Evolution of Concept of Guarantee vis-a-vis IBC: A Judicial Analysis

By- Varun Akar (an Advocate by profession and Pursuing Graduate Insolvency Programme at Indian Institute of Corporate Affairs)

INTRODUCTION

The need for the contract of guarantee arises from the fact that the lender needs assurance for his money to be returned safely along with the interest and for this assurance at the time of lending a contract of guarantee is entered by the parties. For the contract to be executed there has to be two parties but for the contract of guarantee, there have to be three parties, i.e., lender, borrower and the guarantor. The guarantee contract is different from the contract of indemnity in a way that the former involves three parties and the latter involves two parties.

Also, the nature of the contract is different in both the cases in a way that to make a contract of guarantee there has to be a contract between the guarantor and the borrower wherein the former has agreed to act as surety[1], i.e., that in case if the borrower defaults in repayment to the creditor the guarantor/surety shall repay the same. Further, the guarantor shall have the subrogation rights and he will step into the shoes of the creditor and will claim the money from the borrower. The scope of this chapter is to define the provisions relating to guarantee under the Indian Contract Act, 1872[2] (“Act”) and its practical implications. 

As per Section 126[3] of the Act, a contract of guarantee means a contract wherein the guarantee is given to perform the promise or to discharge the liabilities of the debtor if the debtor is unable to do the same. The person giving the guarantee is called the guarantor, the person for whom the obligations are performed by the guarantor is called the debtor and to whom the obligations are met out by the guarantor is called the creditor. Also, the consideration in these contracts should move from the creditor to the debtor and should be made at the time of making the contract. If the consideration is not contemporaneous to the guarantor then the contract shall not be considered as a valid contract of guarantee.[4] Further, it has to be taken into consideration that the guarantee contract shall be valid only if the guarantee has flown from the guarantor for the obligations which the debtor has undertaken presently, i.e., no guarantee can be given for the consideration which the debtor has received in the past[5] and also for the debts which are not time barred[6]. 

This contract can be oral or written as similar to the normal contracts.[7] It is to be taken into notice that even if the guarantor has not signed on the contract of guarantee still the liability can be imposed on him to repay in case if the borrower defaults in repayment. Kerala High Court in the case of P. J. Rajappan v. Associated Industries (P) Ltd.[8] has held that if the guarantor has not signed the document of guarantee but has played a prominent role in getting the contract executed between the other two parties, then the guarantor cannot evade from his duties of being a guarantor. The Court observed that the transactions leading to his involvement will have to be considered for making the person accountable as guarantor. Further, the contract of guarantee even if the same is not reduced to writing can be implied from the conduct of the guarantor.[9]

Further, the guarantor can’t be made liable in the cases wherein the guarantee has been obtained from him by way of misrepresentation[10] wherein the guarantor was not having any knowledge regarding the materiality of the contract between the other two parties. Also, the contract of guarantee can be declared invalid in the case if the same was obtained by way of concealment, i.e., silence as to material circumstances, as given under Section 143.[11]

Now, the author shall deal with various facets of guarantee in a brief manner as follows:

• Principle of co-extensive liability
• Discharge of debtor doesn’t absolve liability of the guarantor
• Continuous guarantee

Principle of co-extensive liability

As per Section 128[12] the liability of the guarantor/surety is co-extensive to that of the debtor. It is unless provided to the contrary in the contract, the surety has the onus to prove that in the contract there was no principle of co-extensiveness and thus, there won’t arise any liability of the surety. The Supreme Court in the case of Maharashtra State Electricity Board, Bombay v. Official Liquidator, High Court, Ernakulam[13] has held that even if the principal borrower of the loans has gone into liquidation, the same shall not affect the liability of the guarantor to this transaction. In the present case, the bank has given a guarantee in favour of the Appellant which went into liquidation and now the Respondent is claiming the money as the liquidator from the bank to fulfil its obligation towards the contract. The defence taken by the bank was that since the Appellant does not exist more the liability will also not exist. The Court was of the view that the liability of the guarantor was absolute and unconditional and the event of Appellant going into liquidation will not absolve the guarantor’s liability to repay and meet its contractual liability. The Court also held that the liability of the guarantor is co-extensive to the liability of the principal borrower and in the event if the latter party fails to repay the borrower has to pay.  

The principle of co-extensiveness not only extends to the principal amount as given under the contract but has to be applied over the interest and other charges as applicable to the amount and thus, for this amount also the surety is liable for the repayment. Taking forward this notion, the Andhra Pradesh High Court in the case held that the guarantor shall be made liable for the interest and charges incurred for the enforcement of the liability.[14] Also, it has to be taken into consideration that if the liability of the principal borrower gets reduced then the liability of the surety shall also stand reduced to that effect and the creditor cannot claim for the original amount in this case.[15]

Lastly, the acknowledgement made by the borrower or guarantor shall make the other party bound w.r.t. the liability and vice-versa and the guarantor, in this case, shall not have the right to evade from the acknowledgement made by the borrower as they are bound in a contract and have the co-extensive liability.[16] 

Discharge of surety

The Contract Act provides for three ways in which the surety can be discharged from the existing obligations. Section 133[17] provides for the discharge of surety if the terms of the contract have been amended and there has been a variance in the contract from the existing one. Thus, a surety shall stand discharged if there has been a variance and shall be relieved from the subsequent liabilities and the obligations. Also, Section 134[18] provides for the discharge of the guarantor in the case where there is a contract between the borrower and the creditor and the same has resulted in the discharge of the borrower. Further, the section also provides that if any act or omission is made by the creditor and the legal consequence of such act or omission has resulted in the discharge of the borrower then the surety stands discharged in this case. Lastly, Section 135[19] provides for the situation wherein the creditor and the borrower colludes and the creditor agrees not to sue the borrower or agrees to extend the time for repayment, then under such situation, the surety shall stand discharged.

The Supreme Court in the case of The Bank of Bihar Ltd. v. Dr. Damodar Prasad and Anr.[20] has held that the guarantor has no rights to direct the creditor to pursue a remedy against the debtor and shall be restrained from bringing the question of the solvency of the debtor or matter related to parallel proceedings.

Furthermore, the Contract Act, 1872[21] provides for situations wherein the guarantor shall not stand discharged. Section 136[22] provides for the situation wherein the guarantor is not discharged when the agreement is made by the creditor to give more time to the surety, however, this contract should be with the third party and not the debtor. Thereafter, Section 137[23] stipulates that even if the creditor has forbear to sue the debtor, this shall not render the surety released of his contractual obligations. Moreover, Section 139[24] provides for the situation wherein the rights of the surety have been impaired and this will discharge the liability of the surety in the contract of guarantee. The Maharashtra High Court in the case of Babu Rao Ramchandra v. Babu Manaaklal Nehrmal[25] has held that the following needs to be satisfied if the guarantor has to be discharged of his liability: a) there must be an act by the creditor which is against the right of surety, b) there was a duty of the creditor to do an act and he omitted to do an act, and, c) the remedy which the surety had has got impaired because of such conduct of the creditor. 

Continuous Guarantee

Section 129[26] provides for the continuing guarantee which says that the guarantee given by the guarantor shall extend to a series of transactions and the guarantor shall be held accountable for the period till which the guarantee subsist. For determining whether the liability is a continuing one or not, the nature of the contract, the terms and the intention with which the contract was executed has to be taken into account and not just the title of the contract.[27] One of the important consideration in the contract of guarantee is that it has to be always for the contingent liability and has to be always for the definite set of contractual obligations.[28] 

Further, as per Section 130[29] the continuing guarantee shall subsist till the time it is revoked by the surety. It is to be noticed here is that the guarantee shall always be revoked for future transactions and not for past transactions and this has to be notified to the creditor. Also, the continuing guarantee stands extinguished as soon as the guarantor dies as stipulated under Section 131[30]. 

The author explained, in brief, the various principles of the Contract Act which shall come into play with the Insolvency and Bankruptcy Code, 2016[31] (“IBC”/”Code”) in the upcoming chapters. Also, principles such as subrogation rights of the guarantors and co-guarantors shall be deal with exclusively and within one of the upcoming chapters.

CORPORATE GUARANTORS VIS-A-VIS IBC

The author through this chapter shall exclusively deal with various case laws by the Supreme Court, High Courts, NCLAT and NCLTs and shall analyse the current position of law w.r.t. the corporate guarantee and its facets as under the IBC. But before analysing the same, the author shall discuss the relevant provisions under the IBC and the essentials for the application against the Corporate Guarantor (CG).

