Curtailing Initiation of Simultaneous CIRPS Violates the Principle of Guarantee

Introduction
Under the circumstances when a Corporate Debtor defaults in repaying the debt owed to a Financial Creditor or an Operational Creditor, the latter can file an application for initiating a Corporate Insolvency Resolution Process (“CIRP”) before the adjudicating authority under Section 7 or Section 8 (respectively) of the Insolvency and Bankruptcy Code, 2016. A financial creditor or operational creditor is entitled to file for initiation of CIRP against the Principal Borrower or the Corporate Guarantor.
Validity of simultaneous CIRPs
In the case of Vishnu Agarwal v. M/S Piramal Enterprise Ltd. (“Piramal Case”), the National Company Law Appellate Tribunal (“NCLAT”) looked into the question: whether a CIRP can be initiated against two Corporate Guarantors at the same time for the same debt and default. In this case, the Financial Creditor filed a civil suit against the Principal Borrower and both the Corporate Guarantors during the pendency of which, the former issued separate demand notice to both the Corporate Guarantors, demanding payment of the outstanding amount. Not receiving any payment after the expiry of the 15 days period, the Financial Creditor filed two applications for initiation of CIRP in the National Company Law Tribunal (“NCLT”) against both the Corporate Guarantors. The Corporate Guarantors approached the NCLAT in an appeal claiming that two CIRPs cannot be initiated against two different Corporate Guarantors for the same set of claim amount and debt.
The Financial Creditor had filed an application against Corporate Guarantor-2 on 24th May, 2018 and against Corporate Guarantor-1 on 31st May, 2018 for the same amount. The point that came to be highlighted was that since the Adjudicating Authority had accepted the debt payable in law by Corporate Guarantor-2 and admitted the application against it on 24th May, 2018, the other guarantor could make the argument that the debt in question is not due anymore since it is not payable in law because a CIRP has already been initiated against Corporate Guarantor-2 for the same debt. The NCLAT with regards to the question of simultaneous CIRPs against Corporate Guarantors first looked into the definitions of “default”, “debt” and “claim”. It was accepted by the Tribunal that a debt was owed by Corporate Guarantor-2 to the Financial Creditor but the question remained whether once such claim was made by the Financial Creditor against one guarantor (Corporate Guarantor-2 on 24th May, 2018), an application against the other guarantor could be filed for the very same claim or not.
The Tribunal came to hold that for the same set of debt, claim cannot be filed by the same Financial Creditor in two separate CIRPs which implies that for the same debt, two separate CIRPs under Section 7 cannot be initiated simultaneously. This was applicable in cases of multiple guarantors as well as debtors. Taking the ground of joint liability of guarantors for filling separate CIRPs was rejected too, till it was shown that the Corporate Guarantors/Debtors are a joint venture company.
Earlier in the case of ICICI Bank v Vista Steel Private Limited, the NCLAT had held that a CIRP can be initiated against a Corporate Guarantor even if a CIRP has already been initiated against the Principle Debtor. The Piramal case, therefore went completely against the settled position of law with respect to simultaneous CIRPs.
Neglecting the Principle of Guarantee


A contract of guarantee is a contract to perform the promise, or discharge the liability of a third person in case of his default, wherein the person who gives the guarantee is called the surety. Further, where two or more persons are co-sureties for the same debt, either jointly or severally, they are liable to pay, in the absence of any contract to the contrary, each an equal share of the whole debt, or that part of it which remains unpaid by the principal debtor. The essence of the principle of guarantee is that the creditor has the right against both the principal debtor and the surety and he is entitled to proceed against one of them without exhausting his right against the other. Further, when there are a multiple sureties i.e. co-sureties under a contract of guarantee, they have a joint liability to pay the amount due to creditor in case of a default by the debtor. Moreover, the admission of claim against one surety does not extinguish the right of the creditor against the other.
In the Piramal case, the Tribunal merely mentioned that two separate applications for CIRP cannot be filed on the ground of joint liability of guarantors, without elucidating any sound reasoning behind the same. Even if the tribunal’s decision with respect to simultaneous CIRPs is accepted and applied, the judgment has failed to provide clarity in terms of the right of the guarantor against which a CIRP is initiated by the creditor to call upon the other guarantor to contribute to the payment, on the principles of equity. Moreover, the tribunal did not consider a situation where a creditor may want to claim a part of the outstanding amount from the debtor and the other part from the guarantor or a part from one guarantor and the remaining from the other guarantor.
The Tribunal in the Piramal case believed that initiation of two CIRPs would mean recovering the same amount of debt twice from different guarantors leading to an unjust enrichment to the creditor. This was because of the facts of that particular case were such, where the Financial Creditor had issued a verbatim demand notice to both the Corporate Guarantors, claiming the same amount (that was due) from them. However, the Tribunal instead of providing guidelines as to the procedure to be followed for filing simultaneous CIRP against multiple guarantors/debtors, limited itself to the above-mentioned logic while arriving at the conclusion and completely neglected the importance of the principle of guarantee and co-suretyship. Conclusion

The NCLAT in the Piramal case itself points out that there is no restriction under the Insolvency and Bankruptcy Code, 2016 for filing two simultaneous applications under Section 7 against the Principal Borrower as well as the Corporate Guarantor or against both the guarantors. Still, the Tribunal decided against allowing multiple CIRPs at the same time without providing for a reasoning which is in consonance with the principle of guarantee. There already exists a provision which allows for multiple creditors to initiate CIRPs at the same time against the same debtor or guarantor. A need for an express provision allowing for simultaneous CIRPs against multiple debtors/guarantors can also be felt in the light of the objective of the Insolvency and Bankruptcy Code, 2016 (which is to provide for a smooth and quick insolvency resolution, among other things) as well as the concept of guarantee. The pending appeal against the Piramal judgment before the Supreme Court is a ray of hope for expecting alteration in the law that is much needed.
References:
1. Vishnu Agarwal v. Piramal Enterprises Ltd., [2019] 149 CLA 30
2. ICICI Bank v. Vista Steels Ltd., [2018] 208 CompCas 390
3. Insolvency and Bankruptcy Code, 2016
4. Indian Contract Act, 1872

See also  Res Ipsa Loquitur – Law of Torts

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