Kanwar Raj Bhagat Vs. Gujarat Hydrocarbons and Power SEZ Ltd - Financial Creditor can simultaneously or one after another initiate CIRP against the Corporate Debtor as well as Corporate Guarantor.

NCLAT (11.05.2021) in Kanwar Raj Bhagat Vs. Gujarat Hydrocarbons and Power SEZ Ltd. [Company Appeal (AT)(Insolvency) No.1096 of 2020] held that;

• Appellate Tribunal in the case of State Bank of India Vs. Athena Energy Ventures Pvt. Ltd. CA (AT) (Ins) No. 633 of 2020 considered the earlier judgment of Dr. Vishnu Kumar Agarwal (supra.) and after interpreting the law held that the Financial Creditor can simultaneously or one after another initiate CIRP against the Corporate Debtor as well as Corporate Guarantor.

• The onus is on the petitioner to establish that, the contract of guarantee provided anything to diminish the liability of the petitioner under the contract of guarantee excepting the liability of the petitioner being coextensive as that of the company.

• When a financial creditor applies under Section 7 of the Code of 2016 it is exercising a statutory right. The exercise of such statutory right does not depend upon the contractual obligations of the parties bound by the respective contracts between the creditor, principal debtor and the surety. 

• Such contracts cannot be said to have rescinded, novated, frustrated, modified, altered or affected in any manner, on an application under Section 7 of the Code of 2016 being filed. 

• After its admission under Section 7(5) of the Code of 2016, when an order under Section 14 is passed, then also only the statutory right of a financial institution to proceed under the SARFAESI Act, 2002 remains suspended for a limited period. The existing contracts between the surety, principal debtor and the creditor remains unaffected.

Facts of the Case;

1. Section 7 application filed by Financial Creditor (FC) against the Corporate Guarantor (CG-ACIL). was admitted by the Adjudicating Authority (AA) on 26.10.2017.

2. FC filed its claim of Rs. 648.81 Crores with the IRP of ACIL. The IRP admitted the claim amount of Rs.357.29 Crores excluding penal interest. The IRP was replaced by the RPl. The RP verified the claim of  FC & admitted the claim of 247.27 Crores including principal plus interest.

3. Resolution Plan of ACIL was approved by the Adjudicating Authority on 20.09.2018.

4. As per the approved Resolution Plan FC received Rs. 38.87 Crores against its claim of Rs. 648.81 crores as full and final settlement of its outstanding dues.

5. On 10.02.2020, the FC filed Application under Section 7, against the Corporate Debtor on the basis of the same set of debt and default against which a CIRP of the CG-ACIL of the Corporate Debtor has already taken place. Ld. AA admitted the Section 7, Application for initiation of CIRP of CD.

6. Being aggrieved with this order, the Ex-Director of the CD and the successful Resolution Applicant in the CIRP of CG-ACIL  have filed these appeals.

Excerpts of the Order;

# .8. Ld. counsel for the appellant further submitted that the Application under Section 7 of the IBC is not maintainable on the same set of debt and default as successful CIRP has already taken place against the Corporate Guarantor (ACIL). There is no bar in the IBC for simultaneously filing two applications under Section 7 against the Principal Borrower as well as the Corporate Guarantor. However, once an Application under section 7 has been admitted against one of the Corporate Debtor, a second application for the same Financial Creditor for same set of claim and default cannot be admitted against the other Corporate Debtor. Reliance was placed on the judgment rendered by this Appellate Tribunal in the case of Dr. Vishnu Kumar Agarwal Vs. Piramal Enterprises Ltd., CA (AT) (Ins.) 346/2018 and the same proposition was reiterated in the case of SEW Infrastructure Ltd. Vs. Mahender Investment Advisors Pvt. Ltd. CA (AT) (Ins.) 1500/2019.

# 9. It is further submitted that upon approval of the plan, the Financial Creditor accepted Rs. 38.87 Crores against its claim of Rs. 648.81 crores as full and final settlement of its outstanding dues. After a period of two years from approval of the plan; admitting the subsequent application under section 7 of IBC would tantamount to defeating the Resolution Plan. Ld. Adjudicating authority erroneously admitted the application therefore, the impugned order is liable to be set aside.

# 11. Ld. Counsel for the respondent no. 2, Financial Creditor submitted that Section 128 of Indian Contract Act, 1872 provides that the liability of the guarantor/surety is co-extensive with that of principal debtor. In the present case, the Financial Creditor has first approached the guarantor for its outstanding claim by initiating CIRP against the Corporate Guarantor (ACIL) of the Corporate Debtor. The Financial Creditor has now approached the Corporate Debtor, (the Principal Borrower) only for the balance amount. The liability of the Corporate Debtor is co-extensive with that of the guarantor; therefore, the liability of the Corporate Debtor cannot be extinguished simply because the liability of the Guarantor has been extinguished. Any partial recovery by the Creditor from the guarantor does not absolve the Corporate Debtor (Principal Borrower) of its financial obligations, except to the extent of the amount already recovered from the guarantor. He placed reliance on the Judgment of the Hon’ble High court of Calcutta in the Case of Gouri Shankar Jain Vs. Punjab National Bank & Ors. (2019 SCC Online Calcutta 7288) and Judgment of Hon’ble Supreme court in the Case of CoC Essar Steel India Limited Vs. Satish Kr. Gupta 2019 SCC Online SC 1478. It was argued that the Judgment passed by this Appellate Tribunal in the matter of Dr. Vishnu Kumar Agarwal (supra.) is not applicable to the present case as the facts of this case are completely different.