CG in the Code is defined under Section 5(5A) which runs as “a corporate person who is the surety in a contract of guarantee to a Corporate Debtor (“CD”)“.[32] This definition has been brought through the second amendment to the IBC.[33] The application against the CG can be filed under Section 7[34] or Section 9[35] of the Code and such application shall be considered as an application against the CD. Further, the Adjudicating Authority (“AA”) for the application against the CG shall be the NCLT. Section 60(2) of the Code provides that if any application is to be filed against the CG then the same has to be filed before the NCLT and if there is any Corporate Insolvency Resolution Process (CIRP)/ Liquidation pending before any NCLT or other courts then the same has to be transferred to the NCLT where the CIRP w.r.t. CD is going on. Also, an application under Section 7 can be admitted against the CG because Section 5(8)(i)[36] of the Code provides that the guarantee and indemnity provided w.r.t. the financial debt shall qualify to be financial debt.

In the case of State Bank of India v. Mr. Rajendra Bhuta (IRP) of Prabhat Technologies (India) Limited[37] has observed that in a case where the debt is not qualified for being a financial debt as under Section 5(8)[38] of the Code then the application under Section 7[39] of the Code against the CG will not be maintainable. In the present case, there was a Forward Purchase Agreement (“FPA”) which was to be performed by the CD and for which the guarantee was given by the CG and on the default of the same, the creditor claimed the amount as financial debt from the CG. The NCLT observed that the FPA didn’t satisfy the essentials of the financial debt and also could be considered as the financial contract as the same was merely a sale and purchase agreement. Further, the AA observed that the CD has not raised any amount under the FPA and thus, there will not arise any liability in respect of the CD and the CG.

The NCLAT in the case of Ferro Alloys Corporation Ltd. v. Rural Electrification Corporation Ltd.[40] was faced with a similar issue and the reference was made to the Supreme Court case of Bank of Bihar Ltd. v. Dr. Damodar Praasad & Anr.[41] and the Appellate Tribunal concluded that the liability of the guarantor is co-extensive to the debtor’s liability and thus, there is the right of the creditor to proceed towards anyone for the realisation of the claims. Hence, the NCLAT observed that the application against the CD is not necessary for initiating a CIRP against the CG and further went on to say that the simultaneous application against both, the CD and the CG, can be proceeded by the creditor.

Simultaneous applications can be filed against the CG and the CD. 

The author is of the opinion that the Code provides the way for making simultaneous applications against both the CD and the CG. Also, the Supreme Court in the case of SBI v. V. Ramakrishnan and Ors.[42] has also held that the proceedings against both the CD and the CG be initiated under the Code simultaneously. This view can be reflected by way of following decisions of the NCLT and NCLAT.

1. In the case of Edelweiss Asset Reconstruction Company Ltd. v. Trifalagur Swaure Infrastructure Private Limited[43], the Allahabad NCLT has held that a simultaneous application against the Corporate Debtor (CD) and the Corporate Guarantor can be filed for the same set of debt and defaults. 

The Financial Creditor (FC)/ Petitioner in the present case has filed an application under Section 7 of the IBC/Code against the CD who happens to be the Corporate Guarantor of the CD. The FC stated that the principal borrower in the case had borrowed Rs 170 crores from the original creditor (who had later assigned the debt owed to the FC) for which the Corporate Guarantor had given the guarantee. It was further averred that the principal borrower defaulted in payment of the debt and hence, the loan was recalled and the demand notice was sent to both the CD and the Corporate Guarantor. Meanwhile, the Respondent didn’t appear before the NCLT and in one of the applications filed for the CIRP of the principal borrower got admitted for the same set of debts and default.

2. The NCLT referred to the case of Laxmi Pat Surana v. Union Bank of India (Civil Appeal No. 2734 of 2020) which held that if the principal borrower, as well as the guarantor defaults in repayment of the debt then the cause of action against both the parties, will arise in equal measure as the liability of the guarantor is co-extensive to the principal borrower. It further held that as soon as the default is confirmed, the guarantor metamorphoses into the CD and hence will get covered under Section 3(7) of the Code. Hence, the NCLT concluded that there was a default on the part of the CD arising from the deed of guarantee and hence, the petition was admitted under Section 7 of the Code. The above view of the NCLT was the same in the case of IFCI Ltd. v. Anil Mega Food Park Ltd.[44].
3. The NCLAT in the case of State Bank of India v. Athena Energy Ventures Private Limited[45]observed that the application for initiating CIRP can be filed against the CD and the CG simultaneously. The Appellate Tribunal while referring to its earlier case[46] has clearly differentiated the facts of the present case from the facts of the earlier case. The NCLAT observed that the decision given in the “Piramal’s” case was on the issue of whether the second application can be filed against the second guarantor in case the application against the first guarantor was pending for the same set of debt and default. The NCLAT concluded that the issue in the present case is different from the above-mentioned case and thus, the observations of Piramal’s case cannot be made applicable to the present case. 

The Tribunal then referred to Section 60(3) of the Code and concluded that when an application is allowed to be filed under the above section against both the CD and the CG, then there arises no harm in the admission of the applications also. Further, the NCLAT observed that the creditor is not only allowed to file an application for the CIRP but also has the right to file claims in the CIRPs of both the CD and the CG. The above view of the NCLAT was also observed in the case of Edelweiss Asset Reconstruction Company Financial Ltd. v. Gwalior Bypass Projects Ltd.[47] wherein the NCLAT has held that there is no bar under the Code to proceed against both the FC and the Corporate Guarantor in CIRP or at the time of filing of the claims. Further, in the case of Bijay Kumar Agarwal v. State Bank of India and Anr.[48], the NCLAT has observed that the contract of guarantee provides that the liability of the guarantor is co-extensive to the debtor and shall remain independent from that of the guarantor thus, the right of the creditor to file an application under the Code against both the CD and the CG cannot be curtailed.

4. However, an exception is created by the NCLAT in the above-mentioned decided rule. It states that if an application against the CG has been decided and the Financial Creditor (“FC”) has realised the full amount from the successful resolution applicant then the FC won’t be allowed to initiate the second application against the CD or CG, as the case may be. NCLAT in the case of Kanwar Raj Bhagat v. Gujarat Hydrocarbons and Power SEZ Ltd.[49]has observed that that the Appellant challenge to the application for CIRP against the CD is rejected on the ground that the FC is yet to realise the full amount of the claims. 

The brief facts of the case are that the FC gave loans to the CD, for which the CG gave the corporate guarantee, and which was subsequently defaulted by the CD. The FC initiated CIRP against the CG and realised some of the claims from the CIRP of the CG. Later, FC has filed another application for initiating the CIRP against the CD for the remaining amount. The CD has challenged this on the ground that the FC has received the claims as full and final settlement of the claims and no further claims can be made by the FC now. 

The Appellate Tribunal observed that the FC has not realised the amount as full and final settlement of the claims and thus, has the right to file for the CIRP against the CD. Further, the NCLAT also held that even if the FC has accepted the amount as full and final settlement of the claims as per the resolution plan then also the FC has the right to file for the realisation of the dues amount as there is no voluntary compromise w.r.t. the receipt of the claims during the CIRP. Hence, the FC has the right to file the second application against the CD for the recovery of the remaining dues from the CD.

5. Moreover, in the case of IFCI Ltd. v. M/s ACCIL Hospitality Ltd.[50], the NCLAT has carved out another exception to the rule of simultaneous applications and has observed that if the second application as against the CG is with the view that a haircut will be applied to the claims of the FC and the FC will not receive full claims as submitted, then the same shall not be admitted. It further held that even though simultaneous application against the CG is allowed under the IBC, however, if the earlier application stands indecisive and the later application is triggered on the apprehension of less realisation, then the same cannot be admitted.

6. Lastly, in the case of State Bank of India v. Sungrowth Share & Stocks Limited[51], the NCLT has held that the discharge of the CD by operations of law shall not discharge the CG from its obligations to pay. The AA in the present case was faced with the facts wherein the FC has realised some amount from the CIRP of the CD and now has filed an application against the CG for the remaining dues. The CG being the CD in the present case has taken a defence that the application is not maintainable as the FC has realised the amount as full and final settlements in the CIRP of the CD (original) with certain haircuts as usual. 

The AA referred to the resolution plan of the original CD and observed that the guarantor is not relieved from its liability of paying the remaining dues/outstanding balance. It further observed that the original CD is discharged once the resolution plan is approved and not the CG (CD in this case) and hence, the CG cannot get the shield of the law to evade its contractual obligations.

Liability of the co-borrower.

Section 146[52] r/w Section 43[53] provides for a situation wherein there are co-sureties for the same debt whose liability may depend upon the contract. The said sections provide that if in case the principal borrower defaults on the repayment then there may arise a liability on any of the co-surety, either jointly or singly, and in this situation, the creditor shall have the right to proceed against any of the two for the repayments of the credit amount. Also, Section 138[54] provides that the discharge of one surety shall not enable the discharge process for other sureties and in such case, the other guarantors will have to repay the amount if the same was defaulted by the principal borrower.

