Bar on the Simultaneous CIRP under IBC: Is it Justified?

Ministry of Home Affairs [Public domain]

Article by Suvam Kumar and Gaurav Chaliya,

Introduction

In the case of Dr. Vishnu Kumar Agarwal v. M/s. Piramal Enterprises Ltd (“Piramal case”), the National Company Law Appellate Tribunal (“NCLAT”) dealt with two important issues. Firstly, it dealt with the question of whether the creditor can file Corporate Insolvency Resolution Process (“CIRP”) against the principal debtor as well as against the guarantor. The NCLAT relied on Section 128 of the Indian Contract Act, 1872 which provides that the liability of the surety is co-extensive with that of the principal debtor unless it is otherwise provided by the contract. Hence, it was held that a creditor can approach the guarantor by initiating CIRP without having filed the CIRP against the principal borrower.

Secondly, it dealt with the issue of whether two CIRPs can be initiated against two corporate guarantors for the same debt and the tribunal answered it in negative. However, the rationale adopted by the NCLAT has opened a Pandora’s Box regarding the interpretation of initiation of CIRP under the Insolvency and Bankruptcy Code, 2016 (“Code”).

Brief of The Case

In the instant case, the creditor initiated two CIRPs against the guarantors under Section 7 of the Code after the default by both the debtor and the guarantors. With regards to the first issue, NCLAT held that two CIRPs can be initiated simultaneously for same debt. However, while dealing with the second issue, the tribunal placed its reliance on Innoventive Industries Ltd. v. ICICI Bank and Ors., where various key terms were discussed. The case reproduced the definitions of terms like Default, Debt, Financial debt and Operational debt. However, the case relied upon did not provide any rationale or precedent for the bar on the initiation of two CIRP against two corporate guarantors for the same debt. The above mentioned case at no point discusses or furnishes any reason against the initiation of two CIRP against the corporate guarantors. It is a mere reproduction of statement of the law under Section 7 of the Code.

Infirmities in the Verdict

The verdict suffers from several infirmities which raise serious questions regarding the objectives of the Code. Firstly, the interpretation given in the Piramal case goes completely against the core principles of the Code. The purpose of the Code is resolution and not liquidation. Dr. T.K Viswanathan committee has also emphasized the need to provide a solution to the creditors when faced with the problem of default of the debtor. Therefore, any creditor, whether financial or operational, can initiate CIRP to recover the debts. The only requirement for triggering CIRP by creditor laid was that there should be sufficient evidence of default. Moreover, in the case of ICICI Bank v. Vista Steel Private Limited , the NCLAT has held that a CIRP can be initiated against the corporate guarantor even when a CIRP is admitted against the principal debtor. Therefore, the Piramal case goes completely against the settled position of simultaneous CIRP against the borrower and the guarantors. Additionally, there is no bar in the Code for initiating two CIRPs against two corporate guarantors. The NCLAT has wrongly presumed that the initiation of two CIRPs against two corporate guarantors would mean recovery from both the guarantors. In the case of Kaupthing Singer and Friedlander Limited (2011), it was held:

“The function of the rule is not to prevent a double proof of the same debt against two separate estates (that is what insolvency practitioners call “double dip”). The rule prevents a double proof of what is in substance the same debt being made against the same estate, leading to the payment of a double dividend out of one estate. It is for that reason sometimes called the rule against double dividend.”

This essentially means that there is a bar on recovering payment of a double dividend but no bar on the double proof. Hence, the only clog provided by courts for the prevention of unjust enrichment is on the double recovery and not on the double proof.

Secondly, such a bar on the initiation of the CIRP is arbitrary and devoid any reasonableness. For example, if two CIRP applications were filed against corporate guarantor-1 and corporate guarantor-2 on the same date and the application against the corporate guarantor-1 was accepted on 1 January 2019 while application against the corporate guarantor-2 was accepted on 2 January 2018. There seems no justification for accepting the first application and rejecting the second one since both the applications were filed at the same time. Moreover, admission of claim against one guarantor cannot constitute extinction of the right against the other guarantor, since they both have joint and several liability.

Thirdly, such rule of interpretation goes against the principles of suretyship. According to the Report of the Insolvency Law Committee, 2018, it has been noted that if one of the CIRP is accepted against corporate guarantor-1, then until such CIRP is finalized, the other sureties (corporate guarantor-2’s) liability is put on hold and such antithetical interpretation would not serve the purpose of the agreement of guarantee that the parties entered into. Hence, it would render the contract of guarantee infructuous.

Fourthly, the liability of two or more than two guarantors is co-extensive and release of one co-surety does not mean that other surety is free from its liability. In the United Bank of India v. Modern Stores (India) Ltd, it was held that liability of co-sureties is joint and several and it cannot be discharged either by creditor or guarantor. Moreover, the right to contribution provides that co-sureties are liable to pay equal shares and liability of co-surety cannot be deferred in any manner until the creditor exhausts all his remedies against the debtor. Therefore, until the overall debt is exhausted, the liability of co-surety cannot, in any manner, be ousted.

Similarly, in ICICI Bank Ltd. & Ors. v. CA Ritu Rastogi & Ors., it was held that since the liability of guarantors is independent in nature as the agreement of guarantee is a separate and independent contract in itself and hence, the objections regarding initiation of two CIRPs cannot be raised against such contract which is agreed expressly.

Conclusion

Upon the perusal of the aforementioned arguments and reasoning, it is pertinent to note that the bar on the initiation of two CIRPs against two corporate guarantors for the same debt is flawed in many aspects. There shall not be any bar on the double proof of same debt against two guarantors rather the bar shall only be on the payment of double dividend by the corporate guarantors to the creditor as the same would cause unjust enrichment. The liability shall be imposed and distributed on both the guarantors and not just on the guarantors against whom the CIRP application has been accepted earlier and the debt shall be recovered in that proportion. Hence, ensuring greater protection to the rights of the creditor would boost India’s rank in World Bank’s “The Ease of Doing Business" index. In the light of above mentioned flaws, the authors believe that the case at hand which is pending before the Supreme Court requires strict scrutiny.