Vekas Kumar Garg Vs. DMI Finance Pvt. Ltd. & Anr. - In an application under Section 7, the Financial Creditor and the Corporate Debtor alone are the necessary party.

 NCLAT (18.02.2021) in Vekas Kumar Garg Vs. DMI Finance Pvt. Ltd. & Anr.  [Company Appeal (AT) (Insolvency) No. 113 of 2021] held that;

• In an application under Section 7, the Financial Creditor and the Corporate Debtor alone are the necessary party and the Adjudicating Authority is, at the pre-admission stage, only required to satisfy itself that there is a financial debt in respect whereof the Corporate Debtor has committed a default warranting triggering of CIRP.

Excerpts of the order;

18.02.2021: Appellant- Mr. Vekas Kumar Garg seeking impleadment as a necessary party in CP IB-2115/ND/2019 pending before the Adjudicating Authority (National Company Law Tribunal), New Delhi Bench, Court-VI, at the pre-admission stage under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“I&B Code” for short) is aggrieved of the impugned order dated 10th December, 2020 by virtue whereof its application for impleadment came to be rejected on the ground that he was not necessary party to the proceedings. The impugned order is assailed on the ground that the Appellant is the Resolution Professional of two companies namely— ‘M/s. Ninex Developers Limited’ (“NDL” for short) which is facing the Corporate Insolvency Resolution Process (CIRP) before the Adjudicating Authority (NCLT), Principal Bench, New Delhi in C.P. No. (IB) 281(PB)/2019 and also in the CIRP of ‘M/s. Redtopaz Real Estate Pvt. Ltd.’ (“RREPL” for short), CIRP of which is also pending before the Adjudicating Authority (NCLT), Bench-II, New Delhi in CP No. (IB)-667(ND) of 2019.

# 2. It is submitted on behalf of the Appellant that the main Company Petition is pending adjudication in which Respondent No.1 is seeking triggering of CIRP against Respondent No.2. It is further submitted that if CIRP is commenced against Respondent No.2, NDL holding 46.59% equity shares would be the direct sufferer which is already undergoing a CIRP. Besides the interest of many homebuyers will be in jeopardy. It is further submitted that the application under Section 7 pending consideration before the Adjudicating Authority is not maintainable in view of the Judgment passed by this Appellate Tribunal in “Dr. Vishnu Kumar Agarwal vs. M/s. Piramal Enterprises Ltd.- Company Appeal (AT) (Insolvency) No. 346/2018”.

# 3. After hearing learned counsel for the Appellant and going through the record, we are of the view that the ground projected by the Appellant in his capacity as Resolution Professional of NDL for seeking impleadment in CP IB- 2115/ND/2019 pending consideration before the Adjudicating Authority does not warrant impleadment of Appellant as party Respondent. In an application under Section 7, the Financial Creditor and the Corporate Debtor alone are the necessary party and the Adjudicating Authority is, at the pre-admission stage, only required to satisfy itself that there is a financial debt in respect whereof the Corporate Debtor has committed a default warranting triggering of CIRP. The Adjudicating Authority is required to satisfy itself in regard to there being a financial debt and default thereof on the part of the Corporate Debtor besides the application being complete as mandated under Section 7(5) of the ‘I&B Code’ and then pass an order of admission or rejection on merit as mandated under sub-section (4) of Section 7 within 14 days. No third party intervention is contemplated at that stage.

# 4. No lengthy hearing is warranted at the pre-admission stage nor can the dispute in regard to shareholding or inter se directorial issue be entertained.

# 5. Viewed from this perspective, we find no legal infirmity in the impugned order passed by the Adjudicating Authority. The course open to Appellant would be to apprise the IRP of the admission of the claim in CIRP of NDL if the application under Section 7 pending before the Adjudicating Authority is admitted and IRP is appointed. Such situation may not arise if the Adjudicating Authority is not satisfied about debt and default.

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IFCI Ltd Vs. Anil Mega Food Park Pvt. Ltd. - Insolvency Proceedings against both Corporate Debtor as well as Guarantor can be initiated.

NCLT Ahmedabad (29..01.2021) in IFCI Ltd Vs. Anil Mega Food Park Pvt. Ltd.  [CP(IB) No.287/7/ NCLT/ AHM/2019 ] held that;

• Supreme Court in the case of State Bank of India  vs. V. Ramakrishnan and Ors. (14.08.2018 - SC) has held that proceedings against both Corporate Debtor as well as Guarantor can be initiated. Even, Hon'ble NCLAT itself in its subsequent decision after considering the decision relied on the Corporate Guarantor has changed its view and has held that the proceeding against the Corporate Debtor and as well as Corporate Guarantor can be undertaken under Section 7 of the IBC, 2016 simultaneously.

