Indubitably, legal controversies lead to the ultimate improvisation of legislation. Likewise, Insolvency and Bankruptcy Code, 2016 (hereinafter IBC) has encountered a plethora of amendments to reach its upper state and incorporate a way to unravel the incessantly emerging disputes. While the Insolvency and Bankruptcy Code (Amendment) Act, 2020 is a commendable attempt to resolve the intricacies of the existing disputes, yet it fails to address the issues regarding the invocation of guarantee for payments of debts to the creditor. Notably, the amended IBC is still silent about the procedure to simultaneous initiation of Corporate Insolvency Resolution Processes (hereinafter CIRP) against the Corporate Debtors as well as the Guarantors.
The tussle between the Legal Precedents
It is pertinent to note that The National Company Law Appellate Tribunal (hereinafter NCLAT) through its decision in the case of Vishnu Kumar Agarwal v. Piramal Enterprises Ltd., (hereinafter Piramal Enterprises) regarding initiation of CIRP held that there is no bar on filing two simultaneous applications against the ‘Principal Borrower’ as well as the ‘Corporate Guarantor(s)’ under Section 7 of the IBC. Notably, this decision of the NCLAT has led to several predicaments particularly due to a dearth of provisions under the IBC which can corroborate the said decision.
Furthermore, the NCLAT in Piramal Enterprises laid down that, once for the same set of claims, an application is admitted against one of the corporate debtors (i.e. either principal borrower or corporate guarantor), a second application by the same creditor for the same set of claims and default cannot be admitted against the other corporate debtor (i.e. either the principal borrower or corporate guarantor). It is clear as crystal that NCLAT, on one hand, has allowed filing simultaneous applications for the commencement of CIRPs against the principal borrower and the guarantor but on the other, it has barred invocation of CIRP against any of them if CIRP against any one of them has already been initiated.
Notably, Section 14 of the IBC enumerates that the moratorium shall not be applicable to the guarantor suggesting that the creditor can proceed against the corporate guarantor during the CIRP of the Principal Borrower. The decision given by the NCLAT in Piramal Enterprises, if effectuated will defeat the purpose of Section 14 of the IBC.
Moreover, the Supreme Court, in Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta, (Essar Steel) clarified the issue of the law of guarantors, the Supreme Court has followed its previous decision in State Bank of India v. Ramakrishna wherein it bestowed upon the creditor a right to invoke contracts of guarantees during insolvency proceedings thereby allowing a creditor the maximum recourse possible. Consequently, para 66 of the decision in Essar Steel suggests that the CIRP against a guarantor can commence even when CIRP against the principal borrower exists which is contrary to the decision of the NCLAT in Piramal Enterprises. Now, with the decision in Piramal Enterprises being dealt by the Supreme Court under an appeal, it becomes unclear as to what procedure ought to be followed when a creditor moves against the guarantor for the satisfaction of the outstanding debt after the partial payment of the debt by the resolution plan.
Besides, it is pertinent to note that one of the most significant characteristics of a guarantee contract is the co-extensive liability of the principal debtor and the guarantor in terms of section 128 of the Contract Act. This implies that the liability of a guarantor is immediate and is not deferred until the creditor exhausts its remedies against the principal debtor. However, in view of all these contradictions, it is only reasonable that it be affirmed that there is no bar on commencement of CIRP against the principal borrower or the guarantor even if a prior CIRP against any one of them subsists.
Firstly, although the NCLAT in Piramal Enterprises has established that a there is no bar in filing simultaneous applications for CIRP against the principal borrower and the guarantor, yet the IBC is silent on the furthering procedure if CIRP has been initiated against both the Principal Borrower as well as the Corporate Debtor. Neither the IBC specifies any provision for the management of such disputes nor any precedent judgements happen to tackle the same. At the outset, if CIRP against both run simultaneously, it will still be unclear that who will ultimately pay the debt of the creditor. Although a creditor has been provided maximum recourse as affirmed in Essar Steel, still he cannot be allowed to invoke all his remedies at once as it will lead only to chaos.
Secondly, Section 60(2) of the Code affirms that application for CIRP against the guarantor(s) can be filed before the National Company Law Tribunal if the CIRP against the debtor is still pending before it, which clearly does not talk about simultaneous applications. Rather it can be inferred that if a CIRP against the corporate debtor is pending before the NCLT, Section 60(2) allows the filing of an application for insolvency resolution against the guarantor of such corporate debtor thereby contradicting the decision laid down in Piramal Enterprises.
Further, allowing simultaneous initiation of CIRP against both principal borrower and the corporate debtor will drastically hamper the framework of the code eventually adding to the pile of burden on the Adjudicating Authorities. This decision is like riding on a road without a map, one may keep moving but will never reach the destination. The Creditors might file a simultaneous application against both but the bewilderment of an unsettled finality on the matter will always haunt them.
While the decision of the NCLAT in the matter of Ferro Alloys Corporation Ltd. v. Rural Electrification Corporation Ltd., where it held that it is not necessary to initiate CIRP against the principal borrower before initiating CIRP against the corporate guarantors is gladly accepted and appreciated but at this juncture, there exists a dire requirement that the legislature comes up with such an amendment which resolves the imminent difficulties arising due to the lack of requisite provisions.
(Author Vishal Rajvansh is 3rd Year Student, BA.LLB, National University of Study and Research in Law, Ranchi.)