To Proceed or not to Proceed: Demystifying the Quandary of Parallel Proceedings under the IBC: Part 2

*Anusha Maurya & Milind Rajratnam

Part 1 of this Article can be found here.

Hitches in ‘Parallel Proceedings’ under IBC:

The IBC Second Amendment Act, 2018 by inserting sub-section (c) to Section 14 has kept the assets of personal guarantor outside the purview of assets of corporate debtor which paved the way to initiate the concurrent proceedings under the Code but, along with the benefits this decision has ensued with it a plethora of egregious impediments which nullify the therapeutic impact of the development and relegate the effectiveness of the statute. Some of the major problems are discussed hereafter:

• The bewilderment of ‘Double Dipping’-

Recently, the NCLAT in Piramal Enterprises Case clarified the moot questions beleaguering the problem of simultaneous proceedings against the corporate debtor and corporate guarantor. The adjudicating authority inclined towards allowing simultaneous proceedings against the guarantor and debtor but parallelly, rejected the idea of initiating simultaneous proceedings for ‘same debt.’ The reason for such decision was to prevent creditors from having ‘unjust enrichment’ via repetitive claims.[i]

This decision is also bolstered by the Allahabad HC decision in Sanjeev Shriya v SBI[ii] where Court favoured the view that the claims with regard to debt against the corporate debtor can be said to be crystallized only after the resolution plan has been approved under Section 31 or a liquidation order is passed under Section 33 of the Code. Therefore, simultaneously initiating proceedings against guarantors should be deterred[iii] as the claim remains uncrystallized. This unjust practice of ‘double dipping’ was also criticized in Insolvency Law Committee Report of February 2020. Furthermore, double dipping defeats the end goal of IBC, by reducing it to an instrument of debt recovery rather than helping in revival of insolvents.

Alternatively, this discretion of concurrent proceedings is not available to operational creditors as held by NCLAT in MS Jain v TVG Ltd which makes this holding a bit unjust as there lies no material differences between the obligation of guarantors in cases of financial or operational debt[iv]. The contractual liability of the guarantor arises in both cases on existence of default and is immaterial of the nature of the debt but NCLAT relying on literal interpretation of definition of financial and operational debt has precluded operational creditors from enforcing their guarantees under IBC.

• Peculiar Impact on other proceedings under IBC-

One more critical issue is highlighted vide Section 96 and 100 of IBC which tends to impose an absolute moratorium with respect of ‘all debts’ claimed under the insolvency resolution proceedings of the personal guarantors initiated under Part III of the IBC. This absolute moratorium in other words has wider range than the moratorium issued under Section 14 of IBC and interferes with the principal proceedings under the Code. This moratorium inadvertently halts the CIRP of corporate debtor and parallelly bars the creditor from exercising their contractual remedy against other guarantors (in cases of multiple personal guarantors).

• Rebuffed ‘Subrogation Rights’-

Subrogation is quintessential element of the contract of guarantee and rests upon the doctrine of equity[v] & the principles of natural justice.[vi] The harmonious reading of provisions of ICA with IBC provides leeway to the creditor to exercise his remedy as soon as the amount is defaulted by the principle-debtor, therefore, a ‘creditor’ is also the ‘financial creditor’ qua ‘corporate guarantor’[vii]. Hence, there exists no ambiguity with regard to holding ‘guarantors’ liable for the default committed by the principle debtor even under IBC. But the impediment is witnessed when there is conflict between Section 140 of ICA, 1872 and Sections 14 & 31 of IBC, 2016.

The former provision provides the guarantors with the right of subrogation thereby, allowing guarantors to step into the shoes of creditor[viii] once the guarantor pays the defaulted amount but, the latter provisions provided under the IBC, imposes an absolute restriction on initiation of legal proceedings against the debtor and furthermore, extinguishes the liability of the debtor with regard to the claims already dealt under the resolution plan. The language of Section 31 of IBC makes it clear that is binding on the guarantor in order to avoid any attempt to escape liability under the provision of the Contract Act.[ix] Since in cases of simultaneous insolvency resolution proceedings, once the ‘claim’ is settled vide the resolution plan, no legal proceeding can be initiated against the corporate debtor therefore, the guarantor will be barred from initiating subrogation proceedings and consequently, will be left remediless.

This enigma was witnessed by the Hon’ble SC in the Essar Steel Case, where Court thwarted the rights of guarantors by vindicating a resolution plan denying right to subrogation to personal guarantors. This decision was further upheld in Lalit Mishra v Sharon Biomedicine Ltd where the NCLAT explicitly held personal guarantor’s right to subrogation is taken away in cases of proceedings under this Code. SC in Vijay Jain v Standard Chartered Bank clarified that allowing guarantors to exercise subrogation rights under IBC, will leave the entire CIRP redundant and will provide the promoters qua guarantors a gateway to escape their contractual liabilities.

