Co-borrower liability under insolvency law upheld where financial debt, default, and separate proceeding against the original borrower were proved.
A co-borrower corporate debtor can be proceeded against under the Insolvency and Bankruptcy Code when documents show assumption of liability, financial debt, and continuing default. On the record, the loan addendum and settlement materials established the corporate debtor's liability, the recall of the facility, and outstanding dues, so the Section 7 application was treated as maintainable and not time-barred. The existence of an earlier insolvency proceeding against the original borrower did not bar a separate proceeding against the co-borrower, because the liabilities were treated as coextensive for the same debt. CIRP was admitted and the arbitration reference was rejected as infructuous.
Issues: (i) Whether the application under Section 7 of the Insolvency and Bankruptcy Code, 2016 was maintainable and within limitation; (ii) whether the proceeding was barred as a multiple proceeding for the same debt; (iii) whether a creditor-debtor relationship existed between the financial creditor and the corporate debtor.
Issue (i): Whether the application under Section 7 of the Insolvency and Bankruptcy Code, 2016 was maintainable and within limitation.
Analysis: Section 7 enables a financial creditor to initiate CIRP on proof of financial debt and default. The corporate debtor had been added as a co-borrower by the addendum and had assumed the rights, interests and liabilities of the original borrower. The record also showed continuing defaults, recall of the loan in 2019, and an acknowledged settlement reducing the admitted dues. In that backdrop, the objection that the application was not maintainable or was barred by limitation was rejected.
Conclusion: The application was held maintainable and not barred by limitation, in favour of the appellant.
Issue (ii): Whether the proceeding was barred as a multiple proceeding for the same debt.
Analysis: The earlier insolvency proceeding was against the original borrower, whereas the present application was against the co-borrower corporate debtor. The existence of another proceeding concerning the original borrower did not bar initiation against the co-borrower, since liability of the co-borrower was treated as coextensive for the debt owed.
Conclusion: The proceeding was not barred as a multiple proceeding for the same debt, in favour of the appellant.
Issue (iii): Whether a creditor-debtor relationship existed between the financial creditor and the corporate debtor.
Analysis: The documents established disbursement of financial facilities and the corporate debtor's assumption of liability as co-borrower. The admissions in the correspondence and settlement deed, together with the outstanding account figures, were treated as sufficient proof of financial debt and default.
Conclusion: A creditor-debtor relationship was held to exist, and default was established, in favour of the appellant.
Final Conclusion: The application under Section 7 was admitted, CIRP was initiated against the corporate debtor, and the requested arbitration reference stood rejected as infructuous.
Ratio Decidendi: A corporate person that assumes co-borrower liability under a financing arrangement can be proceeded against under Section 7 of the Insolvency and Bankruptcy Code, 2016 once financial debt and continuing default are established, and such liability is not avoided merely because proceedings against the principal borrower are pending or have been initiated separately.
TaxTMI 
AI Drafter ✕
TaxTMI 
