Guarantees will ensure better payment of debts for now

By Aditya Vikram Dua and Aniket Sawant, SNG & Partners
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It is a common practice for lenders to obtain guarantees for securing financial assistance granted to a borrower entity. The guarantor’s liability crystallises as soon as the borrower defaults on the debt. However, the provisions of the Insolvency and Bankruptcy Code, 2016 (code), do not expressly deal with simultaneous claims in the corporate insolvency resolution processes (CIRP) of the borrower and corporate guarantor.

Aditya Vikram Dua, Senior associate, SNG & Partners
Aditya Vikram Dua
Senior associate
SNG & Partners

It was assumed that a financial creditor may claim in the CIRPs of both borrower and guarantor. The National Company Law Appellate Tribunal (NCLAT) concurred with that view and in Dr Vishnu Kumar Agarwal v M/s Piramal Enterprises Ltd (Piramal case) held that there is no bar in the code to filing appli- cations simultaneously under section 7 against the principal borrower and the corporate guarantors. However, the NCLAT disallowed the invocation of a CIRP against any of them if a CIRP against any one of them had already started. This ruling created a conundrum for lenders as the NCLAT recognised the principle of co-extensive liability of the debtor and the guarantor, but rejected its application under the provisions of the code.

The contrary view was taken by the NCLAT in State Bank of India v Athena Energy Ventures Private Limited (Athena case). The NCLAT recognised that the simultaneous remedy is central to a contract of guarantee, and where the borrower and surety are undergoing CIRPs, the lender should be able to file claims in both. The NCLAT observed that in such cases the amount received by the lender from the borrower or guarantor would be adjusted in the other CIRP. The NCLAT suggested that this can be conveniently done, especially if the resolution professional (RP) in the CIRPs is the same.

In the Athena case, the NCLAT observed that the Supreme Court made interim orders to maintain the status quo and stayed the judgments of the NCLAT in appeals that followed from the Piramal case, as well as other judgements in which the rationale laid down in the Piramal case was followed.

In the recent case of State Bank of India v Animesh Mukhopadhyay, Resolution Professional of Zenith Finesee India Pvt Ltd, the NCLAT further strengthened the position of the lenders and declined to follow its ruling in the Piramal case. The NCLAT held that until payment is received in one CIRP by the lender, claims can be maintained in both CIRPs against the borrower and corporate guarantor for the same amount and representation on the committee of creditors (CoC) in both CIRPs to the extent of that amount due will be justified.

Aniket Sawant, Associate, SNG & Partners
Aniket Sawant
Associate
SNG & Partners

The NCLAT took a similar view in Edelweiss Asset Reconstruction Company Ltd v Gwalior Bypass Projects Ltd in which the NCLAT held that there is no bar for the financial creditor to proceed against the principal borrower and corporate guarantor at the same time, or file claims in both CIRPs. The NCLAT in the Zenith and Edelweiss cases adopted the view of the Insolvency Law Committee report of February 2020, that joint and several liability of the borrower and the surety is a key feature of a guarantee. The object of a guarantee is nullified if the creditors are prohibited from filing claims in the CIRPs of both borrower and surety.

Therefore, for now it is settled that financial creditors can initiate CIRPs simultaneously against borrowers and guarantors for the same debt. Such creditors can also claim simultaneously in both CIRPs for the same debt and will have a right to representation and voting in CoCs in both CIRPs. These recent rulings have strengthened the position of financial creditors under the code and have provided much needed clarity.

Although lenders will welcome these decisions of the NCLAT, it remains to be seen whether these decisions of NCLAT will be upheld in the Supreme Court. It is very important for the lenders to be able to claim repayment of dues simultaneously from the borrower and guarantor. At the same time, it may be provided that if the lender recovers some or all of the monies from either the borrower or guarantor, then the lender may have a claim to the extent of its outstanding dues from the other party.

It also remains to be seen whether the legislature will amend the code to reflect the way in which the NCLAT dealt with the problem of simultaneous claims. It needs to clarify the procedures that financial creditors and RPs should adopt in dealing with such simultaneous claims filed by the financial creditors in both CIRPs against the borrower and the guarantor.

Aditya Vikram Dua is a senior associate and Aniket Sawant is an associate at SNG & Partners

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