From Piramal Enterprises Case to State Bank of India case: Finality still required
Ever since its enactment, the Insolvency and Bankruptcy Code, 2016 (“the Code”) is no stranger to the need for judicial intervention to settle issues that are instrumental in achieving the objectives of the Code and providing an effective legal remedy to those who invoke it. In one such circumstance, The National Company Law Appellate Tribunal (“NCLAT”) was called upon to settle some of the highly crucial issues in the cases of Vishnu Kumar Agarwal v. Piramal Enterprises Ltd.  ibclaw.in 16 NCLAT (“Piramal Enterprises Case”), and State bank of India v. Athena Energy Ventures Private Limited (2020) ibclaw.in 344 NCLAT (“State bank of India Case”).
There were two very pertinent issues raised before the Tribunal in the above-mentioned cases that the authors wish to examine and open discourse with. The authors focus on the below mentioned issues dealt with in these cases:
- Whether the Corporate Insolvency Resolution Process (“CIRP”) could be initiated against the Corporate Guarantor even when the Principal Borrower is not a corporate Debtor or a Corporate Person?.
- Whether the Financial Creditor could initiate CIRP against the Principal Borrower and one Corporate Guarantor, or against Principal Borrower or two Corporate Guarantors or against one Corporate Guarantor and other Corporate Guarantor, simultaneously for the same default, debt and facts?
Judgement Analysis of Underlying Issues
The NCLAT in the Piramal Enterprise case answered the first issue in positive and the second issue in negative. However, the NCLAT, in the case of the State Bank of India case overruled its Piramal Enterprises judgment regarding the second issue and allowed simultaneous proceedings. In the light of these developments, the authors wish to examine the determination of the Tribunal in both of these cases.
Analysis of the Piramal Enterprises Case
In this case, the All India Society for Advance Education and Research (“Principal Borrower”) entered into an agreement deed with ‘M/s. Piramal Enterprises Ltd.’ (“Financial Creditor”) for grant of 38,00,00,000/- INR only. The said deed was guaranteed by two ‘Corporate Guarantors’ namely-Sunrise Naturopathy and Resorts Pvt. Ltd. (“Corporate Guarantor – 1”) and Sunsystem Institute of Information Technology Pvt. Ltd. (“Corporate Guarantor – 2”).
On default of the payment, the ‘Financial Creditor’ issued separate demand notice to both the ‘Corporate Guarantors’ individually on 24th October 2017 and 26th October 2017, asking each of the ‘Corporate Guarantors’ to make payment of the outstanding amount of Rs. 40, 28, 76,461/- INR only from the ‘Principal Borrower within 15 days of receipt of such notice.
After still not recovering the amount, the Financial Creditor filed two separate individual applications under Section 7 of the Code for initiation of the CIRP against Corporate Guarantor-1 and Corporate Guarantor No. 2 on the same set of facts and claims before the Hon’ble NCLT, following which the NCLT accepted both applications. This was subsequently challenged before the NCLAT.
The Appellant questioned the maintainability of two CIRPs against two Corporate Guarantors based on the same sets of claims; debt, default and record. The Appellant also raised a question as to how a CIRP can be triggered against Corporate Guarantors without initiating CIRP against the ‘Principal Borrower’. It was also submitted before the Hon’ble tribunal that the Principal Borrower not being a Company, an application under Sections 7 or 9 of the Code cannot be filed.
The court, while answering these questions, analysed Sections 3(10), 3(11), 3(12), 5(7) & (8) of the Code and relied on the cases of Bank of Bihar v. Damodar Prasad and Anr.  ibclaw.in 21 SC and State Bank of India v. Indexport Registered and Ors.  ibclaw.in 25 SC. The Hon’ble Tribunal held that under Section 128 of the Indian Contract Act, the surety’s liability is coextensive with that of the principal debtor and immediate in nature, thus making surety liable to pay the entire amount. Therefore the Creditor is not bound to exhaust his remedies against the principal debtor before suing the surety as the Creditor is also the Financial Creditor qua Corporate Guarantor.
