NCLT Kolkata: Simultaneous CIRP Can Be Initiated Against Principal Borrower And Corporate Guarantor

Background Facts:

Avani Projects Infrastructure Ltd (Corporate Debtor) had entered into a Joint venture agreement ('JVA') with Anupriya Management Pvt. Ltd. (Respondent) for the development of real estate projects. State Bank of India ('SBI'), the Financial Creditor granted various credit facilities to the Corporate Debtor since 2013 of Rs. 67 crores with the Respondent as the Corporate Guarantor.

Defaults were made by the Corporate Debtor leading to its account being classified as Non-Performing Assets ('NPA') on 28.10.2015. Another Financial Creditor, Devi Trading & Holding Ltd. application of the CIRP of the Corporate Debtor was admitted on 13.03.2019

SBI has filed the present application to initiate CIRP against the Respondent u/s 7 of IBC. The total amount of debt default is Rs. 40.90 crores with the date of default as 30.11.2022.

NCLT Verdict:

The NCLT Kolkata admitted the CIRP application and held that a simultaneous CIRP can be initiated against Principal Borrower and Corporate Guarantor under IBC.

The Tribunal took note of the proviso under Sections 127 and 128 of the Indian Contract Act, 1872 ('ICA') and Section 60(2) of IBC.

Section 127 of Indian Contract Act: Consideration for guarantee.

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.

Section 128 of Indian Contract Act: Surety's liability.

The liability of the surety is co- extensive with that of the principal debtor, unless it is otherwise provided by the contract.

Section 60 of IBC: Adjudicating Authority for corporate persons.

(2) Without prejudice to sub-section (1) and notwithstanding anything to the contrary contained in this Code, 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 1 [liquidation or bankruptcy of a corporate guarantor or personal guarantor, as the case may be, of such corporate debtor] shall be filed before such National Company Law Tribunal.

The Tribunal also observed the following decided cases and their ratios:

· Supreme Court in Laxmi Pat Surana v. Union Bank of India (2021) held

“37. Further, the expression “default” has been defined in Section 3(12) to mean non-payment of “debt” when whole or any part or instalment of the amount of debt has become due and payable and is not paid by the debtor or the corporate debtor, as the case may be. In cases where the corporate person had offered guarantee in respect of loan transaction, the right of the financial creditor to initiate action against such entity being a corporate debtor (corporate guarantor), would get triggered the moment the principal borrower commits default due to non-payment of debt.” (Emphasis Added)

· NCLAT in State Bank of India v. Athena Energy Ventures Private Limited (2020) observed:

“19. It is clear that in the matter of guarantee, CIRP can proceed against Principal Borrower as well as Guarantor. The law as laid down by the Hon'ble High Courts for the respective jurisdictions, and law as laid down by the Hon'ble Supreme Court for the whole country is binding. In the matter of Piramal, the Bench of this Appellate Tribunal "interpreted" the law. Ordinarily, we would respect and adopt the interpretation but for the reasons discussed above, we are unable to interpret the law in the manner it was interpreted in the matter of Piramal. For such reasons, we are unable to uphold the Judgment as passed by the Adjudicating Authority.” (Emphasis Added)

· NCLAT in Mohan Kumar Garg v. Omkara Assets Reconstruction Pvt. Ltd. (2023) held:

“8. Insofar as submission of the Appellant that simultaneous proceeding cannot be initiated against the Principal Borrower and the Corporate Guarantee, the Adjudicating Authority has adequately answered the said issue and referred to relevant judgments. Learned counsel for the Respondent has relied on subsequent judgment of this Tribunal in “Edelweiss Asset Reconstruction Co. Ltd. vs. Gwalior Bypass Projects Ltd., Company Appeal (AT) (Ins.) No. 1186 of 2019”, “State Bank of India vs. Mr. Animesh Mukhopadhyay, Company Appeal (AT) (Ins.) No. 186 of 2021” and “Kanwar Raj Bhagat vs. Gujarat Hydrocarbons and Power SEZ Ltd. & Anr., Company Appeal (AT) (Ins.) No. 1096 of 2020” taking the view that simultaneous proceedings against the Principal Borrower and the Corporate Guarantor can be initiated.'