1. In the case of Maitreya Doshi v. Anand Rathi Global Finance Ltd[55], the NCLAT has held that the application against the co-borrower under Section 7 of the IBC shall be maintainable in the same capacity of that of a Corporate Debtor (CD). The Respondent/ Financial Creditor (FC) has extended certain loan facilities to the tune of Rs 6 crores wherein the CD/Appellant had pledged its shares as a guarantee and has also signed on the documents as a co-borrower. The Appellant stated that the intention of the CD was not to enter into certain liability but was only restricted to the pledging of shares which is held in the company of the principal borrower. It was further argued that the pledging of shares won’t create a financial liability on the CD and also for the same loan the application cannot be initiated against both the parties wherein an application has already been admitted against the principal borrower. Also, it was held that since there was no disbursement to the CD and since the CD had only pledged the shares as the security, the Respondent shall at best be the secured creditor and not the financial creditor as there was no guarantee or indemnity.

The Respondent to the arguments advanced by the Appellant argued that the contents of the loan documents mention the CD being a co-borrower and the same is the joint loan agreement which was executed by both (CD and the principal borrower). It further referred to the case of Athena Energy’s case and also to the case of Lalit Kumar Jain v. Union of India[56] wherein it was held that simultaneous application against the guarantor is valid and the approval of resolution plan against the debtor won’t discharge the guarantor of its liabilities.

The NCLAT observed that the sanction letter which was made by the FC at the time of disbursement of the loan was issued to both the CD and the principal borrower and the same was accepted with signatures and stamps of both the above parties. It also observed that in the “loan cum pledge agreement” the CD was stated to be as borrower and pledgor both and further it was agreed that both the parties shall be referred to as borrowers and in case of repayment of loan on-demand promissory note the borrowers were to be made liable. Also, it was observed that the documents were signed by the Appellant on behalf of both the borrowers. Hence, on the basis of the above, the NCLAT concluded that the CD and the principal borrower were the borrowers and the CD was stated to be the co-borrower, thus liable to repay the loan amount.

2. Further, the NCLAT observed that the ratio of Piramal’s case will not be applicable as the facts in the present case are different from the earlier case in a sense that in the present case the liability of the co-borrowers is in question which was not there in the earlier case which talks about guarantor and borrower. Also, the NCLAT referred to the case of Athena Energy and Lalit Kumar Jain to conclude that a simultaneous application against the CD and the guarantor can be initiated and hence, the contentions of the Appellant were dismissed. Lastly, the Appellant Authority observed that had it been the case of only pledging of shares then the outcome of the present case would have been different. Hence, on the above grounds, the appeal was dismissed.  
3. Also, in the case of State Bank of Travancore v. Vasantha Kumari[57], the Kerala High Court has held that in a case of student loan the father who had signed all the documents for availing the loan for the child in the capacity of the co-obligant shall have the liability equal to that of the co-surety/co-borrower. The Court observed that if the father did not have the intention of not repaying the loan, he had not signed the document, thus, in a situation when he had signed the documents he cannot be not allowed to evade his liability and will be considered as co-surety/co-borrower to the third party.

Hence, taking reference from the above case, it can very well be concluded that the co-guarantor by whatever name may be called shall have the obligation to repay the loans taken by the borrower and cannot evade the liability on the ground of there being other guarantors to the CD.

CIRP of CG of Principal Borrower who is not a Corporate Person.

The Supreme Court in the case of Laxmi Pat Surana v. Union Bank of India & Anr.[58] has held that the application for CIRP filed against the CG of the principal borrower (“PB”) can be admitted under the Code.

The Appellant challenged the admission of Section 7 application and stated that the application under Section 7 was for the debts of the PB who is not a corporate person[59] as defined under the Code. It further contended that if the application is allowed then it shall indirectly enforce the Part III of the IBC without even a notification. Thus, it was stated that it was a mere guarantee for which the action cannot be initiated. 

Respondent, on the other hand, contended that the application against both can be filed as the liability is co-extensive as per Section 128[60]. It further submitted that Section 7 enables the FC to initiate a CIRP against the PB and also against the CG if the same is filed by the corporate person. Also, an argument was made w.r.t. the guarantee which was given by the CG and it was argued that the debts arising out of this guarantee are the financial debt[61] as there exist component of the time value of money and the same was disbursed against payment of interest.

The Court observed that the application under Section 7 is always to be filed against the CD who can be the CD or the CG (PB in this case) and can also be filed against the corporate person who has assumed the status of the CD. Also, the Court stated that the definition of claims[62] includes the right in respect of payment for the breach of agreement and further stated that this right shall enable the FC to proceed against both the CD and the PB as the liability was co-extensive and thus, because of this only the stature of the CG metamorphosed into that of the CD. Lastly, the Court observed that the PB may or may not be the corporate person but when the corporate person has extended the guarantee against the loans taken by the PB who is not a corporate person, still it will get covered under the definition of the CD.

Mortgage is not guarantee, but merely are securities.

One such important aspect is to be taken into account is not to confuse the mortgages given as third party securities for securing the loans taken by the CD with that of the guarantee. The Supreme Court in the case of Anuj Jain, IRP for Jaypee Infratech Limited v. Axis Bank Limited Etc.[63] has clearly made out the differentiation between the mortgages and the guarantee. The Court also referred to the case of Committee of Creditors, Essar Steels v. Satish Kumar Gupta[64] wherein the Court has observed that the secured creditors are a class within the class of FCs and concluded that the intention of the Court was not to create a bifurcation but to reflect that class who has given loans to the CD and not the ones who have given loans to the third party but has extended the security from the CD. 

The Apex Court has clearly recognised the debts in question as in form of the third-party security which was given by the CD for securing loans taken by the respondents. It was concluded that the security will not be considered as financial debt and hence, the respondent who was holding the mortgages will not be considered as FCs of the CD.

The situation above can best be depicted by way of a diagram:

By the pictorial representation it can very well be concluded that the lenders had given loan facilities to the JAL for which the security by way of mortgage was given by the JIL, hence, the reasoning given by the Court stands valid that the guarantee agreement allows the guarantor to have the subrogation rights but the security agreement only allows the creditor to recover to the extent of the mortgage security.

Further, the NCLAT in the case of Ascot Realty Private Limited v. Ajay Kumar Agarwal, IRP of RDH Technologies Private Limited[65] which has dismissed the appeal filed by the Appellant held that the mortgage and guarantee are two different aspects. If the loans are secured by the guarantee then the application under Section 7 of the Code can be filed against the CG but if the same is secured by the security interest (like a mortgage) then the application will not be admitted. 

The Appellate Tribunal differentiated between the facts of the present case with that of Anuj Jain’s case and held that in the present case a guarantee was given by the third party which is not similar to creating of third party security interest. Further, NCLAT in one of the cases[66] has observed that the mortgagor shall always claim the money and will not be interested in the growth of the CD as contrary to the CG.

Subrogation right of guarantors vis-a-vis IBC.

Principle of subrogation is given under Section 140[67] which provides that the surety in the contract of guarantee shall have the right to step into the shoes of the creditor if he has obliged with the obligations of the debtor. Also, Section 145[68] provides that there shall be in every contract of guarantee the implied promise of the debtor to indemnify the guarantor if the obligations are met by the guarantor for the debtor. Supreme Court in the case of Amrit Lai Goverdhan Lalal v. State Bank of Travancore[69] has held that the surety under the contract of guarantee shall have the right to procure any remedy which the creditor had against the debtor.

Although, every principle of the Contract Act is applicable to the proceedings under the IBC, however, the principle of subrogation seems ineffective when it comes to IBC. This is because of the fact that Section 32A[70] provides for the clean slate approach, i.e., once the debt of the CD is resolved by way of payment made by the CG then the CG shall not have the right to recover the same from the CD or the successful resolution application. One of the reasons for this is that the Code is to restructure and resolve the debts of the CD and cannot be used for recovery, hence, in a case wherein the CD has been absolved from its liability, no new liability can be inflicted upon it by way of subrogation right of the CG. Hence, it can be seen that the Code undermines the principle of subrogation.

Further, the Supreme Court in Committee of Creditors, Essar Steels v. Satish Kumar Gupta[71] has held that Section 32A of the Code has the clean slate approach and thus, any liability arising after the approval of the resolution plan of the CD cannot be entertained. Hence, the guarantors shall not have the right to subrogate into the shoes of the creditors once the resolution plan is approved as their liability remains intact even after this as held in the case of State Bank of India v. V. Ramakrishnan & Anr.[72]. 

NCLT in the case of State Bank of India v. Sungrowth Share & Stocks Limited[73] has held that the FC shall have the right in case of shortfall in the amount due to the CD to file against the CG. It further observed that the debtor’s liability under the Code gets vanished as soon as the resolution plan is approved in accordance with Section 31 of the Code. However, the guarantor’s liability remains the same towards the FC and once the payment is made by the guarantor to the FC for the debts of the CD then also the CG cannot claim its money back from the CD or the successful resolution applicant. 