This ratio can be said as a boon, in scenario where the promoters and owners of the companies are the personal guarantors but, in cases of third-party personal guarantors, this judgment creates a legal disparity and discourages the third-party guarantors. Additionally, unlike ordinary provisions of guarantee, the guarantor under IBC does not have the leeway to seek discharge from his liability even on the discharge of corporate debtor as the ICA provides relief on a contractual discharge[x] and not on discharge by operation of law[xi] which harshens the guarantor’s liability even more than the principal debtor.

Such blatant disregard of the rights of guarantors poses a humongous threat to the sprouting Indian credit-lending regime and needs to be dealt immediately to create a balance of interest of all stakeholders. Although the Courts are at liberty to interpret law sans economic implications, but such a narrow interpretation will definitely be infructuous and thus, will not serve the larger interest of the economy and general public.

• Multiplicity of proceedings-

The sole aim of introducing IBC in Indian Insolvency regime was to boost the credit-lending regime of India by providing timely disposal of insolvency matters. But, the scheme of multiple proceedings for claims emanating from same set of debt will lead to inordinate chaos and delay in the proceedings and consequently, will leave the entire mechanism redundant. Thus, it is unequivocal that the parallel applications for proceedings can be filed but in case one application is accepted other immediately needs to be dropped as it is in interest of public policy and it reduces the chances of multiple proceedings & contradicting judgments.[xii]

Conclusion and the Way Ahead:

The IBC has been devised to bolster the rights of creditors and has instilled reliance in the Indian-credit lending regime. The breakthrough decision of SC in the Ramakrishnan Case has created a lane for effectuating guarantees, even under the provisions of IBC which has buttressed the remedies of creditors and thus, has vetoed guarantors from evading their liabilities under the disguise of IBC provisions.

Even though simultaneous proceedings are deemed as measure to bolster Indian lending regime, this development has come like a bane for the Indian economy. Analogous to the creditors, the guarantors are also an indispensable pillar in a credit-lending regime, but the decision of Indian SC in Essar Steel and Vijay Jain Case has unjustly enriched the positions of the creditors and has subjected the guarantors of the corporate debtors to the double jeopardy of repayment without subrogation. This inequitable setup has not only jeopardized the interest of guarantors but also has prevented creditors from effectively enforcing their guarantees against multiple guarantors which nullifies the entire idea of the simultaneous proceedings.

Thus, there is an exigent need that the legal impediments that has been created by the constricted interpretations done by the Indian Courts, needs to be brought in congruence with the needs of Indian economy. As per the view of the authors, simultaneous proceedings should be encouraged under the IBC but concurrently a sound framework needs to be created in order to consolidate and effectively adjudicate the multiple proceedings initiated under the Code. Also, the legal dubiousness beleaguering the recently enforced Part III of the IBC needs to be clarified on priority basis, which will render some stability in the radical and vacillated relations between the creditors and the guarantors. Therefore, the need of hour is to mould the provisions of the IBC in order to provide equitable negotiating power to all the three pillars of the Indian credit-lending regime.

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

[i] IL and FS Financial Services Limited v Golden Glow Estates Private Limited CA No CA-918 (PB)/2019 in IB-1038(PB) 2018.

[ii] Sanjeev Shriya v State Bank of India 2017 SCC OnLine All 2717.

[iii] Oshi Foods Ltd v State Bank of India (1997) 2 MPLJ 643.

[iv] Swiss Ribbons Private Ltd v Union of India (2019) SCC OnLine SC 73 [37]-[51].

[v] Krishna Pillai Rajasekharan Nair & Ors v Padmanabha Pillai (2004) 12 SCC 754.

[vi] Amrit Lal Goverdhan Lalan v State Bank of Travancore AIR 1968 SC 1432.

[vii] MS Anirudhan v Thomco’s Bank Ltd AIR 1963 SC 746.

[viii] Morgan v Seymore, (1638) 1 Rep Ch 120.

[ix] SBI v V Ramakrishnan (2018) 17 SCC 394.

[x] Indian Contract Act 1872, s 134.

[xi] Maharashtra State Electricity Board Bombay v Official Liquidator (1982) 3 SCC 358.

[xii] Madhaviamma Bhavaniamma v Kunjikutty Pillai Meenakshi Pillai AIR 2000 SC 2301.