“9. We are of the view that law is well settled that proceeding under Section 7 can be initiated against both the Principal Borrower and Corporate Guarantor and there is no inhibition in proceeding against the Corporate Guarantor although proceeding against Principal Borrower under Section 7 was admitted. We are of the view that no error has been committed by the Adjudicating Authority in admitting Section 7 application against the Corporate Guarantor. There is no merit in the Appeal. Appeal is dismissed.” (Emphasis Added)

· NCLT Kolkata in Hi-Tech Designs Pvt. Ltd. v. Sri Sai Car Sales Pvt. Ltd. (2023) observed:

“8.8.4. Further it is evident that … the Corporate Debtor, had provided corporate guarantee in favour of the Financial Creditor No. 2, to secure the dues of Union Motors, …. the Petition filed under Section 7 of I&B Code, 2016 by the Financial Creditor No. 2 is maintainable against the Corporate Debtor. We rely upon the decision in the case of K. Paramasivam v. The Karur Vysya Bank Ltd. 2022 SCC Online SC 1163: MANU/SC/1108/2022, that:

“13. Under Section 7 of the IBC, CIRP can be initiated against a corporate entity who has given a guarantee to secure the dues of a non-corporate entity as a financial debt accrues to the corporate person, in respect of the guarantee given by it, once the borrower commits default. The guarantor is then, the Corporate Debtor.” (Emphasis Added)

· NCLT Kolkata in IFCI Limited v. NTCIL Infrastructure Private Limited (2023) held:

“10.5.5. […] It is therefore trite, axiomatic and settled law that simultaneous proceedings under Section 7 of the I&B Code, can be initiated and continued against both the Principal Borrower as well as the Corporate Guarantor.'

“11. In the light of the enumerations supra, having noted that the claim against the Principal Borrower and the Corporate Guarantor are different, and we have no hesitation to admit this petition filed under Section 7 of the I&B Code, 2016….” (Emphasised Added)

The Tribunal also referred to the observation of the Insolvency Law Committee in its Report, dated 20.02.2020:

“7. ISSUES RELATED TO GUARANTORS'

“7.1. Under Section 128 of the Indian Contract Act, 1872, the liability of a surety towards a creditor is coextensive with that of the principal borrower. When a default is committed, the principal borrower and the surety are jointly and severally liable to the creditor, and the creditor has the right to recover its dues from either of them or from both of them simultaneously. (Pollock and Mulla, Indian Contract and Specific Relief Acts vol. II (12th edn., LexisNexis Butterworks 2006) p. 1814-1816) The Committee discussed whether in light of this rule of co-extensive liability of the surety and the principal borrower, a creditor should be permitted to initiate CIRP against both the principal borrower and its surety and whether it should be permitted to file its claims in the CIRPs of both the principal borrower and its surety.”

Thus, it observed that a few apartments have been built by the Corporate Debtor on the very same land as a Joint venture Partner and is in the process of seeking Liquidation. Further, it observed that when the Corporate Debtor himself could not seek any resolution plan as a builder, no question of getting a Resolution Plan for the Corporate Guarantor arises.

In conclusion, NCLT admitted the CIRP application against the Corporate Guarantor under Section 7 of IBC.

Case Title: State Bank of India vs. Anupriya Management Pvt. Ltd.

Case No.: Company Petition (IB) No. 18/KB/2023

Counsel for Financial Creditor: Mr. Soumya Roy, Adv. and Mr. Sanosh Mahato, Adv.

Counsel for Corporate Debtor: Mr. Mainak Bose, Adv. and Mrs. Kapita Paul, Adv.

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