IBC : Creditor Can Proceed Against Guarantor Even Without Proceeding Against Borrower, Holds NCLAT [Read Order]

The National Company Law Appellate Tribunal has held that financial creditor can proceed against corporate guarantor even before proceeding against corporate debtor.

It was held :

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 Tribunal was considering appeals filed by two companies, which had stood as guarantors to a loan advanced to another company. When default occurred in repayment, the creditor filed applications under Section 7 of the Insolvency and Bankruptcy Code against the guarantors. The applications were admitted by the NCLT.

This action of NLCT was challenged by them contending that corporate insolvency resolution process cannot be initiated against guarantors, without proceeding against the debtor.

The NCLAT bench headed by Chairperson Justice S J Mukhopadhyaya rejected the argument, by relying on several SC precedents holding that the liability of guarantor is co-extensive with the liability of principal borrower.

The bench also noted that counter-indemnity obligation in respect of a guarantee comes within the meaning of 'financial debt', as per clause (h) of Section 5 (8) of the 'I&B Code'.

However, the bench held that once an application under Section 7 is admitted, another application for the same debt cannot be filed. In this case, the applications under Section 7 were admitted against both the corporate guarantors. This was held to be an improper course of action by the NCLAT. It was held :

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). 

Hence, the CIRP against the second corporate debtor was quashed by the NCLAT.

Read Order