Excerpts of the order;

# 1. This Application is filed by the IFCI LIMITED (hereinafter referred to as the 'Financial reditor') through its Authorised Signatory under Section 7 of the Insolvency & Bankruptcy Code, 2016, r.w. Rule 4 of the Insolvency & Bankruptcy Code, 2016, to start Corporate Insolvency Resolution Process (hereinafter referred to as the 'CIRP') against the ANIL MEGA FOOD PARK PVT. LTD. the Corporate Debtor, on the ground that, it has committed a default in paying the financial debt of Rs. 45,00,00,000/-. (Rupees forty five crores only). 

# 2. The facts in brief are that, the Corporate Debtor provided a Corporate Guarantee in favour of the Financial Creditor for a sum of Rs. 45,00,00,000/- on 11.06.2015. All necessary documents regarding the competency and liabilities of the Corporate Debtor to own its commitments made in this Guarantee has been placed on record. The charges have also created in the records of ROC. It is noted that the borrower defaulted in repayment of the loan resulted into issuance of recall of notice 03.10.2016. The Applicant also invoked Corporate Guarantee given by the Corporate Debtor vide notice dated 22.12.2016. The account of the borrower is classified as Non-Performing Asset (NPA) on 26.09.2016 and the Borrower was under liquidation. The date of default has been claimed 15.04.2016 and the application has been filed on 08.04.2019 i.e. within period of three years from the date of invocation of the Corporate Guarantee. Thus, it is within period of limitation. 

# 3. Learned Counsel Ms. Nalini Lodha appeared for the Financial Creditor narrated these basic facts that there was a debt which was due and payable both in law and fact, hence, an application filed under Section 7 of the Insolvency & Bankruptcy Code, 2016 was to be admitted for the reason that a default has occurred in the discharge of its liabilities arising out of such Corporate Guarantee. 

# 4. It was also claimed that proceeding against Corporate Guarantor could be taken simultaneously or even otherwise. The Learned Counsel for the Corporate Guarantor appeared and submitted that the matter was squarely covered by the decision of the Hon'ble NCLAT, wherein it has been held that the claim for the same debt cannot be filed by the same Financial Creditor in two separate CIRP. It was also claimed that an Appeal is pending before the Hon'ble NCLAT , but there was no Stay on the implication of said judgements, hence, the present application was liable to be dismissed. 

# 5. We have considered the submissions made by both the sides and material available on record. It is disputed fact that the Corporate Debtor has given a Corporate Guarantee to secure the funds borrowed by another group of Corporate entity. The requisite documents meet the requirements of law and there is not defect or technical deficiency thereunder. 

# 6. It is also noted that the Corporate Guarantee has been invoked after Principal borrower has failed to repay the debt. It is also noted that the application filed under Section 7 of the Insolvency & Bankruptcy Code, 2016 is well within period of three years from the date of default, hence, complies with the requirement of law and limitation. 

# 7. The legal plea raised by the Corporate Debtor have got no force of law as the Hon'ble Supreme Court in the case of State Bank of India  vs. V. Ramakrishnan and Ors. (14.08.2018 - SC) has held that proceeding against both Corporate Debtor as well as Guarantor can be initiated. Even, Hon'ble NCLAT itself in its subsequent decision after considering the decision relied on the Corporate Guarantor has changed its view and has held that the proceeding against the Corporate Debtor and as well as Corporate Guarantor can be undertaken under Section 7 of the IBC, 2016 simultaneously. In view of the matter, we hold that this application is liable to be admitted. Accordingly, we admit the same and order as under: 

ORDER 

# 1. Anil Mega Food park Pvt. Ltd. the Corporate Debtor is admitted in Corporate Insolvency Resolution Process (CIRP) under Section 7 of the Insolvency & Bankruptcy Code, 2016 and the moratorium is declared for prohibiting all of the following in terms of Section 14(1) of the Code.

• (a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority; 

• (b) transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein; 

• (c) any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; 

• (d) the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor. 

# 2. The order of moratorium shall have effect from the date of this order till the completion of the Corporate Insolvency Resolution Process or until this Adjudicating Authority approves the Resolution Plan under sub-section (1) of the Section 31 or passes an order for liquidation of Corporate Debtor Company under Section 33 of the Insolvency & Bankruptcy Code, 2016, as the case may be. 

# 3. The Financial Creditor has proposed the name of the Interim Resolution Professional(IRP). Therefore, this Adjudicating Authority hereby appoint Mr. R Choudhary IBBI/IPA-001/IP-P00157 /2017-18/10326to act as an IRP under Section 13(1) (c) of the Code. The IRP did not give his fee schedule. 

# 4. The IRP shall perform all his functions as contemplated, inter alia, by Sections 17,18,20 & 21 of the Code. It is further made clear that all personnel connected with Corporate Debtor, its Promoter or any other person associated with management of the Corporate Debtor are under legal obligation under Section 19 of the Code extend every assistance and co operation to the Interim Resolution Professional. Where any personnel of the Corporate Debtor, its Promoter or any other person required to assist or co-operate with IRP, do not assist or Co-operate, IRP is at liberty to make appropriate application to this Adjudicating Authority with a prayer for passing an appropriate order. 

