Home Legal News Simultaneous initiation of CIRP against Principal Borrower and Corporate Guarantor permissible under IBC: NCLAT

Simultaneous initiation of CIRP against Principal Borrower and Corporate Guarantor permissible under IBC: NCLAT

by Shreya
Simultaneous initiation of CIRP against Principal Borrower and Corporate Guarantor permissible under IBC
The National Company Law Appellate Tribunal (NCLAT) has held that simultaneous initiation of CIRP corporate insolvency resolution process against a Principal Borrower and its Corporate Guarantor is permissible under Insolvency & Bankruptcy Code. (SBI vs Athena Energy Respondent Ventures Private Limited)

The order was passed by a two-member bench of Justice AIS Cheema, Member (Judicial) and VP Singh, Member (Technical) in an appeal preferred against an order passed by National Company Law Tribunal, Hyderabad Bench.

The NCLT had refused to admit SBI’s Section 7 plea against the Corporate Guarantor.

Case Background

The Appellant, State Bank of India, had filed an application in NCLT against the Respondent, Athena Energy Ventures Private Limited who was the Corporate Guarantor for Athena Chattisgarh Power Ltd, the Principal Borrower.

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After the Principal Borrower committed default, the Appellant filed an application under Section 7 IBC and the same was admitted by NCLT.

In the meantime, the Appellant filed another application under Section 7 IBC for initiation of insolvency resolution process against the Corporate Guarantor.

The NCLT declined to admit the Section 7 application on the ground that it was on the same set of facts, claim and default for which insolvency had already been initiated and was in progress.

Aggrieved by the order, the Appellant moved an appeal.

The Appellant inter alia argued as follows:

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– Under Section 128 of the Indian Contract Act, 1872, the liability of the Principal Borrower and the Guarantor is co-extensive and the Creditor is entitled to proceed against either or both and no sequence is required to be followed.

– Under Section 5(8)(a), (h) and (i) IBC, the Principal Borrower and Guarantor are treated similarly. Section 60(2) IBC permits that simultaneous applications could be filed against the Borrower as well as Guarantor and that the same could also be maintained.

– Insolvency Law Committee (ILC) Report of February 2020 observed that proceedings could be maintained against the Borrower as well as Guarantor and Creditor could file claims in both CIRP proceedings.

The Corporate Guarantor, on the other hand, argued:

– IBC proceedings are not adverse in nature and for same amount, there cannot be two CIRP proceedings, one against Borrower and the other against the surety.

– The principle in Section 128 of Contract Act, 1872 is not applicable in insolvency proceedings.

– The amount claimed against the Borrower and the Guarantor being the same, the application against Coporate Guarantor could not be maintained.

Court’s Observations and Order

The NCLAT concluded that IBC has no aversion to simultaneously proceeding against the Corporate Debtor and Corporate Guarantor.

The judgement reads,

“..simultaneously remedy is central to a contract of guarantee and where Principal Borrower and surety are undergoing CIRP, the Creditor should be able to file claims in CIRP of both of them. The IBC does not prevent this.. We are unable to agree with the arguments of Learned Counsel for Respondent that when for same debt claim is made in CIRP against Borrower, in the CIRP against Guarantor the amount must be said to be not due or not payable in law.”

The NCLAT added that it agreed with the Appellant’s stand and ILC Report that insolvency applications were maintainable against both Borrower and Guarantor, and only at the stage of disbursement, an adjustment could be made.

Relying on Section 60(2) and (3) IBC, NCLAT said that since two applications could be filed for the same amount against Principal Borrower and Guarantor, they were maintainable as well.

It further recorded that the insolvency or liquidation or bankruptcy proceedings against the Corporate Guarantor or Personal Guarantor shall have to be transferred to the NCLT dealing with insolvency resolution process or liquidation proceeding of the Corporate Debtor concerned.

The appeal was accordingly allowed and the NCLT order was set aside.

While directing the NCLT to admit the insolvency plea against the Corporate Guarantor, the NCLAT requested that the same Resolution Professional as in the CIRP of the Principal Borrower be appointed.

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