Home » Between The Lines » NCLAT: Creditor could not be restrained from simultaneously initiating CIRP against both the principal borrower and the guarantor

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The National Company Law Appellate Tribunal (“NCLAT”) by way of its judgement dated November 24, 2020 in the matter of State Bank of India v. Athena Energy Ventures Private Limited [CA (AT) (Ins) No. 633 of 2020] set aside the order passed by the National Company Law Tribunal, Hyderabad Bench (“NCLT”) on March 4, 2020. The NCLT had declined to admit the application filed by State Bank of India (“Appellant”) in order to initiate corporate insolvency resolution process (“CIRP”) against Athena Energy Ventures Private Limited (“Respondent”)


The Appellant had filed an application under Section 7 (Initiation of corporate insolvency resolution process by financial creditor) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) against the Respondent. The Respondent stood as a corporate guarantor for Athena Chattisgarh Power Limited (“Borrower”), which had defaulted in repayment of loan facility provided to it. The Borrower was a joint venture company promoted by the Respondent. The Borrower had availed loan facility from the Appellant and several other banks (being a consortium of banks). When the Borrower wished to avail more funds, the Respondent executed a corporate guarantee in favour of the Appellant and the consortium of banks. The Appellant had sanctioned a total of INR 3069,68,00,000/- and had actually disbursed INR 2769,19,05,767/- to the Borrower. Upon Borrower’s default, the Appellant filed an application under Section 7 of the IBC before the NCLT. The said application was admitted on May 15, 2019. Thereafter, the Appellant also filed a Section 7 application against the Respondent that is, the corporate guarantor. The Respondent had then opposed the application on the grounds that it arose out of the same transaction, and therefore the application duplicated the claim of the Appellant, which was not permissible. The Respondent relied on the judgement of the NCLAT in Vishnu Kumar Agarwal v. Piramal Enterprises Limited [CA (AT) (Ins) No. 346 and 347 of 2018] (“Piramal Enterprises”) wherein it had been held that once the petition under Section 7 had been filed against co-guarantor and CIRP had been initiated, the financial creditor could not file another application on the very same set of claims.

Whether a financial creditor can file applications for simultaneously initiating CIRP against a borrower and a guarantor for the same set of debt and default.

Decision of the NCLT

The NCLT relied on the below portion of the NCLAT judgement in Piramal Enterprises:

“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.”

The NCLT noted that the Borrower and the Respondent could not be called ‘joint venture company’ as they were independent companies. Further, the NCLT held that since the application was on the same set of facts, claim and default, for which CIRP had already been initiated and in progress (against the Borrower), the claim of the Appellant had already been admitted. Pursuant to the same, the Appellant’s application against the Respondent came to be rejected.

Contentions before the NCLAT

Appellant’s contentions:

The Appellant contended that under Section 128 (Surety’s liability) of the Indian Contract Act, 1872, the liability of a principal borrower and guarantor is co-extensive and the creditor is entitled to proceed against either or both and no sequence is required to be followed. Per the definition of ‘financial debt’, the IBC also treats the principal borrower and guarantor similarly. As per Section 60(2) (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) of the IBC, simultaneous application could be filed against the borrower and the guarantor and the same could also be maintained. In Piramal Enterprises, the judgement was relating to filing of two separate proceedings against two guarantors. Therefore, the judgement could not apply to this case. Further, the Hon’ble Supreme Court (“SC”) has directed maintaining status quo in the matter of Piramal Enterprises and in other matters (which have followed the judgement in Piramal Enterprises) has stayed the judgements of the NCLAT. The ‘Insolvency Law Committee Report’ of February 2020 (“ILC-Report”), had observed that proceedings could be maintained against the borrower as well as the guarantor, and the creditor could file claims in both CIRP proceedings. Under the IBC, the resolution professional only collates claims. The haircut taken by the creditors in the matter of resolution plan is what the Appellant would be able to recover in the resolution plan or liquidation. That can be adjusted in other proceedings, that is, the claims could be reduced and adjusted proportionately in two CIRP proceedings depending on the liability under the guarantee documents.

Respondent’s contentions:

The Respondent did not dispute the fact that (i) it was a guarantor,(ii) the execution of documents in respect thereof, (iii) the fact that ‘Athena Chattisgarh Power Limited/Borrower’ was the principal borrower, or (iv) the issue regarding quantum of outstanding amounts or the Borrower’s default. It was argued that the soul of the IBC is resolution of the corporate debtor and to keep the corporate debtor as a going concern to maximise value. The proceedings are not adverse in nature. It was accepted that under Section 128 of the Indian Contract Act, 1872, the liability of surety is co-extensive with the principal debtor and the creditor may proceed against principal debtor, or the surety or both, in no particular sequence in recovery proceedings. However, the said principle is not applicable in insolvency proceedings against the principal debtor and surety, or against more than one surety, for same set of claims, as claims against surety have to be reduced to the extent of claims lodged against the principal debtor. There cannot be two CIRP proceedings, one for the borrower and another for the surety, for the same amount. The Respondent also referred to ‘Halsbury’s Laws of England’ to argue that it was necessary for the creditor before proceeding against surety, to request the principal debtor to pay or sue him although solvent, unless this was expressly stipulated. Further, it was argued basis the ‘The Law of Insolvency’ by Ian F Fletcher, that where the creditor had already initiated action against the principal debtor, the liability of the surety is reduced to the amount for which the creditor’s debt had been admitted. In the instant case, since the amount claimed against the Borrower and the Respondent was the same, the application against the Respondent could not be maintained.

