NCLAT decision on whether proceeding against Corporate Guarantor

Hon’ble National Company Law Appellate Tribunal (NCLAT) on January 08, 2019, passed a judgement in the matter of Dr. Vishnu Kumar Agarwal vs Piramal Enterprises Limited setting aside the judgement and order dated May 31st, 2018 passed by the National Company Law Tribunal (NCLT) of Delhi. Facts of the case All India Society for Advance Education and Research’ (“Principal Borrower”) borrowed a loan of Rs. 38 Crores from Piramal Enterprises Limited (“Lender”) which was guaranteed by two Corporate Guarantors viz. Sunrise Naturopathy and Resorts Private Limited - (“Corporate Guarantor No.1”) and Sunsystem Institute of Information Technology Private Limited (“Corporate Guarantor No.2”). The Lender had filed a Civil Suit bearing No. 46/40/2017 before the Court of Additional District Judge-I, Alwar, Rajasthan against the Principal Borrower and both the Corporate Guarantors on 15th September 2017, which is pending adjudication. The Respondent, thereafter, filed two separate applications under Section 7 of IBC for initiation of the Corporate Insolvency Resolution Process (CIRP) against Corporate Guarantor No.1 as well as against Corporate Guarantor No.2 and in both the application same particulars of debt and default were provided. NCLT, Delhi admitted the application against Corporate Guarantor No.2 on 24th May 2018 and thereafter application against Corporate Guarantor No.1 on 31st May 2018. A shareholder of both the Corporate Guarantors filed two separate appeals against the said orders of NCLT passed on 24th May 2018 and 31st May 2018 (‘impugned orders’). Two questions which arose for consideration before NCLAT were i. whether CIRP can be initiated against a Corporate Guarantor, if the Principal Borrower is not a Corporate Debtor or Corporate Person?; and ii. Whether CIRP can be initiated against two Corporate Guarantors simultaneously for the same set of debt and default? NCLAT’s observations and findings i. NCLAT observed that the obligation in respect of the guarantee comes within the meaning of ‘financial debt’ under Section 5 (8) (h) [should be 5 (8) (i)] and as such the Lender is the Financial Creditor of both the Corporate Guarantors; ii. NCLAT also observed that the liability of the guarantors being co-extensive, it is not necessary to initiate CIRP against the Principal Borrower before initiating CIRP against the Corporate Guarantors; and iii. NCLAT also held that for same set of debt, claim cannot be filed by the Financial Creditor in two separate CIRPs for same claim amount and default and once for same claim CIRP is initiated against one of the Corporate Debtor, thereafter the Financial Creditor cannot trigger CIRP against another corporate debtor(s) for same claim amount (debt). iv. NCLAT also observed that while there is no bar under IBC for filing simultaneously two applications under Section 7 against the principal borrower and corporate guarantor(s), once an application for same set of claim is admitted against one of the corporate debtor (borrower or corporate guarantor), second application by the same Financial Creditor for the same claim and default cannot be admitted against the other corporate debtor (borrower or corporate guarantor). v. For the reasons aforesaid, NCLAT upheld the initiation of the CIRP initiated against Corporate Guarantor No.2 pursuant to impugned order dated 24th May,2018, and held that the impugned order dated 31st May 2018 initiating CIRP against the Corporate Guarantor No.1 for same claim/debt is not maintainable and therefore dismissed the application under Section 7 filed by the Financial Creditor against the Corporate Guarantor No.1 and set aside all the consequential acts pursuant to such order. Download Pdf