IBC - Approval Of A Resolution In Respect Of One Borrower Cannot Discharge A Co-Borrower : Supreme Court

The Supreme Court observed that approval of a resolution in respect of one borrower cannot discharge a co-borrower.

If there are two borrowers or if two corporate bodies fall within the ambit of corporate debtors, there is no reason why proceedings under Section 7 of the IBC cannot be initiated against both the Corporate Debtors, the bench of Justices Indira Banerjee and JK Maheshwari observed.

In this case, Adjudicating Authority (National Company Law Tribunal), NCLT, Mumbai Bench admitted a petition under Section 7 of IBC filed by Anand Rathi Global Finance Limited as Financial Creditor, for initiation of the Corporate Insolvency Resolution Process (CIRP) of M/s Doshi  Holdings Pvt. Ltd. "Financial Creditor" had disbursed loan to the tune of Rs.6 Crores to M/s Premier Limited, under three separate Loan-cum-Pledge Agreements. Doshi Holdings pledged shares held by it in Premier, in favour of the Financial Creditor, by way of security for the loan. The Appellate authority (NCLAT) dismissed the appeal filed by Doshi Holdings.

Before the Apex Court, the appellant contended that  the Loan-cum-Pledge Agreements only created a pledge of the shares of Doshi Holdings in Premier in favour of the Financial Creditor and thus the petition under Section 7 of the IBC against the Corporate Debtor was clearly not maintainable. It was contended that contract of indemnity, contract of guarantee and pledge are not one and the same.

In this regard, the Apex Court bench observed:

"The contract of indemnity is a contract by which one party promises to save the other from loss  caused to him by the conduct of the promisor himself or by the conduct of any other person. In a contract of indemnity, a promisee acting within the scope of his authority is entitled to recover from the promisor all damages and all costs which he may incur. A contract of guarantee, on the other hand, is a promise whereby the promisor promises to discharge the liability of a third person in case of his default. The person who gives the guarantee is called the surety. The person in respect of whose default, the guarantee is given is the principal debtor and the person to whom the guarantee is given is the creditor. Anything done or any promise made for the benefit of the principal debtor may be a sufficient consideration to the surety for giving the guarantee. On the other hand, the bailment of goods as security for payment of a debt or performance of a promise is a pledge."

While dismissing the appeal, the bench noted that approval of a resolution plan in relation to a Corporate Debtor does not discharge the guarantor of the Corporate Debtor. It said:

"On a parity of reasoning, the approval of a resolution in respect of one borrower cannot certainly discharge a co-borrower.. If there are two borrowers or if two corporate bodies fall within the ambit of corporate debtors, there is no reason why proceedings under Section 7 of the IBC cannot be initiated against both the Corporate Debtors. Needless to mention, the same amount cannot be realised from both the Corporate Debtors. If the dues are realised in part from one Corporate Debtor, the balance may be realised from the other Corporate Debtor being the co-borrower. However, once the claim of the Financial Creditor is discharged, there can be no question of recovery of the claim twice over. "

Case details

 Maitreya Doshi vs Anand Rathi Global Finance Ltd | 2022 LiveLaw (SC) 789 | CA 6613 OF 2021 | 22 September 2022 | Justices Indira Banerjee and JK Maheshwari

Counsel : Sr. Adv K.V. Vishwanathan for appellant, Adv Prateek Sakseria for respondent

Headnotes

Insolvency and Bankruptcy Code, 2016; Section 7 - The approval of a resolution in respect of one borrower cannot certainly discharge a co-borrower - If there are two borrowers or if two corporate bodies fall within the ambit of corporate debtors, there is no reason why proceedings under Section 7 of the IBC cannot be initiated against both the Corporate Debtors - The same amount cannot be realised from both the Corporate Debtors. If the dues are realised in part from one Corporate Debtor, the balance may be realised from the other Corporate Debtor being the co-borrower. However, once the claim of the Financial Creditor is discharged, there can be no question of recovery of the claim twice over. (Para 36-37)

Indian Contract Act, 1872 - Contract of indemnity, contract of guarantee and pledge - The contract of indemnity is a contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself or by the conduct of any other person. In a contract of indemnity, a promisee acting within the scope of his authority is entitled to recover from the promisor all damages and all costs which he may incur. A contract of guarantee, on the other hand, is a promise whereby the promisor promises to discharge the liability of a third person in case of his default. The person who gives the guarantee is called the surety. The person in respect of whose default, the guarantee is given is the principal debtor and the person to whom the guarantee is given is the creditor. Anything done or any promise made for the benefit of the principal debtor may be a sufficient consideration to the surety for giving the guarantee. On the other hand, the bailment of goods as security for payment of a debt or performance of a promise is a pledge. (Para 35)

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