Observations of NCLAT

In Piramal Enterprises, the NCLAT dealt with the issue as to whether the CIRP could be initiated against two corporate guarantors simultaneously for the same set of debt and default. It was reasoned therein, that the moment the application against guarantor No. 2 was admitted, the guarantor No. 1 could say that the debt in question was not due as it was not payable in law, having shown the same debt payable by guarantor No. 2, which had already been initiated against guarantor No. 2. The result was that in Piramal Enterprises, guarantor No. 1 walked away only because CIRP had anyway been initiated against guarantor No. 2. However, the question in Piramal Enterprises was whether CIRP could be initiated against two corporate guarantors simultaneously for the same set of debt and default and not whether applications could be filed against a principal borrower and a corporate guarantor. The NCLAT then considered Section 60 of the IBC, in respect of which an amendment was introduced by way of the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018. The said amendment was published in the gazette on August 17, 2018. In the erstwhile Section 60(2) of the IBC, the words were “bankruptcy of a personal guarantor of such corporate debtor”. These words were later on substituted by the words “liquidation or bankruptcy of a corporate guarantor or personal guarantor as the case may be, of such Corporate Debtor”. The judgement in Piramal Enterprises, which was passed on January 8, 2019, did not notice the above amendment. Keeping in mind the amendments made to Section 60 of the IBC, it could be said that the IBC has no aversion to simultaneously proceeding against the corporate debtor and the corporate guarantor. If two applications could be filed for the same amount against the principal borrower and the guarantor, the applications against them could also be maintained. The NCLAT found merit in the argument of the Appellant that a creditor could not be restrained from initiating CIRP against both the principal borrower and the surety. The Appellant had also submitted that, when remedy is available against both, application can be maintained against both and it was only at the stage of disbursement that the adjustment may have to be made. The NCLAT noted that arguments made by the Appellant were in line with ILC-Report. Further, the ILC-Report had also referred to the judgement of the SC in Edelweiss Asset Reconstruction Company Limited v. Sachet Infrastructure Limited and Others [CA (AT) (Ins) No. 377 of 2019] dated September 20, 2019, which permitted simultaneous initiation of CIRP against principal borrower and its corporate guarantors. In that matter, the judgment in the matter of Piramal Enterprises was relied on but the larger bench mooted the idea of group CIRP.

Decision of NCLAT

Simultaneous 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. The Respondent had argued that if the debt is the same and claim is made in CIRP against the borrower, the amount must be said to be ‘not due or not payable’ in the CIRP against guarantor. The NCLAT refused to accept this argument and stated that under the contract of guarantee, it is only when the creditor would receive amount, that 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 or guarantor in the respective CIRP that the same should be taken note of and adjusted in the other CIRP. This could be conveniently done, more so when resolution professional in both the CIRP is same. Thereby, the judgment passed by the NCLT was set aside. The NCLT was directed to admit the application against the Respondent and pass necessary orders as per the provisions of the IBC.

Vaish Associates Advocates View:

The NCLAT clearly delineated the difference between the facts in Piramal Enterprises and the present case. In Piramal Enterprises, the primary issue was whether CIRP could be initiated against two guarantors. Further, it has now been clarified by the NCLAT that simultaneous remedy is central to a contract of guarantee. This ruling therefore, makes the position of the guarantor synonymous to the position enumerated under Indian Contract Act, 1872. The fact that creditor can file claims in CIRP against both borrower and guarantor, opens up new risks for the guarantor.

By implication of this judgement, it will have to be understood that the guarantor cannot simply walk away in case of borrower’s default. It is material for the guarantor at the time of execution of documents, to re-assess the terms of the guarantee with respect to how much risk, it is willing to take on and/or the extent of protection that can be possibly availed. As far as the creditors are concerned, the judgment definitely offers a new avenue in the sense that they can now go after both the borrower and guarantor. It is very aptly provided that the amounts received by the creditor would only be a matter of readjustment as regards the borrower and guarantor. It would be interesting to study as to how the balance between the creditor’s and the guarantor’s requirement ultimately plays out in the aftermath of this judgment.

For more information please write to Mr. Bomi Daruwala at [email protected]


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