# 5. We direct the IRP to make public announcement of initiation of Corporate Insolvency Resolution Process (CIRP) and call for submission of claims under Section 15 as required by Section 

# 6. It is further directed that the supply of goods/service to the Corporate Debtor Company, it continuing, shall not be terminated or suspended or interrupted during moratorium period. 

# 7. The IRP shall be under duty to protect and preserve the value of the property of the 'Corporate Debtor Company' and manage the operations of the Corporate Debtor Company as a going concern as a part of obligation imposed by Section 20 of the Insolvency & Bankruptcy Code, 2016. The Financial Creditor is directed to pay an advance of Rs. 5,00,000/ (Rupees Five Lacs only) to the IRP within two weeks from the date of this order for the purpose of smooth conduct of Corporate Insolvency Resolution Process (CIRP) and IRP to file proof of receipt of such amount to this Adjudicating Authority along with First Progress Report. 

# 8. The Registry is directed to communicate a copy of this order to the Financial Creditor, Corporate Debtor and to the Interim Resolution Professional and the concerned Registrar of Companies, after completion of necessary formalities forthwith and upload the same on website immediately after pronouncement of the order. 

# 9. With this observation, CP(IB) No. 287/7/NCLT/AHM/2019 is allowed. 

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State Bank of India Vs. Athena Energy Ventures Private Limited - Insolvency applications against CD and Corporate Guarantor, both can be maintained

NCLAT (2020.11.24) In State Bank of India Vs. Athena Energy Ventures Private Limited [Company Appeal (AT) (Ins) No.633 of 2020] held that; 

• If the above provisions of Section 60(2) and (3) are kept in view, it can be said that IBC has no aversion to simultaneously proceeding against the Corporate Debtor and Corporate Guarantor. If two Applications can be filed, for the same amount against Principal Borrower and Guarantor keeping in view the above provisions, the Applications can also be maintained. 

• We are also of the view that 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.

• Under the Contract of Guarantee, it is only when the Creditor would receive amount, the question of no more due or adjustment would arise. It would be a matter of adjustment when the Creditor receives debt due from the Borrower/Guarantor in the respective CIRP that the same should be taken note of and adjusted in the other CIRP.

• Ordinarily, we would respect and adopt the interpretation but for the reasons discussed above, we are unable to interpret the law in the manner it was interpreted in the matter of Piramal. For such reasons, we are unable to uphold the Judgement as passed by the Adjudicating Authority.

Excerpts of the order;

The Appellant – State Bank of India filed the Application against Respondent – Athena Energy Ventures Private Limited – Corporate Debtor who was Corporate Guarantor for “Athena Chattisgarh Power Ltd.” (The Principal Borrower hereafter referred as “Borrower”). The application was filed as Borrower committed default in repayment of the financial assistance provided to the Borrower. Athena Chattisgarh (Borrower) is joint Venture Company promoted by the Respondent – Corporate Debtor. The Borrower availed financial assistance from the Appellant Bank and other banks, in consortium and had executed necessary documents in favour of the Appellant and other consortium banks. When the need of the Borrower increased, the Respondent which is a joint venture and promoter of Borrower came forward and executed corporate guarantee and documents in favour of the Appellant and other consortium of banks. . . . . .The Borrower committed default and Appellant filed Application under Section 7 of IBC against the Borrower before the Adjudicating Authority. The said Application was numbered as CP(IB)No.616/07/HDB/2018. The same was admitted by Adjudicating Authority by Order dated 15th May, 2019.

# 3. It appears that the Respondent opposed the Application filed claiming that the Application was arising out of very same transaction and very same common Loan Agreement dated 30th March, 2011 as amended by first Amendment Agreement dated 31st March, 2015 followed by second Amendment Agreement dated 1st September, 2016 and thus the Application filed by the Appellant against Respondent was duplicating the claim which was not permissible. The Respondent relied on the Judgement of this Appellate Tribunal in the case of “Vishnu Kumar Agarwal vs. Piramal Enterprise Ltd.” – CA (AT) (Ins.) No. 346 & 347 of 2018 dated 8th January, 2019 where it is held that once the petition under Section 7 of IBC is filed against Principal Debtor/Co- Guarantor and CIRP has been initiated, the Financial Creditor cannot file another Application on the very same set of claim.