Also, in the case of Lalit Mishra and Ors. v. Sharon Bio Medicine Ltd.[74], the NCLAT observed that the guarantor under the IBC does not have the right to subrogate as which it has under the contract law. This is because the proceedings under the Code is for the resolution of the CD and not for the recovery of money. Further, in the case of IDBI Bank Ltd. v. EPC Constructions India Limited[75], the NCLT has upheld the similar principle as discussed above by approving the resolution plan of the CD wherein there were no subrogation rights given to the guarantors. It also observed that if the subrogation rights are allowed then the CIRP process shall become meaningless as in the end, the successful resolution applicant might face a situation wherein it has to pay all the dues of the CD, which is definitely not the intention of the legislature.

Continuous Guarantee vis-a-vis IBC.

Section 129[76] speaks about continuous guarantee which means a guarantee which is extending to a series of transactions. This means that till the time obligations under the contract are to be performed this shall remain. This guarantee can only be revoked as per Section 130[77] and can only be revoked w.r.t. the future transactions and not the transactions which have already taken place. In the recent judgement by the Hon’ble NCLAT in the case of Srinivasa Reddy Velagala, Director, KPR Chemicals Limited v. Sravanthi Infratech Pvt. Ltd., the Appellate Tribunal upheld the decision of the Adjudicating Authority stating that “since there is no termination of the contract, the contract still subsists and hence not barred by limitation“.[78] Further, taking into consideration the correspondences between the parties, the NCLAT concluded that the EPC contract in question was never terminated by either of the parties and thus, the contract still continues. It further went on to say that even though the demand notice was served on 02.07.2018 and the debt fell due on 24.12.2010 and the last payment received to the Respondent was on 25.02.2011, the debt continues to fall even today as the contract was never terminated. Hence, the petition under Section 9 was held as maintainable.

Also, in the case of Export Import Bank of India v. CHL Limited[79] the NCLAT held that the continuing guarantee given by the guarantor shall only be invoked in the situation wherein the CD has defaulted and not otherwise. It was also observed that there was no debt which was due to the CG as the FC has not demanded the money from the CD and thus, it can be said that there does not exist any default.

Another interesting aspect of the continuing guarantee is that it remains till the time the debts are not repaid. Hence, the limitation period for claiming the dues remains till the time the guarantee has not been invoked or the guarantor has refused to perform the guarantee. The Kerala High Court in the case of C.P. Sreelal v. District Collector and Ors.[80] has held that the account remains a live account till the time it is not settled, i.e., the dues remain unsettled, and thus, the period of limitation will commence from the date of the breach of the contract, i.e., the date when the invocation of guarantee was made and the default was made by the guarantor. The same was observed in the case of Margaret Lalita Samuel v. Indo Commercial Bank Ltd.[81] wherein the Supreme Court was of the view that in cases of a continuing guarantee, the period of limitation starts from the time the guarantor refuses to perform the obligations. In this, the account remains the live account and for the same, the limitation period shall be the one which is mentioned under Article 115[82]. 

In interesting observations made by the High Court of Delhi in the case of Subhash Chand and Anr. v. State Bank of Patiala and Anr.[83] held that the proceedings against the guarantor are valid even for the time-barred claims if the guarantee is of the nature of the continuing guarantee. The Court observed that the liability of the borrower and the guarantor can accrue at one point in time or at different times and thus, it is possible that the liability of the guarantor can arise at a later point in time. 

Also, a question may arise as to the fact that if the debtor has acknowledged the debts will it be binding on the guarantor and can the limitation period get extended after the acknowledgement. The Chattisgarh High Court in the case of State Bank of India v. Dr. Annad R. Ahuja[84] has held that if the acknowledgement has been made by the borrower, it shall be made effective to the obligations of the guarantors and thus the limitation period for proceeding against the guarantor shall stand extended as the liability of the debtor and the surety is co-extensive. Similar, to what has been laid above, the Karnataka High Court in the case of R. Lilavati v. Bank of Baroda[85] has observed that where the terms of the guarantee deed provide for the right of giving consent by the borrower on behalf of the guarantor, and if this right is exercised by the borrower to acknowledge the debts, the same shall be considered as valid acknowledgement and thus, will extend the limitation period against the debtor. 

In this reference, NCLAT in the case of Mr Piyush Periwal v. Stressed Assets Stabilization Fund (SASF)[86] was faced with the facts that the debtor has defaulted upon the loan and the whole loan amount was recalled by the FC. Post this, the FC resorted to BIFR for recovering the amount and the case was pending till 2016 after which the Code came into existence. The NCLAT has observed that even if the guarantor has given the guarantee in the year 1997 and after that, the time period of three years for filing the case has been expired, the guarantee still exist as the same is the continuing guarantee and thus, the limitation period has not commenced until the guarantee is invoked. Thus, the application under Section 7 was admitted against the guarantor. 

Another interesting issue that pops up w.r.t. continuing guarantee is that can the continuing guarantee be invoked during the moratorium and if not invoked then can the same be invoked and present as a claim in the CIRP of the CD. NCLAT in the case of Edelweiss Asset Reconstruction Company Limited v. Orissa Manganese and Minerals Limited & Ors.[87] has held that if the guarantee was invoked at the time of commencement of the CIRP, then the same cannot be invoked after the CIRP commencement date as the same would be barred by moratorium under Section 14. The Appellate Tribunal further observed that the guarantee which was not invoked at the time of commencement of CIRP will not be considered as claim existing at the time of the CIRP and accordingly shall not be admitted by the Resolution Professional (“RP”).

Further, the NCLAT in the case of Export Import Bank of India v. RP JEKPL Private Limited[88] has been observed contrary to what was observed in the Edelweiss case (above). The Appellate Tribunal observed that the definition of a claim under the Code includes the mature and unmatured claims and thus, the RP under Section 25[89] of the Code is duty-bound to collate all the claims. Thus, it was observed that the unmatured claims can be filed during the CIRP. Also, it was observed that the invocation of guarantee can be made during the moratorium and the claim can be submitted to the RP after the public announcement has been made.  

Hence, from the above judicial pronouncements, it can very well be concluded that the provisions w.r.t. the invocation of corporate guarantee under the Code is settled and the creditor has the clarity w.r.t. the process under the IBC regarding the application against the CG.

PERSONAL GUARANTORS VIS-A-VIS IBC

Although, the issue w.r.t. personal guarantor has been settled by the Supreme Court, however, the same is still a hot topic for discussion in the market. Personal Guarantors[90] as defined under the Code means an individual who is surety in the contract of guarantee to the CD. The bone of contention herein is the phrase “surety to the CD”, i.e., only the portion which is related to the personal guarantors who are surety to the CD are made applicable as of now by the Central Government by way of notification.[91] However, there was a lot of ambiguity when the provision w.r.t. PG was made effective which the author shall discuss below by way of a summary of the decision by the Supreme Court in the case of Lalit Kumar Jain v. Union of India & Ors.[92]

Contentions of the Petitioners

The Petitioners argued that the notification dated 15.11.2019 is the result of the excessive delegation by the Central Government and thus the conditions imposed while enforcing such provisions of the Code as related to the PG of the CD is invalid, arbitrary and thus stands ultra vires to the powers of the Central Government as given under Section 1(3)[93]. It was further argued that the provisions made effective were not severable in nature and thus, the carving of limited provisions and its application only to PG of the CD is impermissible in law and stands unconstitutional. 

Also, the Petitioners stated that there was non-application of the mind by the Central Government while bringing such provisions into effect as the previous legislation such as Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920 were not repealed and thus, this creates an incongruence between the new and the old legislations in terms of forum and application of the law. It was also argued that the distinction created doesn’t have intelligible differentia basing which the PGs were singled out from the individuals under the Code and hence, a separate class is created thereby, leading to the class distinction which is prohibited under Article 14[94]. Moreover, the impugned notification was targeted on the ground that it will create a mechanism that will empower the creditors to recover the money from the PG which certainly is not the objective of the Code. Lastly, it was argued that the moratorium once applicable to the PG as per Section 101[95] will make the PG stand equivalent to the CD in terms of the debts payable which certainly is not the intention of the IBC.

Contentions of the Respondents

Respondents, on the other hand, countered by stating that the intention of the legislature was to create three different entities as the amendment in 2018 indicates and thus under Section 2(e)[96] of the Code a class w.r.t. PGs to the CD was added. It further referred to the amendment in the year 2018 which amended Section 60(2)[97] of the Code to make it applicable to the PG to the CD. Hence, the intention of the legislature was clear in unifying the adjudication of the insolvency process of the CD and the PG to the CD through the same forum. Had this been not done, the CIRP of the CD would have worked itself out to exclude the PGs who in the majority of the cases were the people behind taking the loans by giving their guarantee and the primary reason for the insolvency of the CD. It was also stated that the unification of the process relating to both the insolvency will give a clearer picture of the resources and assets of the CD and the PG who has given his personal guarantee for availing the loan/credit by the CD and this will maximise the value of the assets of the CD and will promote entrepreneurship thereby satisfying the objectives of the Code.