The second issue was whether Financial Creditor could initiate CIRP against the Principal Borrower and one Corporate Guarantor, or against Principal Borrower or two Corporate Guarantors, or against one Corporate Guarantor and other Corporate Guarantor, simultaneously for the same set of debt and default.
While adjudicating on this issue, the Hon’ble Tribunal held that once CIRP under section 7 of the Code is initiated against one of the Corporate Debtor, the Financial Creditor cannot trigger CIRP against other ‘Corporate Debtor(s), for the same claim amount arising out of the same facts.
The Tribunal went on to add that even though there is a provision for the Financial Creditor to file a joint application under Section 7, the Financial Creditor cannot file Section 7 application against two or more Corporate Debtors on the ground of joint liability till it is shown that the Corporate Debtors combined are Joint Venture Company.
Analysis of the State Bank of India case
In the State bank of India case, the Hon’ble NCLAT examined the similar issue of simultaneous CIRP proceedings by the Financial Creditor against the Principal Borrower and other Corporate Guarantor(s) for the same set of debt and default.
In this case, the State Bank of India (“Appellant”) filed the Application against Athena Energy Ventures Private Limited- (“Respondent/Corporate Debtor”), who was a Corporate Guarantor for Athena Chhattisgarh Power Ltd. (“Principal Borrower”). The application was filed as the Principal Borrower committed default in repayment of the financial assistance provided by the Creditor. The Principal Borrower is a Joint Venture Company promoted by the Respondent-Corporate Debtor. The Borrower availed financial assistance from the Appellant Creditor and had executed documents in favour of the Appellant. Later, when the demand for money of the Borrower increased, the Respondent, a joint venture and promoter of Borrower, came forward and executed corporate guarantee and documents in favour of the Appellant.
The Appellant had sanctioned 30,69,68,00,000/- INR, out of which 27,69,19,05,767/- INR was disbursed to the Borrower. Later, when the Borrower committed default, the Appellant filed an Application under Section 7 of IBC against the Borrower before the Adjudicating Authority, which was subsequently admitted by it. At the same time, the Appellant also filed an Application under Section 7 of IBC to seek initiation of CIRP against Respondent-Corporate Guarantor.
The Hon’ble Tribunal partially overruled its judgement in Piramal Enterprises and held that under IBC, there is no bar on simultaneous proceeding against the Corporate Guarantor and Corporate Debtor. If two applications can be filed against Principal Borrower and the Guarantor for the same amount, then considering the above provisions, the said Applications can also be maintained.
The simultaneous remedy is central to a contract of guarantee. In the case of CIRP against the Principal Borrower and the surety, the Creditor is allowed to file claims against both of them in the process of CIRP.
Under the Contract of Guarantee, only when the Creditor receives the outstanding amount would the question of due or adjustment settle. When the Creditor receives the outstanding debt from the Borrower/Guarantor in the respective CIRP, the same should be noted and adjusted in the other CIRP.
It is clear that in the matter of guarantee, CIRP can proceed against Principal Borrower and Guarantor.
It can be seen that the NCLAT judgment in the State Bank of India case has attempted to fix the error made in the Piramal Enterprises Case. There, the NCLAT erred in interpreting and analysing Section 128 of the Indian Contract Act, 1872. It could be concluded that a creditor has the right to obtain a decree against either the surety or the principal debtor or both.
The Piramal Enterprises judgement has been challenged before the Hon’ble Supreme Court, which is still pending. At this juncture, it is crucial to clarify the simultaneous CIRP issue as the NCLAT has contradicted its findings and has partially overruled its Piramal Enterprises judgment in the State bank of India case.
However, since the matter is still pending before the Apex court, the NCLAT judgment in the State bank of India case will be followed by all NCLTs for the time being as per the judicial discipline wherein the lower adjudicating authorities follow the latter judgement.
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