# 4. The Adjudicating Authority heard the parties and referred to observations of this Tribunal in the matter of “Piramal”. Keeping Judgement in the matter of Piramal in view, the Adjudicating Authority raised question that when Application under Section 7 had been admitted against the Principal Borrower whether the present Application by the same Financial Creditor could be admitted against Corporate Guarantor on same set of claims and default. The Adjudicating Authority relied on Para – 32 of the Judgement in the matter of Piramal and reproduced the same as under:-

“In para 32 of their Judgement (supra) the Hon’ble NCLAT observed as under:-

• “There is no bar in the ‘I&B Code’ for filing simultaneously two applications under Section 7 against the ‘Principal Borrower’ as well as the ‘Corporate Guarantor(s)’ or against both the ‘Guarantors’. However, once for same set of claim application under Section 7 filed by the ‘Financial Creditor’ is admitted against one of the ‘Corporate Debtor’ (‘Principal Borrower’ or ‘Corporate Guarantor(s)’), second application by the same ‘Financial Creditor’ for same set of claim and default cannot be admitted against the other ‘Corporate Debtor’ (the ‘Corporate Guarantor(s)’ or the ‘Principal Borrower’). Further, though there is a provision to file joint application under Section 7 by the ‘Financial Creditors’, no application can be filed by the ‘Financial Creditor’ against two or more ‘Corporate Debtors’ on the ground of joint liability (‘Principal Borrower’ and one ‘Corporate Guarantor’, or ‘Principal Borrower’ or two ‘Corporate Guarantors’ or one ‘Corporate Guarantor’ and other ‘Corporate Guarantor’), till it is shown that the ‘Corporate Debtors’ combinedly are joint venture company.”

Relying on the above paragraph, the Adjudicating Authority discussed and concluded that the Principal Borrower and Respondent could not be called joint venture Company as they were independent Companies having independent Memorandum of Association. Then, relying on the above paragraph in the matter of Piramal, the Adjudicating Authority declined to admit the Application as it was on same set of facts, claim and default for which CIRP was already initiated and was in progress in CP(IB) No.616/7/HDB/2018 and where according to the Adjudicating Authority, the claim of Applicant had already been admitted. Thus, the Application of the Appellant against the Respondent came to be rejected.

# 5. The present Appeal is against such Judgement.

# 11. Having heard Counsel for both sides and having gone through the record, it appears appropriate for us to first refer to Judgement in the matter of Piramal.

# 13. Apart from this, the observations in the Judgement in the matter of Piramal do not appear to have noticed Sub-Sections 2 and 3 of Section 60 of IBC. It would be appropriate to reproduce Section 60(1) to (3) which reads as under:-

• “60. Adjudicating Authority for corporate persons.--

• (1) The Adjudicating Authority, in relation to insolvency resolution and liquidation for corporate persons including corporate debtors and personal guarantors thereof shall be the National Company Law Tribunal having territorial jurisdiction over the place where the registered office of the corporate person is located.

• (2) Without prejudice to sub-section (1) and notwithstanding anything to the contrary contained in this Code, where a corporate insolvency resolution process or liquidation proceeding of a corporate debtor is pending before a National Company Law Tribunal, an application relating to the insolvency resolution or [liquidation or bankruptcy of a corporate guarantor or personal guarantor of such corporate debtor] shall be filed before such National Company Law Tribunal. 

• (3) An insolvency resolution process or [liquidation or bankruptcy proceeding of a corporate guarantor or personal guarantor, as the case may be, of the corporate debtor] pending in any Court or tribunal shall stand transferred to the Adjudicating Authority dealing with insolvency resolution process or liquidation proceeding of such corporate debtor.”

If the above provisions of Section 60(2) and (3) are kept in view, it can be said that IBC has no aversion to simultaneously proceeding against the Corporate Debtor and Corporate Guarantor. If two Applications can be filed, for the same amount against Principal Borrower and Guarantor keeping in view the above provisions, the Applications can also be maintained. It is for such reason that Sub-Section (3) of Section 60 provides that if insolvency resolution process or liquidation or bankruptcy proceedings of a Corporate Guarantor or Personal Guarantor as the case may be of the Corporate Debtor is pending in any Court or Tribunal, it shall stand transferred to the Adjudicating Authority dealing with insolvency resolution process or liquidation proceeding of such Corporate Debtor. Apparently and for obvious reasons, the law requires that both the proceedings should be before same Adjudicating Authority.

# 14. It would be appropriate now to refer to the observations made by the Insolvency Law Committee in its Report of February, 2020. Relevant part of the Report has been filed by the Appellant as Annexure – C (Diary No.23383). Para 7 of the Report is as follows:- …………….

# 15. The learned Counsel for the Appellant is relying on the above observations of the ILC to argue that the Creditor cannot be restrained from initiating CIRP against both the Principal Borrower as well as the surety and also maintaining the same. The learned Counsel submitted that when remedy is available against both, Application can be maintained against both and only at the stage of disbursement, adjustment may have to be made.