Further, it was also contended that Section 1(3) of the Code provides for the powers of the Central Government to implement certain provisions of the Code as per the needs and thus, the enactment of Section2(e)[98] which provides for the applicability of the Code on the PGs to the CD is constitutional. Also, reference was made to provisions of Section 60[99] which provides that the NCLT shall be the AA for the matters related to insolvency of the PGs to the CD. It was also submitted that the CG and PG are a part of one class as both of them are guarantors to the CD and thus, the mechanism to operationalise the Part III of the Code to a certain extent by way of impugned notification stands the test of constitutionality. Further, reference was made to the case of Maharashtra State Electricity Board Bombay v. Official Liquidator, High Court, Ernakulum & Anr.[100] and it was stated that there is no effect on the liability of the guarantor even if the liability of the debtor is discharged by law. The same was held in the case of SBI v. V. Ramakrishnan & Anr.[101] wherein the Court held that the approval of the resolution plan won’t discharge the liability of the guarantor. Lastly, it was argued that the provisions w.r.t. Section 179[102] starts with the phrase “subject to the provisions of Section 60”, hence, this means that the legislature has purposefully carved out the PGs for the purpose of the Code and thus, the insolvency-related to the PGs shall be dealt as per Section 60 and hence, the AA as under Part III of the Code shall not be the AA for the PGs to the CD for the purposes of Section 60. 

Observations of the Court

The Court observed that the amendment in the year 2018 to Section 60 has not actually amended anything specifically to PGs as the application against the PG was then also to be filed before the NCLT wherein the case of the CD is going on. This means that it was always contemplated by the legislature to deal with the insolvency of the CD and its PG identically to unify the process during the insolvency proceedings. It further observed that the AA for PGs shall be the NCLT wherein the CIRP of the CD is pending adjudication. Also, the Court specifically stated that the legislature purposefully has not repealed both the old laws dealing with individual insolvencies and has not also notified Section 243[103] of the Code. This means that the provision relating to the overriding effect of the Code under Section 238[104] shall prevail and thus, the proceedings w.r.t. PGs to the CD insolvency will be dealt with specifically as per the provisions of the Code. 

Based on the above reasoning and the submissions of the Respondent, the Court came to the conclusion that there was the legislative intent behind segregating PGs from other categories of individuals. Hence, the notification stood the test of constitutionality as the same was not termed as the selective application of the provisions of the Code.    

Appropriate jurisdiction and pre-requisite for filing the application against the PG.

Now, this brings to the next consideration w.r.t. the issues under personal guarantee arising under the Code, that which body has the jurisdiction to adjudicate upon the matters arising out of the same and under what circumstances the adjudication can be done. 

1. In the case of SBI v. V. Ramakrishnan & Anr.[105], the Supreme Court categorically stated that the AA for the matters to be dealt with under the Code relating to the PGs to the CD shall be the NCLT as mentioned under Section 60 of the Code. It further held that since the provisions w.r.t. individual insolvency has not been notified yet under the Code, the Debt Recovery Tribunal (“DRT”) does not have the power to adjudicate upon the matters relating to individual insolvency of PGs. Also, it was observed that Section 243 of the Code is not in force and thus, the appropriate court/tribunal for the adjudication of individual insolvency shall be the one as given under previous legislation, but for the insolvency of the PGs to the CD, if the case is filed under the IBC, it shall be the NCLT. 
2. Further, NCLT Mumbai (Bench IV) in the case of Insta Capital Private Limited v. Ketan Vinod Kumar Shah,[106] has held that if the application against the CIRP of the Corporate Debtor (CD) is not filed or admitted in the NCLT, then the application against the personal guarantor to the CD cannot be sustained in the NCLT. The brief facts and observations in the case are as follows:

The Petitioner/ Financial Creditor (FC) has filed an application under Section 95 of the Code in the NCLT and has produced various documents highlighting the evidence of the debt due and payable upon which the CD has defaulted. The FC contended that under the Code, an application against both the debtor and the guarantor can be filed simultaneously as there exists a co-extensive liability as per the ratio laid in the case of State Bank of India v. Athena Energy Ventures Private Limited.  

On the other hand, the Respondent/ Personal Guarantor to the CD (PG) contended that as per Section 60(2) of the Code an application against the PG can only be initiated in the NCLT wherein the application is pending before that particular NCLT regarding the CIRP of the CD.

The issue for consideration before the NCLT was that can an application by the FC be initiated against the PG if there are no CIRP/liquidation proceedings against the CD. The Adjudicating Authority (AA) while reading Section 60 of the Code along with Section 128 of the Contract Act, 1872 observed that an application can be filed against both the CD and the guarantor simultaneously. It further observed that as per the non-obstante clause given under Section 60(2) of the IBC, an application can be filed under the NCLT for the insolvency resolution process against the PG only and only when the CIRP is pending before the CIRP. It was also observed that as under Section 95, the FC can file an application only against the PG of the CD which is already undergoing CIRP/liquidation.

Hence, the application against the PG was held unsustainable.

3. Moreover, in the case of Punjab National Bank v. Carnation Auto India Pvt. Ltd. & Anr.[107], the NCLAT was of the view that the Part III of the Code has not been notified till date (which stands true today also) and thus, no application can be filed against the PGs to the CD under Part III until and unless the same is notified by the Central Government. It also observed that Section 60 in sub-section (2) provides for a non-obstante clause which clearly shows that the notwithstanding clause will override the provisions of Part III unless notified. Lastly, the Appellate Tribunal also observed that even if we the Tribunal has to assume that the said part is notified still the application for initiation of insolvency against the PGs to the CD will have to be filed before the NCLT and not the DRT as per Section 60 (2) of the Code. 

Essentials of application against the PG.

The author shall be discussing few case laws and shall through the discussion analyse various essentials for filing the application against the PG.

1. One of the essentials for filing an application is to file an application under Section 95[108] which is to be r/w Section 60 of the Code. Guwahati NCLT in the case of Bank of Baroda v. M/s Blufern Ventures Pvt. Ltd.[109] has observed that for initiating application under the Code against the PG, the FC has to send a demand notice under Form-B and has to wait for the period of 14 days during which if the payment is not received, he may file an application under Section 95 of the Code. Also, in the case of Intec Capital Ltd. v. M/s Eastern Embroidery Collections Private Limited[110], the Delhi NCLT has observed that for admission of an application filed against the PG should be filed under Section 95(1)[111] in Form-C, should be accompanied with all the details and documentary evidence w.r.t. the debts owed by the creditor to the guarantor and the debtor and should be filed after a period of 14 days from the date of demand notice to the PG as given under Section 95(4)[112] of the Code r/w Rule 7[113]. 

The requirement for the demand notice is further discussed in the below-mentioned case.  

2. NCLT Delhi (Bench III) in the case of State Bank of India v. Ms Jaya Singh[114], the Adjudicating Authority (AA) has held that if the demand notice has not been sent to the Personal Guarantor (PG) to the Corporate Debtor (CD), then the application under Section 95(1) of the IBC will not sustain.

In the present case, the Applicant/Financial Creditor (FC) filed an application under Section 95(1) r/w Rule 7(2) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process of PG to CD) Rules, 2019 (“Rules”) against the Respondent/PG for the defaults incurred on the loans taken by the CD for which the PG has given a personal guarantee. It was submitted by the FC that liquidation proceedings have been ordered by the NCLT against the CD and furtherance of that a notice in Form B under Rule 7(1) of the Rules was sent to the PG.

It was observed that the demand notice was sent to the PG who was not the party to the present case and there was no demand notice sent to the Respondent against which an application under Section 95 is filed. The AA referred to Rule 7(1) of the Rules and concluded that for an application to get accepted under Section 95 of the Code, a demand notice is to be sent to the PG of the CD demanding payment of the amount in default.

The AA concluded that since there was no demand notice served to the PG/Respondent as required mandatorily under Section 95(4)(b) of the Code r/w Rule 7(1) of the Rule, the application was not proceeded with. Hence, the petition was dismissed.

3. The third essential of an application against the PG is that mandatory notice is not to be given to the PG as held in the case of Ravi Ajit Kulkarni v. State Bank of India[115]. The Appellant in the present case has challenged the impugned order of the NCLT which has accepted the petition under Section 95 of the Code and has appointed the RP without giving any notice of hearing. The Appellant contended that since the notice was not issued, the principles of natural justice was not followed and thus, the case proceeded by the AA was without any merits.

