Construction (CD) which is the proprietary firm of the Appellant by two loan agreements in 2007 and 2008 for a term loan of Rs. 9,60,00,000/- and additional amount of Rs. 2,45,00,000/- respectively. Such amount was disbursed by the Principal Borrower i.e. M/s. Surana Metals Limited in which the promoter is the Appellant who offered guarantee towards the loan accounts of the Principal Borrower. On 30th January, 2010 the loan accounts were declared Non Performing Asset (NPA). Recall notice was issued by the FC to the Principal Borrower and CD, for repaying the outstanding amount of Rs. 12,35,11,548/-
b. Application was filed against the Principal Borrower under Section 19 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDBFI) before Debt Recovery Tribunal (DRT) at Kolkata. During time of the stated pendency initiated by the FC, Principal Borrower assured repeatedly for repaying the outstanding amount, but because the commitment was not fulfilled, the FC in the form of notice for payment wrote to the CD on 3rd December, 2018 under Section 4(1) of the code. CD replied to the said notice that since it was not the Principal Borrower and nor any financial debt was owed to the FC and neither committed for repaying any outstanding amount.
c. FC filed an application under Section 7 of the code for initiating CIRP against the CD on 13th February, 2019 before National Company Law Tribunal (NCLT), Kolkata. The application was not maintainable since the Principal Borrower was not a “corporate person” and also it was barred by limitation, as the date of default was 30th January, 2010 and the application was filed on 13th February, 2019 i.e. beyond three years and such objections was resolved by the Adjudicating Authority (AA) vide judgment dated 6th December, 2019. The AA held that the action which was initiated against the CD, being coextensively liable for repaying the debt of the Principal Borrower and failed to do so despite of the recall notice, became a CD and is liable under Section 7 of the code. With respect to the second objection, the CD and the Principal Borrower acknowledged and admitted the debt again and again and lastly on 8th December, 2018 and thus the application filed on February, 2019 was within limitation.
d. The matter was brought before the National Company Law Appellate Tribunal (NCLAT), New Delhi by the Appellant and vide judgment dated 19th March, 2020 the appeal was dismissed and the conclusion of the AA with respect to the two objections which was raised by the Appellant was affirmed. The Appellant aggrieved by the judgment of the NCLAT, approached to the Supreme Court of India (SC) by appeal retelling the two objections.
i. Whether an action under 7 of the IBC can be initiated by the FC against corporate person (CD) relating to the guarantee offered in respect of loan account of the principal borrower, who committed default and is also not a corporate person within the meaning of the code?
ii. Whether an application filed under Section 7 of the code after three years from the date of declaring the loan account as NPA, not barred by limitation?
1. By Adv. Abhijit Sinha (Appellant)
a. The learned counsel argued that Section 7 in simple terms means that an application can be filed only against the CD by the FC. A CD can be a corporate person who had borrowed money or a corporate person who gives guarantee for another corporate person to repay the borrowed money. Further, the initiation of insolvency firms and individuals as per Part III of IBC is not notified yet.
b. As per the Insolvency Law Committee report, 2020 Chapter 7 deals with the issue relating to Guarantors. It states that under a contract of guarantee, a creditor cannot recover more than what is due to it, action against the surety cannot be prevented on the ground that there is alternative relief against the principal borrower. There is a liberty on the creditor for proceeding against either surety or debtor alone or jointly against both. Thus, it is restricting a creditor for initiating CIRP against both surety and principal borrower will prejudice the creditor’s rights which is provided under the contract of guarantee for proceeding simultaneously against both of them.
c. Thus, it is urged that other view will indirectly enforce the code against partnership firms and proprietorship firms or individuals who are governed as per Part III of the code without even being notified. Therefore, corporate guarantee is extended with respect to loan given to a “corporate person” as per meaning of Part II of the code.
d. The application was ex facie barred by the limitation in view of Article 137 of the Limitation Act, 1963 since the default is done in the year 2010. FC invoked Section 18 of the Limitation Act, 1963 which is not applicable to the proceedings of the code because it applies to suits of property or right.
2. By Adv. O.P. Gaggar (Respondent No. 1)
a. The learned counsel argued that Section 7 of the code enables the FC for initiating CIRP against the principal borrower if it will be a corporate person which includes against the corporate person being guarantor in relation to the loans which is obtained by entity not being a corporate person.
b. With respect to the second issue it was open to the FC for maintaining application after three years even from the declaration of accounts as NPA because of acknowledging the debt also by the CD from time to time and lastly on 8th December, 2018. The CD admitted the initial loan granted by the FC in the favour of the Principal Borrower and also of having provided collateral security for securing the liability of the Principal Borrower. NCLT and NCLAT has justly taken due cognizance of the said admission.
