Business Laws

Tightening the screws on guarantors

| Updated on January 10, 2021

Can insolvency proceedings be initiated simultaneously against both the borrower and the corporate guarantor?

Judicial bodies have often tried to settle this contentious issue, but contradicting judgments have kept the issue still alive.

The Supreme Court, while reiterating the co-extensive liability of guarantors in different decisions including State Bank of India Vs Ramakrishnan and COC of Essar Steel India Limited Vs Satish Kumar Gupta, had no occasion to go into the validity of the personal insolvency provisions of the IBC.

The apex court, however, was recently seized of this contentious issue in the matter of State Bank of India Vs Anil Ambani, Chairman of Reliance Communications.

In a recent decision by the NCLAT too (SBI Vs Athena Energy Ventures), the issue came back into limelight.

(In this case, Athena Energy Ventures, a finance company, guaranteed a SBI loan of ₹2,769-crore given to its subsidiary, Athena Chattisgarh Power.) The NCLAT has allowed the simultaneous insolvency proceedings against the principal borrower and the corporate guarantor. The order was in contradiction with the order passed by the tribunal in Vishnu Kumar Agarwal Vs Piramal Enterprise, where it held that once the CIRP is initiated, simultaneously other proceeding shall not be allowed.

In the present case, the NCLAT, while allowing the simultaneous proceedings, said that the liability of the Principal Borrower and the Guarantor is co-extensive as per Section 128 of the Indian Contract Act.

Therefore, simultaneous remedy is central to a contract of guarantee and where the principal borrower and surety are undergoing the CIRP, the creditor should be able to file claims against both of them, and the IBC cannot prohibit the same. In the SBI Vs Athena case, the guarantor, Athena Energy Ventures’ contention was that it was the very same transaction and very same common loan agreement, and therefore, the proceedings against it was duplicating the claim.

The NCLAT, relying heavily on the judgemnt in the “State Bank of India Vs Ramakrishnan” case noted that the IBC has no aversion to simultaneously proceed against the corporate debtor and corporate guarantor and thus, as per sections 60(2) and (3) of the code, if two applications are allowed to be filed for the same amount against the borrower and the guarantor, the same can also be allowed to be maintained.

Further, the tribunal also relied on the ruling in the “Edelweiss Asset Reconstruction Company Ltd. Vs Sachet Infrastructure Ltd” case in which simultaneous initiation of CIRP against the borrower and the guarantors was permitted. This order may set the precedent for the financial creditors to file subsequent applications under Section 7 of the IBC in cases of default by the borrower.

It remains to be seen whether this view of the NCLAT will gain approval of the apex court in the case of Anil Ambani, stated supra.

(AK Mylsamy is Managing Partner, Ak Mylsamy & Assocaites Llp)

Published on January 10, 2021

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