AUTHOR : ISHIKA CHATTOPADHYAY

In the judgment of Dr. Vishnu Kumar Agarwal v. M/s Piramal Enterprises Limited [Company Appeal (AT) (Insolvency) No. 346 and 347 of 2018, NCLAT (order dated January 8, 2019)], the NCLAT had to decide on two contentious issues, viz. whether two separate Corporate Insolvency Resolution Processes (CIRP) initiated against two corporate guarantors will be maintainable in case the claim or default is same; and whether a CIRP can be initiated against a corporate guarantor in case the principal debtor is not a corporate person. The NCLAT held that in case of the same set of claims or default, a financial creditor cannot initiate a CIRP against one corporate debtor, which may either be the principal borrower or the corporate guarantor, if an application for initiating CIRP has already been admitted against another corporate debtor. The dilemma with the abovementioned Piramal judgment is that it takes a route contrary to settled position of law regarding the treatment of guarantors under insolvency proceedings.

Position of guarantors under Indian Contract Act, 1872

Under Section 128 of the Indian Contract Act, 1872 it is provided that in a contract of guarantee, the surety has a liability that is “co-extensive” with the liability of the principal debtor, which essentially means that a creditor can initiate simultaneous proceedings against the principal debtor and the surety, in recovery of his dues, and it is not mandatory that the creditor has to exhaust his remedy against the principal debtor before initiating proceedings against the surety. 

Position of guarantors under the Insolvency and Bankruptcy Code, 2016

Section 14 of the IBC provides for the imposition of a moratorium which prohibits institution or continuation of any suit or proceeding against the corporate debtor as well as any action to recover or enforce any security interest created by the corporate debtor on its property. There has been confusion with respect to applicability of moratorium under Section 14 of the Code since its very inception, and several cases have ensued before the NCLTs as well as NCLAT.  The Insolvency Law Committee was constituted by the Ministry of Corporate Affairs to find solutions to this confusion. The Committee suggested that all assets of the guarantors to the corporate debtor should be kept outside the ambit of moratorium imposed under the IBC. Accordingly, the Insolvency and Bankruptcy Code (Second Amendment Act), 2018 came into being, whereby clause (b) was inserted to sub-section (3) of Section 14 of the Code, which provided that the moratorium will not be applicable to the guarantor of a corporate debtor. There are therefore no provisions in the Code which restricts a creditor to institute a CIRP against the principal debtor and the guarantor at the same time.

It must be mentioned in this context that the very purpose of the enactment of the IBC was to induce availability of more credit in the market by facilitating the recovery of dues by creditors. The Amendment Act of 2018 goes in the same direction as it upholds the basic principles of a contract of guarantee even during a period of moratorium.

Dilemma regarding the Piramal Judgment

The very nature of a contract of guarantee is to secure the lender by enabling him to proceed against both the principal debtor and the surety, without a requirement to exhaust the remedy against one of them before he can proceed against the other. The Piramal judgment goes against this very principle by saying that a financial creditor cannot initiate a CIRP against one corporate debtor when an application for initiating CIRP has already been admitted against another corporate debtor. It may be argued here that IBC being a special law, its effects will override those of the Contract Act, but the IBC itself does not have any bar on the institution of a second CIRP as ruled in the judgment. In fact, the IBC, under Section 14 excludes the assets of the surety in a contract of guarantee from the moratorium, thus enabling the institution of CIRPs against it. Also, under Sections 60(2) and (3) of the IBC, it has been provided that the same bench of the NCLT will be dealing with insolvency proceedings against a principal debtor and its corporate guarantor, thus once again implying that simultaneous proceedings may be instituted against them. 

This judgment basically gives an escape route to a guarantor, thereby negating the very purpose of the enactment of the IBC as well as that of the Amendment Act of 2018. An appeal has been filed against the judgment in the Supreme Court and it will be interesting to see how the Apex Court interprets the position of guarantors and whether any subsequent amendments are brought about in the Code.

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