# 16. We find substance in the arguments being made by the learned Counsel for Appellant which are in tune with the Report of ILC. The ILC in para – 7.5 rightly referred to subsequent Judgement of “Edelweiss Asset Reconstruction Company Ltd. v. Sachet Infrastructure Ltd. and Ors.” dated 20th September, 2019 which permitted simultaneously initiation of CIRPs against Principal Borrower and its Corporate Guarantors. In that matter Judgment in the matter of Pirmal was relied on but the larger Bench mooted the idea of group Corporate Insolvency Resolution Process in para – 34 of the Judgement. The ILC thus rightly observed that provisions are there in the form of Section 60(2) and (3) and no amendment or legal changes were required at the moment. We are also of the view that 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. Under the Contract of Guarantee, it is only when the Creditor would receive amount, the question of no more due or adjustment would arise. It would be a matter of adjustment when the Creditor receives debt due from the Borrower/Guarantor in the respective CIRP that the same should be taken note of and adjusted in the other CIRP. This can be conveniently done, more so when IRP/RP in both the CIRP is same. Insolvency and Bankruptcy Board of India may have to lay down regulations to guide IRP/RPs in this regard.

# 18. We have already mentioned that when Hon’ble Supreme Court was dealing with Section 60(2), it was in the context of bankruptcy of Personal Guarantor and the Act 26 of 2018 was yet not published. The above para – 24 of the Judgement in the matter of Ramakrishnan can be conveniently read keeping in view the substituted provisions as per Act 26 of 2018. In place of Personal Guarantor, one can read “Corporate Guarantor” and with suitable changes, scheme of Section 60(2) and (3) can be appreciated from that angle also. The issue involved in the matter of “Ramakrishnan” was whether Section 14 of IBC will provide for a moratorium for the limited period mentioned in the Code, on admission of an insolvency petition would the same apply to Personal Guarantor of a Corporate Debtor. The issue was answered in negative by the Hon’ble Supreme Court. The Hon’ble Supreme Court in such context made observations as above in Paragraphs – 24 and 25 of the Judgement.

# 19. It is clear that in the matter of guarantee, CIRP can proceed against Principal Borrower as well as Guarantor. The law as laid down by the Hon’ble High Courts for the respective jurisdictions, and law as laid down by the Hon’ble Supreme Court for the whole country is binding. In the matter of Piramal, the Bench of this Appellate Tribunal “interpreted” the law. Ordinarily, we would respect and adopt the interpretation but for the reasons discussed above, we are unable to interpret the law in the manner it was interpreted in the matter of Piramal. For such reasons, we are unable to uphold the Judgement as passed by the Adjudicating Authority.

# 20. It is not shown that the application was otherwise incomplete. We thus, proceed to pass the following Order:-

• ORDER

• The Appeal is allowed. Impugned Order passed by the Adjudicating Authority dated  th March, 2020 is quashed and set aside. CP(IB)No. 466/7/HDB/2019 filed by the  ppellant before Adjudicating Authority is restored to the file of the Adjudicating  uthority. The Adjudicating Authority is directed to admit the Application  P(IB)No.466/7/HDB/2019 and pass further necessary Orders as per provisions of IBC. The Adjudicating Authority is requested to appoint the same IRP/RP as has been appointed in CP(IB)616/7/HDB/2018 in the CIRP proceeding against M/s. Athena Chattisgarh Power Ltd. (Principal Borrower). The IRP/RP will act in accordance with law keeping observations in this Judgment in view.

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State Bank of India Vs. V. Ramakrishnan & Anr. - Amendment in Section 14(3) is retrospective in nature.

Supreme Court of India (14.08.2018) in State Bank of India Vs. V. Ramakrishnan & Anr. [Civil Appeal No. 3595 of 2018 With Civil Appeal No. 4553 of 2018] held that; 

• As per section 128 of the Indian Contract Act, 1872, the liability of the surety is co-extensive with that of the principal debtor and the creditor may go against either the principal debtor, or the surety, or both, in no particular sequence [Chokalinga Chettiar v. Dandayunthapani Chattiar, AIR 1928 Mad 1262]. 

• The liability of the principal debtor and the surety is co-extensive and is joint and several [Bank of Bihar v. Damodar Prasad, AIR 1969 SC 297].

• The Report of the said Committee makes it clear that the object of the amendment was to clarify and set at rest what the Committee thought was an overbroad interpretation of Section 14. That such clarificatory amendment is retrospective in nature

 

Excerpts of the order;

# 27. We now come to the argument that the amendment of 2018, which makes it clear that Section 14(3), is now substituted to read that the provisions of sub-section (1) of Section 14 shall not apply to a surety in a contract of guarantee for corporate debtor. The amended Section reads as follows:

• “14. Moratorium.—

• xxx xxx xxx

• (3) The provisions of sub-section (1) shall not apply to—

- (a) such transactions as may be notified by the Central Government in consultation with any financial sector regulator;

-  (b) a surety in a contract of guarantee to a corporate debtor.”