Judgment passed by the Supreme Court of India
With the decision of the Supreme Court, it helps us to understand more about Section 7 of the code which gave a new direction from this judgment. The Court upheld the view which was taken by NCLT and NCLAT in their respective judgments. The Supreme Court also affirmed the decision of the NCLAT that from the date of acknowledgment a fresh period of limitation is required to be computed. The important thing which can be understood from the judgment is that the Principal Borrower is not required to be a “corporate person” for the insolvency process to be initiated against a company which stood as its guarantor under the IBC.
CHAPTER 4 – CONCLUSION
IBC came into effect from 1st December, 2016, which is even though dealing with the various aspects of insolvencies and recoveries; it has significantly focused on all classes of corporate insolvencies. It has been a historic development for India for the very first time, after independence, were able to see a drastic move all of the issues with respect to financial distress have been brought under the same roof which will be captured by a single code. We can thus understand from the above judgments that various changes were brought in relation to the guarantors. The judgment of the NCLAT with respect to Piramal matter, gave rise to the principle of no double dipping which appeared to be sound as a creditor, if claim is already against one guarantor, it cannot recover for the same claim from the another guarantor. Further, it can also be understood that the whole burden came on a single guarantor. It is worthwhile in taking into account the fact that case is pending in appeal before the Supreme Court whose decision can give conclusive stand to this issue.
The case of Laxmi Pat Surana brings a new direction under Section 7 of the code. Also, the Supreme court held that from the date of acknowledgment a fresh period of limitation is needed to be computed. The vital thing which can be understood from the judgment is that the Principal Borrower is not required to be a “corporate person” for the insolvency process to be initiated against a company which stood as its guarantor under the IBC. The code is a shift from “Debtor in possession” to “Creditor in control” and idea to give debtor several chances for surviving with the hope which will revive and also rise as phoenix from the ashes. Even though the code is comprehensive it brings changes again and again through judgments and at the end it results to understand the code in a different approach. Thus, through this code, shareholders are ensured for India’s insolvency regime to continue in achieving its objectives and facilitating India to strengthen credit environment and further entrepreneurship in the country.
A. PRIMARY SOURCES
B. SECONDARY SOURCES
a. Ashima Oban, Bambi Bhalla, “Supreme Court on Maintainability of Action under Section 7 of IBC against a Corporate Guarantor”, Lexology, (April 7, 2021)
b. Padmaja Kaul, Varun Khanna, “A Storm is Brewing: The Insolvency of Personal Guarantors”, Indus Law (January 13, 2020)
c. Ravi Charan, Neha Pathak, “India: Simultaneous CIRPs against Principal Borrower and Corporate Guarantor for the Same Debt”, Mondaq, (December 16, 2020)
d. Abhik Saha, “Case Analysis of Dr. Vishnu Kumar Agarwal Vs. Ms. Piramal Enterprises Ltd.”, Pathlegal, (June 8, 2020)
e. Aastha, Shradha Rakhecha, “Double Dip under IBC- A Tough Choice for Lenders”, Argus Partners, (November 11, 2019)
Laxmi Vishwakarma, “Supreme Court Holds That Insolvency Proceeding Is Maintainable Against a Corporate Guarantor of a Non Corporate Principal Borrower”, Legal 60, (April 4, 2021) (Last visited 14/6/2021)
Legal Era, “Supreme Court: Even if Principal Borrower is not ‘Corporate Person’ Insolvency Proceedings can be initiated against Corporate Guarantor”, (March 21, 2021) (Last visited 14/6/2021)
 The Insolvency and Bankruptcy Code, § 5 (5A).
Indian Contract Act, 1872, §128, Act of Parliament, 1872, (India).
 The Insolvency and Bankruptcy Code, § 14.
 The Insolvency and Bankruptcy Code, § 60 (2).
 The Insolvency and Bankruptcy Code, § 60 (3).
 Dr. Vishnu Kumar Agarwal Vs. M/s. Piramal Enterprises Ltd., Company Appeal (AT) (Insolvency) No. 346 & 347 of 2018, MANU/NL/0003/2019
 The Insolvency and Bankruptcy Code, § 7.
 The Insolvency and Bankruptcy Code, § 9.
 Bank of Bihar vs. Damodar Prasad, (1969) 1 SCR 620
 Supra at footnote 2
 State Bank of India vs. Indexport Registered and Ors., (1992) 3 SCC 159
 The Insolvency and Bankruptcy Code, § 5(8).
 M/s. Piramal Enterprises Limited Vs. Vishnu Kumar Agarwal, Diary No. 2220 of 2019, C. A. No. 000878/ 2019
 Recovery of Debts Due to Banks and Financial Institutions Act, 1993, §19, Act of Parliament, 1993 (India).
 The Insolvency and Bankruptcy Code, § 4(1).
 Supra at footnote 7
 Limitation Act, 1963, Article 137, Act of Parliament, 1963, (India).
 Limitation Act, 1963, §18, Act of Parliament, 1963, (India).
 The Insolvency and Bankruptcy Code, § 3(8).
 Supra at footnote 1
 Supra at footnote 2