To Proceed or not to Proceed: Demystifying the Quandary of Parallel Proceedings under the IBC: Part 1

*Anusha Maurya & Milind Rajratnam

Introduction:

According to the Black’s Law Dictionary, ‘Guarantee’ means “the undertaking of the performance of a duty or the payment of a debt by a third person (who is not a party to the contract)”.[i] In simple words, it means to assure the fulfilment of a condition. The principle underpinning a guarantee is that its express terms are a repository of the guarantor’s obligations and therefore must be narrowly construed.

It is well-settled under Section 128 of the Indian Contract Act, 1872 (hereinafter “ICA”) that unless otherwise provided or restricted by the guarantee, the liability of a guarantor is co-extensive with that of the principal debtor, and in Om Hari Agarwal v State of Uttar Pradesh[ii], it was clarified that the liability of the guarantor is joint and several with that of the principal debtor. The Supreme Court of India (hereinafter “SC”) further clarified the law on guarantee in Industrial Investment Bank Ltd v Biswanath Jhunjhunwala[iii] and observed that a contract of guarantee gives the creditor the right to sue the guarantor or the principal debtor jointly, separately and even simultaneously to reclaim the debt.

The issue of whether simultaneous/parallel proceedings for the same debt can be initiated against the guarantor and the Principal Debtor at the same time was raised for the first time in ICICI Bank Ltd v CA Ritu Rastogi wherein the National Company Law Tribunal (hereinafter “NCLT”) Delhi allowed the guarantor to proceed against the guarantor and the corporate debtor simultaneously. However, recently the National Company Law Appellate Tribunal (hereinafter “NCLAT”) deviated from the said approach in Dr Vishnu Kumar Aggarwal v M/s Piramal Enterprises Limited (hereinafter “Piramal Case”) and held that the Insolvency and Bankruptcy Code, 2016 (hereinafter “IBC”) does not preclude the simultaneous filing of two applications under Section 7 against the guarantor or the corporate debtor or against both at the same time, however, if one application is admitted against either of the two, then the same creditor cannot file a second application for the same set of claims and default.

Owing to these different sets of interpretations, the approach regarding the initiation of parallel proceedings against the corporate debtor and the personal guarantors under the IBC is still unclear. This article analyses the on-going trend of parallel proceedings under the IBC, both before and after the acceptance of the resolution plan, in light of decided cases, and concludes with a pragmatic approach that needs to be followed in order to solve the issues surrounding parallel proceedings under the IBC.

The advent of concurrent proceedings under IBC:

The discussion on parallel proceedings becomes more pertinent after the enactment of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Regulations, 2019 (hereinafter “Regulations”) and the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019(hereinafter “Rules”).

These Regulations and Rules allow creditors to initiate parallel insolvency proceedings against the corporate debtor and the personal guarantor at the same time. In such instances, there are two distinct issues that may arise. Firstly, with regard to the creditor’s right to recover after approval of the resolution plan; and secondly, with regard to the creditor’s right to proceed against the guarantor while the insolvency proceedings against the corporate debtor are underway. Both these issues are dealt with hereafter.

• Scenario after approval of the Resolution Plan-

As per the scheme of the IBC, the acceptance and approval of the resolution plan by the Committee of Creditors and the adjudicatory authority puts an end to the insolvency proceedings. Section 31 of the IBC states that the full and final liability of the corporate debtor is determined by such an accepted resolution plan, however, there are no such provisions under the IBC which provide for the extinguishment of liability of a guarantor after the approval of the resolution plan.

In order to protect themselves from the claims of recovery debts, the guarantors usually resort to the provisions of the ICA, viz, Section 134 which provides that an act relieving the principal debtor of its liabilities often discharges the surety of its liabilities in relation to that debt. A quintessential element to satisfy the requirements of this section is that the agreement to discharge the principal debtor of the debt was reached through their own volition and not because of operation of law. However, the approval of resolution plan can be well construed within the ambit of ‘operation of law’ as it is a result of the insolvency proceedings conducted in line with the provisions of the IBC. Owing to this, the application of Section 134, ICA in the context of insolvency proceedings would be erroneous. Therefore, since the conditions of Section 134 are not fulfilled in cases of insolvency proceedings, the said provision cannot be relied upon to relieve the guarantor of his liability to pay and the creditor can proceed against the guarantor for the recovery of debts, even after the acceptance of the resolution plan.

• Scenario when the CIRP is underway

In the case of Alpha & Omega Diagnostics (India) Ltd v Asset Reconstruction Company of India Ltd & Ors, while negating the applicability of moratorium under Section 14 of IBC on the assets of the guarantor, the NCLAT observed that the term “its” under Section 14(1)(c) of the IBC refers only to the assets of the corporate debtor. Similarly, in Schweitzer Systemtek India Pvt Ltd v Phoenix ARC Pvt Ltd[iv], the NCLT Mumbai clarified in explicit terms that the properties not held by the corporate debtor would be beyond the purview of the moratorium imposed under Section 14. This implies that the CIRP proceedings against the corporate debtor cannot be taken as a hindrance to the recovery proceedings against the guarantor.

Taking these cases into consideration, an amendment was made to Section 14 of the IBC to settle the position of law with regard to its applicability. The amendment made it very clear that if a corporate debtor is going through a moratorium under Section 14, then the guarantor cannot be absolved of his liability due to such moratorium. Moreover, the SC in State Bank of India v V Ramakrishnan(hereinafter “Ramakrishnan case”) held that the 2018 amendment to Section 14 is retrospective in nature and it will apply to the pre-amendment proceedings too. Furthermore, in the Ramakrishnan case, the SC bestowed upon the creditor the right to invoke contracts of guarantees during insolvency proceedings thereby giving a creditor the highest possible remedy. The holding of the Ramakrishnan case was reiterated by the SC in Committee of Creditors of Essar Steel India Ltd v Satish Kumar Gupta (hereinafter “Essar Steel case”), and it was also emphasized that even insolvency proceedings can be initiated against the guarantor during the on-going CIRP of the principal debtor.

Therefore, in light of the above-mentioned cases, it is safe to conclude that simultaneous insolvency proceedings can take place against both the Guarantor and the Corporate Debtor for the same debt. This argument is also in tune with the newly enacted Rules and Regulations. In addition, Section 60 of the IBC also allows the creditor to proceed against the guarantors during the insolvency of the principal debtor.

Although these provisions and their respective judicial interpretations pave a way for parallel proceedings against the principal debtor and the guarantor, there are certain cases in which a contrary position with regard to parallel proceedings has been upheld by the courts and tribunals.

*The authors are students at Dr. Ram Manohar Lohiya National Law University, Lucknow.

[i] Guarantee Definition, Black’s Law Dictionary (11th edn 2014), available at Westlaw.

[ii] Om Hari Agarwal v State of Uttar Pradesh (2006) 7 ADJ 390.

[iii] Industrial Investment Bank Ltd v Biswanath Jhunjhunwala (2009) 9 SCC 478.

[iv] Schweitzer Systemtek India Private Limited v Phoenix ARC Private Limited 2017 SCC OnLine NCLT 7532.