The NCLAT formulated an issue whether the service of an advance copy of the petition by the creditor is considered as deemed service of notice. 

The Appellate Tribunal on the conjoint reading of Section 95(5)[116] r/w Rule 3(1)(g)[117] r/w 7(2)[118] observed that the Code only prescribes for sending a copy of the application by the creditor to the PG and the CD which the creditor has successfully met out. Thus, it was observed that since the procedure as prescribed was successfully obliged, it shall be considered as deemed notice. Further, on the issue of no notice by the AA, the NCLAT observed that the Code only prescribes for the issuance of notice by the creditor and not from the AA.

Also, as observed in Vinod Sehwag v. Siemens Financial Services Pvt. Ltd.[119], the aspect of appointment of RP should be notified to the PG so that the latter can appear when the process of appointment is complied with by the AA as given under Section 99[120] of the Code. 

Furthermore, in the recent case of Surendra B. Jiwrajka v. Omkara Assets Reconstruction Pvt. Ltd.[121], the High Court of Bombay has held that the parties are required to be heard in an application filed under 95 of the Code before the Adjudicating Authority takes any decision with respect to admission or rejection of the application.

The Petitioner in the present case has challenged the impugned order passed by the Debt Recovery Tribunal which has observed that no objections can be entertained till the time the resolution professional submits its report under Section 97 of the IBC. Further, the Petitioner contended that the Respondent has already assigned loan to another party and thus, there arises no jurisdiction to file an application under Section 95. It was further contended that the order imposing interim moratorium on the Petitioner is against the principles of natural justice as no hearing was afforded to him before appointing the resolution professional.

On the contrary, the Respondent (originally the Applicant) submitted that the jurisdiction of a writ court doesn’t arise when it comes to Section 95-Section 99 of the Code which only provides for collection of evidences. It was argued that the question w.r.t. giving chance of hearing to the Petitioner shall arise only in the case wherein the resolution professional has submitted his report. Reference was made to the case by the NCLAT (Ravi Ajit Kulkarni v. State Bank of India).

The Court referred to the provisions of the Code from Section 95-99 and observed that the Code provides for time-lines for each stage of the proceedings but the timeline for the time between the interim moratorium and the date of admission/rejection of the application is not given in the Code and also the time in which the resolution professional has to submit its report to the AA. Thus, the Court held that before the AA takes a decision regarding the admission or rejection of the application post receipt of report from the resolution professional, the parties are required to be heard along with the notice of the report. Lastly, the Court observed that the impugned order is upheld and the resolution professional is required to submit the report within a definite time period of six weeks from the date of receipt of the order after which the DRT shall decide the application within 14 days after giving both the parties the opportunity of being heard.

4. The fourth essential is that there is no requirement of pending CIRP against the CD for initiating an application against the PG.

Delhi NCLT in the case of PNB Housing Finance Ltd. v. Mr. Mohit Arora[122] has cleared the position of law w.r.t. Personal Guarantors (PG) to the Corporate Debtor(CD) that the application regarding the CIRP of the CD is not mandatorily required to be admitted for initiating an application against the PG under the Code.

An application under Section 95(1) r/w Rule 7(2) of the IB (Application to Adjudicating Authority for IRP for PGs to the CD) Rules, 2019 (Rules) for the default in repayment of the loan taken by the CD and the PG. The Applicant stated that the demand notice as required under Form-B was also sent to the PG post which the application has been filed.

Respondent, countering fiercely against the application filed by the Applicant, stated that the application stands barred by jurisdiction and thus is not maintainable. He stated that the Code provides for the insolvency resolution process of the PGs only to the CD and not the individuals and thus, in the present case wherein the application against the CD is not admitted and is only pending for admission by the NCLT, the same doesn’t provides for the grounds to file any application against the PG. He further stated that the appropriate forum to file the application in this situation will be the DRT as under Section 179 of the Code. Reference was made by the Respondent to the case of Altico Capital India Ltd. v. Rajesh Patel & Ors[123] wherein the NCLT has dismissed the application of the creditor on the ground that the CD for which the personal guarantee was given was not under the CIRP. Also, in the case of KEB Hana Bank v. Mr. Rohit Nath[124], the DRT, Chennai has observed for the initiation of insolvency resolution process against the PG who was not under the CIRP. Hence, from the above-mentioned submissions, the Respondent concluded that for filing an application against the PG for whom the application concerning CIRP is not admitted shall not be admitted by the NCLT and the appropriate forum for the same shall be DRT.

Countering this, the Applicant referred to the case of Ferro Alloys Corporation Limited v. Rural Electrification Corporation Limited[125] and stated that the application against the CD is not necessary to initiate CIRP against the corporate guarantor. Reference was also made to the case of Bank of Bihar Limited v. Dr. Damodar Prasad & Anr.[126] wherein the Supreme Court has observed that the simultaneous applications can be filed against the borrower and the guarantor as the liability of both the parties are co-extensive. Lastly, the Applicant referred to the case of Lalit Kumar Jain v. Union of India and submitted that the application under Section 179 of the Code is subject to Section 60 of the IBC and Section 60(2) of the Code is without prejudice to Section 60(1) of the Code, thereby giving overriding effect to the former section and thus application relating to insolvency, liquidation, bankruptcy of PGs of the CD shall be filed before the NCLT.

The Adjudicating Authority (AA) observed that the provision in Section 179 shall not be made applicable in the present case and Section 60 is thus attracted thereby giving jurisdiction to the NCLT. Further, the NCLT focused on Section 60 (1) of the Code and stated that the words written are “in relation to” thereby including the application against the PGs of the CD against whom the application may be admitted or pending. Also, the AA referred to Rule 3(f) of the Rules which provides for the definition of the PG and stated that the definition doesn’t include or has explicit mention of the requirement of commencement of CIRP/ Liquidation against the CD. Thus, the NCLT concluded that the application against the PG can be filed in the NCLT even if the application against the CD is not been filed/admitted by the NCLT or is pending for admission.

Hence, the application filed by the applicant got admitted.

Moratorium under Section 14 not applicable to PG.

Section 14(3)(b)[127] which got amended[128] provides that the applicability of the moratorium as given under Section 14(1)[129] shall not be made applicable to the guarantors as under the contract of guarantee. This means that the benefits which the CD gets during the moratorium period shall not be extended to the guarantors under the Code and hence, the application can be filed against them. 

1. The Supreme Court in the case of State Bank of India v. V. Ramakrishnan & Anr. was faced with the question of whether Section 14 will be made applicable to the assets of the PG of a CG. The Respondent argued that the moratorium shall be made applicable to the assets of the PGs and no realisation shall be made from the properties of the PG. The NCLT & NCLAT also observed that once the resolution plan is passed under Section 31[130] of the Code, the same shall be binding upon the PG as the PG shall stand in the shoes of the creditor and thus, the protection under Section 14 shall be given to the PG.  

The Appellant in the present case argued that the liabilities of the CD and the PG is co-extensive and thus, they would be considered as a separate entity and can be proceeded differently. It further referred to Section 101[131] which provides for the moratorium in cases of individual insolvencies and stated that there is a striking difference between the moratorium under Section 14 and Section 101 as the former only deals with the assets of the CD and not the PGs. 

The Court concluded that the wordings of Section 14 expressly excludes PGs and only provides for the rights of the CD. Hence, the application of moratorium under Section 14 was made to be non-applicable to the PGs. Further, the Court contrasted the difference between Section 14 and Section 101 in the sense that in the former the moratorium is granted only for the debts due to the limited liability companies and not the PGs whereas the latter covers the moratorium applies to the individuals having unlimited liability. Thus, on the above-mentioned reasoning, the Court set aside orders of the AA. 

2. Further, the High Court of Calcutta in the case of Gouri Prasad Goenka v. State Bank of India[132]has held that Section 14 clearly provides for an exception from the applicability of moratorium to a guarantor, thus, the guarantor cannot absolve from their liability for the obligations incurred prior to the approval of the resolution plan. 

Hence, it can be concluded that the protection under Section 14 is not applicable to the assets of the PG and thus, the application under Section 95 of the Code can be filed against them.   

Assets of PG are not to be included in the assets of CD.

The last issue for consideration in this article is that “can a creditor ask the liquidator/ RP for the inclusion of the assets of the PG in the liquidation estate/ assets of the CD”.

The answer to this is in negative as the principle of “separate legal personality” will be applied. As per this principle, the company has a separate identity apart from its owner and the assets of both are different which cannot be merged. Thus, any assets given by the director in personal guarantee capacity cannot be included in the liquidation estate as only the properties of the CD will be included in the same. As per Section 36[133] of the IBC, the Liquidation Estate includes only the assets over which the CD has the ownership rights or the possession and this shall always be in relation to a CD. Thus, any question w.r.t. the property of the director/PG shall not come into existence while forming the liquidation estate. In the case of Punjab National Bank v. Vindhya Vasini Industries Ltd.[134], the NCLT observed that the liquidator cannot include the house property of the director in the liquidation estate.