 

# 28. The Insolvency Law Committee, appointed by the Ministry of Corporate Affairs, by its Report dated 26.03.2018, made certain key recommendations, one of which was:

• “(iv) to clear the confusion regarding treatment of assets of guarantors of the corporate debtor visàvis the moratorium on the assets of the corporate debtor, it has been recommended to clarify by way of an explanation that all assets of such guarantors to the corporate debtor shall be outside scope of moratorium imposed under the Code;” 

 

The Committee insofar as the moratorium under Section 14 is concerned, went on to find:

• “5.5 Section 14 provides for a moratorium or a stay on institution or continuation of proceeding, suits, etc. against the corporate debtor and its assets. There have been contradicting views on the scope of moratorium regarding its application to third parties affected by the debt of the corporate debtor, like guarantors or sureties. While some courts have taken the view that Section 14 may be interpreted literally to mean that it only restricts actions against the assets of the corporate debtor, a few others have taken an interpretation that the stay applies on enforcement of guarantee as well, if a CIRP is going on against the corporate debtor.”

• xxx xxx xxx

• “5.7 The Allahabad High Court subsequently took a differing view in Sanjeev Shriya v. State Bank of India, 2017 (9) ADJ 723, by applying moratorium to enforcement of guarantee against personal guarantor to the debt. The rationale being that if a CRIP is going on against the corporate debtor, then the debt owed by the corporate debtor is not final till the resolution plan is approved, and thus the liability of the surety would also be unclear. The Court took the view that until debt of the corporate debtor is crystallised, the guarantor’s liability may not be triggered. The Committee deliberated and noted that this would meant that surety’s liabilities are put on hold if a CIRP is going on against the corporate debtor, and such an interpretation may lead to the contracts of guarantee being infructuous, and not serving the purpose for which they have been entered into.

• 5.8 In State Bank of India v. V. Ramakrishnan and Veeson Energy Systems, NCLAT, New Delhi, Company Appeal (AT) (Insolvency) No. 213/2017 [Date of decision – 28 February, 2018], the NCLAT took a broad interpretation of Section 14 and held that it would bar proceedings or actions against sureties. While doing so, it did not refer to any of the above judgments but instead held that proceedings against guarantors would affect the CIRP and may thus be barred by moratorium. The Committee felt that such a broad interpretation of the moratorium may curtail significant rights of the creditor which are intrinsic to a contract of guarantee.”

• 5.9 A contract of guarantee is between the creditor, the principal debtor and the surety, where under the creditor has a remedy in relation to his debt against both the principal debtor and the surety [National Project Construction Corporation Limited v. Sandhu and Co., AIR 1990 P&H 300]. The surety here may be a corporate or a natural person and the liability of such person goes as far the liability of the principal debtor. As per section 128 of the Indian Contract Act, 1872, the liability of the surety is co-extensive with that of the principal debtor and the creditor may go against either the principal debtor, or the surety, or both, in no particular sequence [Chokalinga Chettiar v. Dandayunthapani Chattiar, AIR 1928 Mad 1262]. Though this may be limited by the terms of the contract of guarantee, the general principle of such contracts is that the liability of the principal debtor and the surety is co-extensive and is joint and several [Bank of Bihar v. Damodar Prasad, AIR 1969 SC 297]. The Committee noted that this characteristic of such contracts i.e. of having remedy against both the surety and the corporate debtor, without the obligation to exhaust the remedy against one of the parties before proceeding against the other, is of utmost important for the creditor and is the hallmark of a guarantee contract, and the availability of such remedy is in most cases the basis on which the loan may have been extended.

• 5.10 The Committee further noted that a literal interpretation of Section 14 is prudent, and a broader interpretation may not be necessary in the above context. The assets of the surety are separate from those of the corporate debtor, and proceedings against the corporate debtor may not be seriously impacted by the actions against assets of third parties like sureties. Additionally, enforcement of guarantee may not have a significant impact on the debt of the corporate debtor as the right of the creditor against the principal debtor is merely shifted to the surety, to the extent of payment by the surety. Thus, contractual principles of guarantee require being respected even during a moratorium and an alternate interpretation may not have been the intention of the Code, as is clear from a plain reading of Section 14.

• 5.11 Further, since many guarantees for loans of corporates are given by its promoters in the form of personal guarantees, if there is a stay on actions against their assets during a CIRP, such promoters (who are also corporate applicants) may file frivolous applications to merely take advantage of the stay and guard their assets. In the judgments analysed in this relation, many have been filed by the corporate applicant under Section 10 of the Code and this may corroborate the above apprehension of abuse of the moratorium provision. 

 

The Committee concluded that Section 14 does not intend to bar actions against assets of guarantors to the debts of the corporate debtor and recommended that an explanation to clarify this may be inserted in Section 14 of the Code. The scope of the moratorium may be restricted to the assets of the corporate debtor only.”