# 12. Having heard Ld. Counsel for the parties, we have minutely examined the record and considered their rival submissions.

# 13. Following issues arise in this appeal for our consideration:

• (i) Whether the Application under Section 7 of IBC is barred by limitation?

• (ii) Whether the second Application under Section 7 of IBC is not maintainable against the Corporate Debtor as for the same debt and default, CIRP has already been taken place against the Corporate Guarantor and the Financial Creditor has accepted the amount in full and final settlement of all its dues?

Issue No. (i)

# 17. In the present case, admittedly the date of default is 15.04.2012. Within three years, i.e on 24.03.2015, the Debt Repayment and Settlement Agreement was entered into by the parties (Diary no. 24049, Page 214-245, Appeal Paper Book). The Corporate Debtor failed to repay the debt as per Debt Repayment and Settlement Agreement. Therefore, Financial Creditor cancelled the said agreement (Diary no. 24049, Page 246-256, Appeal Paper Book) on 29.05.2017. In this agreement, the Corporate Debtor has specifically acknowledged the debt.

Thereafter, within three years i.e on 10.02.2020, the Financial Creditor filed the Application under Section 7 of the IBC. It is apparent that the Application is filed within extended period and the Application is within limitation. We find no force in the arguments advanced by the Ld. Counsel for the appellant. Thus, we affirm the finding of Ld. Adjudicating Authority that the Application is within limitation.

Issue No. (ii)

# 20. Further, this Appellate Tribunal in the case of State Bank of India Vs. Athena Energy Ventures Pvt. Ltd. CA (AT) (Ins) No. 633 of 2020 considered the earlier judgment of Dr. Vishnu Kumar Agarwal (supra.) and after interpreting the law held that the Financial Creditor can simultaneously or one after another initiate CIRP against the Corporate Debtor as well as Corporate Guarantor.

# 21. We are of the view that Application under Section 7 of the IBC against the Corporate Debtor for the same debt and default is maintainable in the light of judgment of Athena Energy Ventures (supra.)

# 22. Now we have considered whether the Financial Creditor had accepted the amount in the resolution plan as full and final settlement of all its dues.

# 24. With the aforementioned Clause of the Resolution Plan, it cannot be said that the Financial Creditor accepted the amount in full and final settlement of all its dues. However, the right of recovery of debt of Financial Creditor available against the Corporate Guarantor has extinguished. It is useful to refer to the judgment passed by the Hon’ble High Court of Calcutta in the case of Gouri Shankar Jain Vs. Punjab National Bank & Anr. 2019 SCC Online Calcutta 7288 wherein it was held that:

• “# 19. Section 128 of the Act of 1872 stipulates that, the liability of the surety is coextensive with the of the principal debtor, unless it is otherwise provided by the contract. The onus is on the petitioner to establish that, the contract of guarantee provided anything to diminish the liability of the petitioner under the contract of guarantee excepting the liability of the petitioner being coextensive as that of the company. . . . . .

• # 26. The Code of 2016 stipulates that, a Resolution Plan in respect of a corporate debt is required to be approved by a vote of not less than 66% of the voting share of the financial creditors. In a given case, the financial creditor applying for initiation of Corporate Insolvency Resolution process in respect of a corporate debtor may be holding more than 66% of the voting share of the financial creditors in respect of such corporate debtor. In such case, the best available Resolution Plan in respect of the corporate debtor may contemplate payment of a portion of the claim of the financial creditors in full and final settlement. Such Resolution Plan may be approved by the financial creditor in the meeting of the committee of creditors. Would such an approval mean that, the financial creditor entered into a composition with the corporate debtor, thereby impairing the right of the financial creditor to recover the balance amount from the guarantor of the corporate debtor ? In my view, the answer is in the negative.

• # 27. An application under Section 7 of the Code of 2016 once admitted under Section 7(5) thereof has two terminal points for the corporate debtor. The Code of 2016 does not contemplate withdrawal of an application under Section 7 once it is admitted under Section 7(5). The terminal points are, firstly, the approval of a Resolution Plan and secondly, the initiation of liquidation proceeding on a Resolution Plan not being approved. When a financial creditor applies under Section 7 of the Code of 2016 it is exercising a statutory right. The exercise of such statutory right does not depend upon the contractual obligations of the parties bound by the respective contracts between the creditor, principal debtor and the surety. Such contracts cannot be said to have rescinded, novated, frustrated, modified, altered or affected in any manner, on an application under Section 7 of the Code of 2016 being filed. After its admission under Section 7(5) of the Code of 2016, when an order under Section 14 is passed, then also only the statutory right of a financial institution to proceed under the SARFAESI Act, 2002 remains suspended for a limited period. The existing contracts between the surety, principal debtor and the creditor remains unaffected.

# 25. With the aforesaid discussion, we are not convinced with the argument made by the Ld. Counsel of the appellant that CIRP has already taken place against the Corporate Guarantor therefore, the second application against the Corporate Debtor is not maintainable. It cannot be held that the Financial Creditor accepted the amount in full and final settlement of all its dues. We are therefore of the considered view that the Application under Section 7 of the IBC is maintainable against the Corporate Debtor for the same debt and default and the Financial Creditor can recover the remaining dues from the Corporate Debtor.

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