Further, in the case of Nitin Chandra Naik v. Sanidhya Industries LLP[135], the NCLAT has observed that the properties of the PG cannot be attached in the resolution plan been made by the RP in the CIRP of the CD. In the present case, the Appellant is challenging the approval of the resolution plan which has incorporated the properties of the PG without the consent of the PG. The NCLAT dismissed the approval of the resolution plan and observed that the FC has to resort to the appropriate procedure for proceeding against the PG to the CD and thus, the present approval of the plan was considered to be an irregular exercise of powers.

CONCLUSION

The author through this paper has presented a diverse scope of applicability of provisions of the Indian Contract Act, 1872 on the proceedings under the IBC and has come to a conclusion that the provisions of the contract law are applicable to the proceedings under the Code, except the principle of subrogation. The author has drawn a conclusion that the application under the Code can be filed against the guarantors irrespective of the fact that proceedings against the CD are already filed. However, one of the important observations from the above study is that for filing an application under the Code against the PG, there is no need of a pending or admitted CIRP application filed against the CD.

 

Reference:

[1] Janwatraj v. Jethmal, AIR 1958 Raj. 343.

[2] The Indian Contract Act, 1872, No. 9, Acts of Imperial Legislative Council (1872) (Ind.).

[3] The Indian Contract Act, 1872, § 126, No. 9, Acts of Imperial Legislative Council (1872) (Ind.).

[4] Ram Narain v. Hari Singh, AIR 1964 Raj. 76.

[5] Dr. P C Markanda, Naresh Markanda & Rajesh Markanda, The Law of Contract 1439 (4th ed. 2 vol., Lexis Nexis 2017).

[6] Ibid.

[7] Karnataka State Industrial Investment and Development Corp. Ltd. v. State Bank of India & Anr., 2005 (1) CTLJ 331 Kar.; 2004 (4) KarLJ 266.

[8] P.J. Rajappan v. Associated Industies Pvt. Ltd. & Anr., Writ No. S.A. No. 245 of 1983 (Kerala High Court) (2017) ibclaw.in 16 HC

[9] Mathura Das & Ors. v. Secy. of State & Anr., AIR 1930 All. 848.

[10] The Indian Contract Act, 1872, § 142, No. 9, Acts of Imperial Legislative Council (1872) (Ind.).

[11] The Indian Contract Act, 1872, § 143, No. 9, Acts of Imperial Legislative Council (1872) (Ind.).

[12] The Indian Contract Act, 1872, § 128, No. 9, Acts of Imperial Legislative Council (1872) (Ind.).

[13] Maharashtra State Electricity Board v. Official Liquidator, High Court, Ernakulam & Anr., [2017] ibclaw.in 19 SC

[14] Indian Overseas Bank v. G. Ramulu & Ors., 1999 (2) ALD 104; 1999 (2) ALT 40.

[15] Kantilal R. Shah v. Central Bank of India, 1995 GLH (2) 952 (Guj).

[16] P. Jagdeshwar Reddy v. Bank of Maharashtra & Anr., AIR 2012 NOC 398 (AP).

[17] The Indian Contract Act, 1872, § 133, No. 9, Acts of Imperial Legislative Council (1872) (Ind.).

[18] The Indian Contract Act, 1872, § 134, No. 9, Acts of Imperial Legislative Council (1872) (Ind.).

[19] The Indian Contract Act, 1872, § 135, No. 9, Acts of Imperial Legislative Council (1872) (Ind.).

[20] The Bank of Bihar Ltd. v. Dr. Damodar Prasad & Anr., [2017] ibclaw.in 21 SC

[21] The Indian Contract Act, 1872, No. 9, Acts of Imperial Legislative Council (1872) (Ind.).

[22] The Indian Contract Act, 1872, § 136, No. 9, Acts of Imperial Legislative Council (1872) (Ind.).

[23] The Indian Contract Act, 1872, § 137, No. 9, Acts of Imperial Legislative Council (1872) (Ind.).

[24] The Indian Contract Act, 1872, § 139, No. 9, Acts of Imperial Legislative Council (1872) (Ind.).

[25] Babu Rao Ramchandra Rao v. Babu Manaklal Nehrmal, AIR 1938 Nag 413; ILR 1939 Nrg. 175.

[26] The Indian Contract Act, 1872, § 129, No. 9, Acts of Imperial Legislative Council (1872) (Ind.).

[27] Hasan Ali v. Waliullah & Anr., AIR 1930 All. 730.

[28] Ibid.

[29] The Indian Contract Act, 1872, § 130, No. 9, Acts of Imperial Legislative Council (1872) (Ind.).

[30] The Indian Contract Act, 1872, § 131, No. 9, Acts of Imperial Legislative Council (1872) (Ind.).

[31] The Insolvency and Bankruptcy Code, 2016, No. 31, Acts of Parliament (2016) (Ind.).

[32] The Insolvency and Bankruptcy Code, 2016, §5(5A), No. 31, Acts of Parliament (2016) (Ind.).

[33] The Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, No. 26, Acts of Parliament (2018) (Ind.).

[34] The Insolvency and Bankruptcy Code, 2016, § 7, No. 31, Acts of Parliament (2016) (Ind.).

[35] The Insolvency and Bankruptcy Code, 2016, § 9, No. 31, Acts of Parliament (2016) (Ind.).

[36] The Insolvency and Bankruptcy Code, 2016, § 5(8)(i), No. 31, Acts of Parliament (2016) (Ind.).

[37] State Bank of India v. Mr. Rajendra Bhuta (IRP) of Prabhat Technologies (India) Limited, (2021) ibclaw.in 28 NCLT

[38] The Insolvency and Bankruptcy Code, 2016, § 5(8), No. 31, Acts of Parliament (2016) (Ind.).

[39] The Insolvency and Bankruptcy Code, 2016, § 7, No. 31, Acts of Parliament (2016) (Ind.).

[40] Ferro Alloys Corporation Ltd. v. Rural Electrification Corporation Ltd., [2019] ibclaw.in 17 NCLAT

[41] Supra n. 20

[42] State Bank of India v. V. Ramakrishnan & Anr., [2018] ibclaw.in 29 SC

[43] Edelweiss Asset Reconstruction Company Ltd. v. Trifalagur Swaure Infrastructure Private Limited, Company Petition (IB) No. 63/ALD/2019.

[44] IFCI Ltd. v. Anil Mega Food Park Ltd., (2021) ibclaw.in 52 NCLT

[45] State Bank of India v. Athena Energy Ventures Private Limited (2020) ibclaw.in 344 NCLAT

[46] Dr. Vishnu Kumar Agarwal v. M/s Piramal Enterprise Ltd. [2019] ibclaw.in 16 NCLAT

[47] Edelweiss Asset Reconstruction Company Financial Ltd. v. Gwalior Bypass Projects Ltd., (2021) ibclaw.in 114 NCLAT; Emerald Realtors Pvt. Ltd. v. Suraksha Asset Reconstruction Ltd., (2021) ibclaw.in 311 NCLAT

[48] Bijay Kumar Agarwal v. State Bank of India & Anr., [2020] ibclaw.in 234 NCLAT

[49] Kanwar Raj Bhagat v. Gujarat Hydrocarbons and Power SEZ Ltd., (2021) ibclaw.in 228 NCLAT

[50] IFCI Ltd. v. M/s ACCIL Hospitality Ltd., [2020] ibclaw.in 210 NCLAT

[51] State Bank of India v. Sungrowth Share & Stocks Limited, (2019) ibclaw.in 54 NCLT

[52] The Indian Contract Act, 1872, § 146, No. 9, Acts of Imperial Legislative Council (1872) (Ind.).

[53] The Indian Contract Act, 1872, § 43, No. 9, Acts of Imperial Legislative Council (1872) (Ind.).

[54] The Indian Contract Act, 1872, § 138, No. 9, Acts of Imperial Legislative Council (1872) (Ind.).

[55] Maitreya Doshi v. Anand Rathi Global Finance Ltd., (2021) ibclaw.in 403 NCLAT

[56] Lalit Kumar Jain v. Union of India & Ors., (2021) ibclaw.in 61 SC

[57] State Bank of Travancore v. Vasantha Kumari & Ors., 2013 (1) KLT 649.

[58] Laxmi Pat Surana v. Union of India & Anr., (2021) ibclaw.in 53 SC.

[59] The Insolvency and Bankruptcy Code, 2016, § 3(7), No. 31, Acts of Parliament (2016) (Ind.).

[60] The Indian Contract Act, 1872, § 128, No. 9, Acts of Imperial Legislative Council (1872) (Ind.).

