Creditor's rights against CD & Corporate Guarantor under IBC

Query - The bank wants to file reference to NCLT U/s 7  against the borrower and the corporate guarantor both. Can it do so as per the IBC or NCLT / NCLAT / SC judgements ?

Let’s look to provisions of the code. As per sub - section (2) & (3) of section 60 of the code, application U/s -7 can be filed against both the CD & the corporate guarantor.

Section 60 of the code

# Section 60. Adjudicating Authority for corporate persons. -

(1) The Adjudicating Authority, in relation to insolvency resolution and liquidation for corporate persons including corporate debtors and personal guarantors thereof shall be the National Company Law Tribunal having territorial jurisdiction over the place where the registered office of a corporate person is located.

(2) Without prejudice to sub-section (1) and notwithstanding anything to the contrary contained in this Code, where a corporate insolvency resolution process or liquidation proceeding of a corporate debtor is pending before a National Company Law Tribunal, an application relating to the insolvency resolution or 1[liquidation or bankruptcy of a corporate guarantor or personal guarantor, as the case may be, of such corporate debtor] shall be filed before the National Company Law Tribunal.

(3) An insolvency resolution process or 2[liquidation or bankruptcy proceeding of a corporate guarantor or personal guarantor, as the case may be, of the corporate debtor] pending in any court or tribunal shall stand transferred to the Adjudicating Authority dealing with insolvency resolution process or liquidation proceeding of such corporate debtor.

However NCLAT in it’s order dated 08.01.2019 in Dr. Vishnu Kumar Agarwal  Vs M/s. Piramal Enterprises Ltd restricted this remedy to either one of the CD or it’s corporate guarantor.  The concerned ruling of NCLAT is given below.

NCLAT order dated 08.01.2019 in Dr. Vishnu Kumar Agarwal  Vs M/s. Piramal Enterprises Ltd.

#32. There is no bar in the ‘I&B Code’ for filing simultaneously two applications under Section 7 against the ‘Principal Borrower’ as well as the ‘Corporate Guarantor(s)’ or against both the ‘Guarantors’. However, once for same set of claim application under Section 7 filed by the ‘Financial Creditor’ is admitted against one of the ‘Corporate Debtor’ (‘Principal Borrower’ or ‘Corporate Guarantor(s)’), second application by the same ‘Financial Creditor’ for same set of claim and default cannot be admitted against the other ‘Corporate Debtor’ (the ‘Corporate Guarantor(s)’ or the Principal Borrower’). Further, though there is a provision to file joint application under Section 7 by the ‘Financial Creditors’, no application can be filed by the ‘Financial Creditor’ against two or more ‘Corporate Debtors’ on the ground of joint liability (‘Principal Borrower’ and one ‘Corporate Guarantor’, or ‘Principal Borrower’ or two ‘Corporate Guarantors’ or one ‘Corporate Guarantor’ and other ‘Corporate Guarantor’), till it is shown that the ‘Corporate Debtors’ combinedly are joint venture company.

In addition  to the above restriction , NCLAT  further ruled, in it’s order dated 04.07.2019 in Standard Chartered Bank Vs. Satish Kumar Gupta, R.P. of Essar Steel Ltd. & Ors, that  ‘Financial Creditors’ in whose favour guarantee were executed as their total claim stands satisfied to the extent of the guarantee, they cannot reagitate such claim from the Principal Borrower.

NCLAT order dated 04.07.2019 in Standard Chartered Bank Vs. Satish Kumar Gupta, R.P. of Essar Steel Ltd. & Ors.

# 221……………..The ‘Financial Creditors’ and the ‘Operational Creditors’ whose claims have been decided by the Adjudicating Authority or this Appellate Tribunal, such decision being final

and is binding on all such ‘Financial Creditors’ and the ‘Operational Creditors’ in terms of Section 31 of the ‘I&B Code’. Their total claims stand satisfied and, therefore, they cannot avail any remedy under Section 60(6) of the ‘I&B Code’. The ‘Financial Creditors’ in whose favour guarantee were executed as their total claim stands satisfied to the extent of the guarantee, they cannot reagitate such claim from the Principal Borrower.

Thus by the above two rulings NCLAT has left the sub-section (2) & (3) of section 60 of the Code redundant & meaningless. Now the question arises, whether the NCLT / NCLAT, who draw their existence from  the provision of the Code, can pass orders or rulings beyond the provision of the code.

Here observations of  Shardul S Shroff - Executive Chairman, Shardul Amarchand Mangaldas & Co. and Member of the Standing Committee of the Insolvency Law Committee (ILC) in his article are quite relevant in the present context also.

How do the rules of insolvency operate? Were rules of insolvency disrupted by judicial intervention by NCLAT in Essar case?  

# [7] The Adjudicating Authority / Appellate Authority are tribunals created and empowered pursuant to the IBC or Companies Act, 2013.  As creatures of the statutes, they cannot arrogate to themselves the power of a civil court or constitution court.