 

# 29. The Report of the said Committee makes it clear that the object of the amendment was to clarify and set at rest what the Committee thought was an overbroad interpretation of Section 14. That such clarificatory amendment is retrospective in nature, ………….

 

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Dr. Vishnu Kumar Agarwal vs. M/s. Piramal Enterprises Ltd - Insolvency Application against Two CD's with same set of papers

NCLAT (08.01.2019) in Dr. Vishnu Kumar Agarwal vs. M/s. Piramal Enterprises Ltd.[Company Appeal (AT) (Insolvency) No. 346 & 347 of 2018] held that once for the same set of claim application under Section 7 filed by the ‘Financial Creditor’ is admitted against one of the ‘Corporate Debtors’ [‘Principal Borrower’ or ‘Corporate Guarantor(s)’], second application by the same ‘Financial Creditor’ for same set of claim and default cannot be admitted against the other ‘Corporate Debtor’ (the ‘Corporate Guarantor(s)’ or the Principal Borrower’). 

Excerpts of the order;

# 4. The ‘Financial Creditor’ had filed a Civil Suit bearing No. 46/40/2017 before the Court of Additional District Judge-I, Alwar, Rajasthan against the ‘Principal Borrower’ and both the ‘Corporate Guarantors’ on 15th September, 2017, which is pending adjudication.

 

# 5. During the pendency of this suit, the ‘Financial Creditor’ issued separate demand notice to both the ‘Corporate Guarantors’ on 24th October, 2017 and 26th October, 2017 calling upon each of the ‘Corporate Guarantors’ to make payment of the outstanding amount of Rs. 40,28,76,461/- (Rupees Forty Crores Twenty-Eight Lakhs Seventy-Six Thousand Four Hundred and Sixty-One Only) from the ‘Principal Borrower’ within 15 days of receipt of such notice, failing which, the ‘Financial Creditor’ may take all remedial measures including the initiation of the ‘Corporate Insolvency Resolution Process’ in terms of the ‘Insolvency and Bankruptcy Code, 2016’ (“I&B Code” for short).

 

# 7. The ‘Financial Creditor’- (‘M/s. Piramal Enterprises Ltd.’) thereafter, filed an application under Section 7 of the ‘I&B Code’ for initiation of the ‘Corporate Insolvency Resolution Process’ against ‘Sunrise Naturopathy and Resorts Pvt. Ltd.’- (“Corporate Guarantor No.1”) and another application under Section 7 of the ‘I&B Code’ for initiation of the ‘Corporate Insolvency Resolution Process’ against ‘Sunsystem Institute of Information Technology Pvt. Ltd.’- (“Corporate Guarantor No.2”).

  

# 8. The Adjudicating Authority (National Company Law Tribunal), Principal Bench, New Delhi, by impugned order dated 24th May, 2018 admitted the application and initiated ‘Corporate Insolvency Resolution Process’ against ‘Sunsystem Institute of Information Technology Pvt. Ltd.’- (“Corporate Guarantor No.2”).

 

# 9. By another order dated 31st May, 2018, the Adjudicating Authority (National Company Law Tribunal), Principal Bench, New Delhi, admitted the application and initiated ‘Corporate Insolvency Resolution Process’ against ‘Sunrise Naturopathy and Resorts Pvt. Ltd.’- (“Corporate Guarantor No.1”).

 

# 11. In the aforesaid background, learned counsel for the Appellant raised question of maintainability of two ‘Corporate Insolvency Resolution Processes’ against two ‘Corporate Guarantors’ based on same sets of claim; debt, default and record.

 

# 12. Learned counsel for the Appellant submitted that no ‘Corporate Insolvency Resolution Process’ can be initiated against the ‘Corporate Guarantors’, without initiating ‘Corporate Insolvency Resolution Process’ against the ‘Principal Borrower’. Further, according to him, the ‘Principal Borrower’ not being a Company, no application under Sections 7 or 9 can be filed against it. If no application under Sections 7 or 9 can be filed against the ‘Principal Borrower’, the application under Section 7 for same claim and debt cannot be filed against the ‘Corporate Guarantors’.

 

# 13. It was also submitted that for same set of claim amount and debt, two ‘Corporate Insolvency Resolution Processes’ cannot be initiated against two different ‘Corporate Guarantors’.

 

# 15. The questions arise for consideration in these appeals are:

• i. Whether the ‘Corporate Insolvency Resolution Process’ can be initiated against a ‘Corporate Guarantor’, if the ‘Principal Borrower’ is not a ‘Corporate Debtor’ or ‘Corporate Person’? And;

• ii. Whether the ‘Corporate Insolvency Resolution Process’ can be initiated against two ‘Corporate Guarantors’ simultaneously for the same set of debt and default ?