[61] The Insolvency and Bankruptcy Code, 2016, § 5(8), No. 31, Acts of Parliament (2016) (Ind.).

[62] The Insolvency and Bankruptcy Code, 2016, § 3(6), No. 31, Acts of Parliament (2016) (Ind.).

[63] Anuj Jain, IRP for Jaypee Infratech Limited v. Axis Bank Limited Etc., (2019) ibclaw.in 62 SC

[64] Committee of Creditors of Essar Steel India Ltd. (through authorized signatory) v. Satish Kumar Gupta & Ors., (2019) ibclaw.in 57 SC

[65] Ascot Realty Private Limited v. Ajay Kumar Agarwal, IRP of RDH Technologies Private Limited, (2020) ibclaw.in 300 NCLAT

[66] 9M Corporation v. Mr. Naresh Verma RP Bohra Pratisthan Pvt. Ltd., (2021) ibclaw.in 317 NCLAT

[67] The Indian Contract Act, 1872, § 140, No. 9, Acts of Imperial Legislative Council (1872) (Ind.).

[68] The Indian Contract Act, 1872, § 145, No. 9, Acts of Imperial Legislative Council (1872) (Ind.).

[69] Amrit Lal Goverdhan Lalan v. State Bank of Travancore, 1968 AIR 1432.

[70] The Insolvency and Bankruptcy Code, 2016 § 32A, No. 31, Acts of Parliament (2016) (Ind.).

[71] Supra n. 64.

[72] Supra n. 42.

[73] Supra n. 51.

[74] Lalit Mishra and Ors. v. Sharon Bio Medicine Ltd. & Ors., [2018] ibclaw.in 47 NCLAT

[75] IDBI Bank Ltd. v. EPC Constructions India Limited, M.A. 354/2019 in C.P. No. 1832/IBC/NCLT/MB/MAH/2017.

[76] The Indian Contract Act, 1872, § 129, No. 9, Acts of Imperial Legislative Council (1872) (Ind.).

[77] The Indian Contract Act, 1872, § 130, No. 9, Acts of Imperial Legislative Council (1872) (Ind.).

[78] Srinivasa Reddy Velagala, Director, KPR Chemicals Limited v. Sravanthi Infratech Pvt. Ltd., (2021) ibclaw.in 43 NCLAT

[79] Export Import Bank of India v. CHL Limited, [2019] ibclaw.in 27 NCLAT

[80] C.P. Sreelal v. District Collector & Ors., AIR 2007 Ker 131.

[81] Margaret Lalita Samuel v. Indo Commercial Bank Ltd., Civil Appeal No. 2133 of 1968.

[82] The Limitation Act, 1908, art. 115, No. 36, Acts of Parliament (1963).

[83] Subhash Chand & Anr. v. State Bank of Patiala & Anr., RSA No. 56 of 2006 (Delhi High Court).

[84] State Bank of India v. Dr. Anand R. Ahuja, F A No. 119 of 1993 (Chattisgarh High Court).

[85] R. Lilavati v. Bank of Baroda, AIR 1987 Kant. 2.

[86] Mr Piyush Periwal v. Stressed Assets Stabalization Fund (SASF), (2019) ibclaw.in 434 NCLAT

[87] Edelweiss Asset Reconstruction Company Limited v. Orissa Manganese and Minerals Limited & Ors., (2019) ibclaw.in 308 NCLAT

[88] Export Import Bank of India v. RP JEKPL Private Limited, [2018] ibclaw.in 52 NCLAT

[89] The Insolvency and Bankruptcy Code, 2016, § 25, No. 31, Acts of Parliament (2016) (Ind.).

[90] The Insolvency and Bankruptcy Code, 2016, § 5(22), No. 31, Acts of Parliament (2016) (Ind.).

[91] The Insolvency and Bankruptcy (Application to Adjudicating Authority for Bankruptcy Process for Personal Guarantors to Corporate Debtors) Rules, 2019.

[92] Supra n. 56.

[93] The Insolvency and Bankruptcy Code, 2016, § 1(3), No. 31, Acts of Parliament (2016) (Ind.).

[94] India Const., 1950 art. 14.

[95] The Insolvency and Bankruptcy Code, 2016, § 101, No. 31, Acts of Parliament (2016) (Ind.).

[96] The Insolvency and Bankruptcy Code, 2016, § 2(e), No. 31, Acts of Parliament (2016) (Ind.).

[97] The Insolvency and Bankruptcy Code, 2016, § 60(2), No. 31, Acts of Parliament (2016) (Ind.).

[98] The Insolvency and Bankruptcy Code, 2016, § 2(e), No. 31, Acts of Parliament (2016) (Ind.).

[99] The Insolvency and Bankruptcy Code, 2016, § 60, No. 31, Acts of Parliament (2016) (Ind.).

[100] Supra n. 13.

[101] Supra n. 42.

[102] The Insolvency and Bankruptcy Code, 2016, § 179, No. 31, Acts of Parliament (2016) (Ind.).

[103] The Insolvency and Bankruptcy Code, 2016, § 243, No. 31, Acts of Parliament (2016) (Ind.).

[104] The Insolvency and Bankruptcy Code, 2016, § 238, No. 31, Acts of Parliament (2016) (Ind.).

[105] Supra n. 42.

[106] Insta Capital Private Limited v. Ketan Vinod Kumar Shah, (2021) ibclaw.in 462 NCLT

[107] Punjab National Bank v. Carnation Auto India Pvt. Ltd. & Anr., (2019) ibclaw.in 320 NCLAT

[108] The Insolvency and Bankruptcy Code, 2016, § 95, No. 31, Acts of Parliament (2016) (Ind.).

[109] Bank of Baroda v. M/s Blufern Ventures Pvt. Ltd., C.P. (IB) No. 05.GB/2018.

[110] Intec Capital Ltd. v. M/s Eastern Embroidery Collections Private Limited, (2021) ibclaw.in 410 NCLT

[111] The Insolvency and Bankruptcy Code, 2016, § 95(1), No. 31, Acts of Parliament (2016) (Ind.).

[112] The Insolvency and Bankruptcy Code, 2016, § 95(4), No. 31, Acts of Parliament (2016) (Ind.).

[113] The Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019, Rule 7.

[114] State Bank of India v. Ms. Jaya Singh, (2021) ibclaw.in 465 NCLT

[115] Ravi Ajit Kulkarni v. State Bank of India, (2021) ibclaw.in 396 NCLAT

[116] The Insolvency and Bankruptcy Code, 2016, § 95(5), No. 31, Acts of Parliament (2016) (Ind.).

[117] The Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019, Rule 3(1)(g).

[118] The Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019, Rule 7(2).

[119] Vinod Sehwag v. Siemens Financial Services Pvt. Ltd., (2021) ibclaw.in 419 NCLAT

[120] The Insolvency and Bankruptcy Code, 2016, § 99, No. 31, Acts of Parliament (2016) (Ind.).

[121] Surendra B. Jiwrajka v. Omkara Assets Reconstruction Pvt. Ltd., (2021) ibclaw.in 26 HC

[122] PNB Housing Finance Ltd. v. Mr. Mohit Arora, (2021) ibclaw.in 701 NCLT

[123] Altico Capital India Ltd. v. Rajesh Patel & Ors[123], I.A. No. 1062/2021 in C.P. No. 293/2020.

[124] KEB Hana Bank v. Mr. Rohit Nath, (2020) ibclaw.in 01 DRT

[125] Ferro Alloys Corporation Limited v. Rural Electrification Corporation Limited, [2019] ibclaw.in 17 NCLAT

[126] Bank of Bihar Limited v. Dr. Damodar Prasad & Anr., [2017] ibclaw.in 21 SC

[127] The Insolvency and Bankruptcy Code, 2016, § 14(3)(b), No. 31, Acts of Parliament (2016) (Ind.).

[128] The Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, No. 26, Acts of Parliament (2018) (Ind.).

[129] The Insolvency and Bankruptcy Code, 2016, § 14(1), No. 31, Acts of Parliament (2016) (Ind.).

[130] The Insolvency and Bankruptcy Code, 2016, § 31, No. 31, Acts of Parliament (2016) (Ind.).

[131] The Insolvency and Bankruptcy Code, 2016, § 101, No. 31, Acts of Parliament (2016) (Ind.).

[132] Gouri Prasad Goenka v. State Bank of India, (2021) ibclaw.in 13 HC

[133] The Insolvency and Bankruptcy Code, 2016, § 36, No. 31, Acts of Parliament (2016) (Ind.).

[134] Punjab National Bank v. Vindhya Vasini Industries Ltd., (2018) ibclaw.in 47 NCLT

[135] Nitin Chandra Naik v. Sanidhya Industries LLP, (2021) ibclaw.in 404 NCLAT