Lenders face a choice between debtor, guarantor

By Ramya Hariharan and Asmita Rakhecha, HSA Advocates
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Guarantee as a form of collateral security is popular in financing deals as the liability of a guarantor and the principal debtor are coextensive. Thus, the creditor has a remedy against both the principal debtor and the surety without the having to exhaust the remedy against one of the parties before proceeding against the other. Despite this well-established principle, the question of whether simultaneous proceedings can be initiated against the principal debtor and guarantor was the subject of debates under the Insolvency and Bankruptcy Code, 2016 (code).

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Ramya Hariharan
Partner
HSA Advocates

The National Company Law Appellate Tribunal (NCLAT), in the Vishnu Kumar Agarwal v Piramal Enterprises Ltd case, did not allow simultaneous proceedings against corporate guarantors for the same debt. Piramal Enterprises, a financial creditor, had instituted a corporate insolvency resolution process (CIRP) against the two corporate guarantors – Sunrise Naturopathy and Resorts and Sunsystem Institute of Information Technology for a debt owed to it by All India Society for Advance Education and Research. It had not initiated a CIRP against the borrower. The NCLAT was faced with two questions – whether a CIRP can be initiated against corporate guarantors without initiating one against the principal borrower, and whether a CIRP can be initiated against two corporate guarantors simultaneously.

The NCLAT answered the first question in the affirmative. However, with regards to the second question, the NCLAT held that though there is no bar in the code for filing applications simultaneously, once one of the applications is admitted, the financial creditor cannot proceed against the others. The rationale was that the code does not have the provision for filing a joint application against multiple corporate debtors unless they are combined in a joint venture company. The NCLAT held that for the same set of debts, a claim cannot be filed by the same financial creditor in two separate CIRPs. This means the lender is barred from pursuing parallel proceedings and it cannot participate in the CIRP of both the borrower and the guarantor even if such proceedings or one of them have been initiated by any other creditor or by the debtor itself.

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Ramya Hariharan is a partner and Asmita Rakhecha is an associate at HSA Advocates. HSA is a full service firm with offices in New Delhi, Mumbai, Bengaluru and Kolkata.

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