 

# 21. From clause (h) of Section 5 (8) of the ‘I&B Code’, it is clear that counter-indemnity obligation in respect of a guarantee comes within the meaning of ‘financial debt’ and, therefore, there is no dispute that ‘M/s. Piramal Enterprises Ltd.’ is a ‘Financial Creditor’ of both ‘Sunrise Naturopathy and Resorts Pvt. Ltd.’- (“Corporate Guarantor No.1”) and ‘Sunsystem Institute of Information Technology Pvt. Ltd.’- (“Corporate Guarantor No.2”).

 

# 25. In view of the aforesaid decision of the Hon’ble Supreme Court, we hold that it is not necessary to initiate ‘Corporate Insolvency Resolution Process’ against the ‘Principal Borrower’ before initiating ‘Corporate Insolvency Resolution Process’ against the ‘Corporate Guarantors’. Without initiating any ‘Corporate Insolvency Resolution Process’ against the ‘Principal Borrower’, it is always open to the ‘Financial Creditor’ to initiate ‘Corporate Insolvency Resolution Process’ under Section 7 against the ‘Corporate Guarantors’, as the creditor is also the ‘Financial Creditor’ qua  Corporate Guarantor’. The first question is thus answered against the Appellant.

 

# 29. In the present case, the ‘Financial Creditor’- (‘M/s. Piramal Enterprises Ltd.’) has claimed that it was owed financial debt of Rs. 40,28,76,461/- from ‘Sunsystem Institute of Information Technology Pvt. Ltd.’- (“Corporate Guarantor No.2”), which means that the ‘Financial Creditor’ was owed debt which is disbursed against the time value of money. Once such claim is made by the same very ‘Financial Creditor’- (‘M/s. Piramal Enterprises Ltd.’) against one of the ‘Corporate Debtor’ (‘Corporate Guarantor No.2’) in respect of same financial debt for triggering ‘Corporate Insolvency Resolution Process’ and such application is admitted (on 24th May, 2018), the question arises as to whether for same very claim and for same very default, the application under Section 7 against the other ‘Corporate Debtor’- (‘Corporate Guarantor No.1’)— ‘Sunrise Naturopathy and Resorts Pvt. Ltd.’ can be initiated?

 

# 31. The matter can be looked from another angle. The question arises whether the ‘Financial Creditor’- (‘M/s. Piramal Enterprises Ltd.’) can claim same amount of Rs. 40,28,76,461/- from the ‘Resolution Professional’ appointed pursuant to the ‘Corporate Insolvency Resolution Process’ against the ‘Corporate Guarantor No.1’ (‘Sunrise Naturopathy and Resorts Pvt. Ltd.’), as also from the ‘Resolution Professional’ appointed pursuant to ‘Corporate Insolvency Resolution Process’ initiated against ‘Sunsystem Institute of Information Technology Pvt. Ltd.’- (“Corporate Guarantor No.2”)? Admittedly, for same set of debt, claim cannot be filed by same ‘Financial Creditor’ in two separate ‘Corporate Insolvency Resolution Processes’. If same claim cannot be claimed from ‘Resolution Professionals’ of separate ‘Corporate Insolvency Resolution Processes’, for same claim amount and default, two applications under Section 7 cannot be admitted simultaneously. Once for same claim the ‘Corporate Insolvency Resolution Process’ is initiated against one of the ‘Corporate Debtor’ after such initiation, the ‘Financial Creditor’ cannot trigger ‘Corporate Insolvency Resolution Process’ against the other ‘Corporate Debtor(s)’, for the same claim amount (debt).

 

# 32. There is no bar in the ‘I&B Code’ for filing simultaneously two applications under Section 7 against the ‘Principal Borrower’ as well as the ‘Corporate Guarantor(s)’ or against both the ‘Guarantors’. However, once for the same set of claim application under Section 7 filed by the ‘Financial Creditor’ is admitted against one of the ‘Corporate Debtors’ (‘Principal Borrower’ or ‘Corporate Guarantor(s)’), second application by the same ‘Financial Creditor’ for same set of claim and default cannot be admitted against the other ‘Corporate Debtor’ (the ‘Corporate Guarantor(s)’ or the Principal Borrower’). Further, though there is a provision to file joint application under Section 7 by the ‘Financial Creditors’, no application can be filed by the ‘Financial Creditor’ against two or more ‘Corporate Debtors’ on the ground of joint liability (‘Principal Borrower’ and one ‘Corporate Guarantor’, or ‘Principal Borrower’ or two ‘Corporate Guarantors’ or one ‘Corporate Guarantor’ and other ‘Corporate Guarantor’), till it is shown that the ‘Corporate Debtors’ combinedly are joint venture company.

 

Disclaimer: The sole purpose of this blog is to create awareness on the subject and must not be used as a guide for taking or recommending any action or decision. A reader must do his own research and seek professional advice if he intends to take any action or decision in the matters covered in this blog.

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