2023 (8) TMI 1636 - AT - IBC

Parallel Insolvency Proceedings Validated: Section 7 IBC Allows Simultaneous Action Against Borrower and Guarantor

Mohan Kumar Garg Versus Omkara Assets Reconstruction Pvt. Ltd. & Anr.

The SC upheld simultaneous insolvency proceedings under Section 7 of IBC against both Principal Borrower and Corporate Guarantor. The Tribunal found no ... Admission of application u/s 7 filed by the Financial Creditor against the Appellant who was Corporate Guarantor - simultaneous initiation of proceedings u/s 7 of IBC against both the Principal Borrower and the Corporate Guarantor - HELD THAT:- The Adjudicating Authority has noted that the Notice was issued on 14.03.2018 by the Financial Creditor to Principal Borrower as well as the Corporate Guarantor that the Principal Borrower has defaulted in payment towards the outstanding amount - Appellant cannot be allowed to raise the issue of non-filing of the Corporate Guarantee on the record when the existence of Corporate Guarantee was not even disputed in the proceeding. Conclusion - The law is well settled that proceeding under Section 7 can be initiated against both the Principal Borrower and Corporate Guarantor and there is no inhibition in proceeding against the Corporate Guarantor although proceeding against Principal Borrower under Section 7 was admitted. There is no merit in the Appeal - Appeal is dismissed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal were:Whether proceedings under Section 7 of the Insolvency and Bankruptcy Code (IBC) can be initiated simultaneously against both the Principal Borrower and the Corporate Guarantor.Whether the Adjudicating Authority erred in admitting the Section 7 application against the Corporate Guarantor when proceedings against the Principal Borrower had already been admitted.Whether the absence of the Corporate Guarantee document on record and lack of examination thereof by the Adjudicating Authority vitiates the admission of the Section 7 application against the Corporate Guarantor.Whether the Corporate Guarantor's reply disputing the Financial Creditor's due diligence in loan disbursement affects the existence or enforceability of the Corporate Guarantee.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Admissibility of simultaneous proceedings under Section 7 against Principal Borrower and Corporate GuarantorRelevant legal framework and precedents: Section 7 of the IBC empowers a Financial Creditor to file an application for initiating Corporate Insolvency Resolution Process (CIRP) against a Corporate Debtor in case of default. The question whether simultaneous proceedings can be initiated against both Principal Borrower and Corporate Guarantor has been subject to judicial scrutiny. The Tribunal referred to its own precedents, including the judgment in the 'Athena Energy' case, which supports simultaneous proceedings, and the contrary view taken in 'Vishnu Kumar Agarwal's Case' by a Coordinate Bench which disallowed such simultaneous proceedings.Court's interpretation and reasoning: The Tribunal, after considering the conflicting precedents, aligned itself with the view that there is no legal inhibition against initiating proceedings under Section 7 against both the Principal Borrower and the Corporate Guarantor simultaneously. The Tribunal relied on subsequent judgments including 'Edelweiss Asset Reconstruction Co. Ltd. vs. Gwalior Bypass Projects Ltd.', 'State Bank of India vs. Mr. Animesh Mukhopadhyay', and 'Kanwar Raj Bhagat vs. Gujarat Hydrocarbons and Power SEZ Ltd.' which have consistently upheld the permissibility of simultaneous proceedings.Key evidence and findings: The Tribunal noted that the Financial Creditor had issued notices under Section 13(2) of the SARFAESI Act to both the Principal Borrower and the Corporate Guarantor, and that default was established against both parties. The Corporate Guarantor had also responded to the notice, albeit disputing the due diligence of the Financial Creditor but not the existence of the guarantee.Application of law to facts: Since the Corporate Guarantor had not disputed the existence of the Corporate Guarantee, and the default was acknowledged, the Tribunal found no ground to preclude simultaneous proceedings against the Corporate Guarantor. The legal framework under IBC does not bar such parallel proceedings.Treatment of competing arguments: The Appellant argued that simultaneous proceedings were impermissible and relied on the 'Vishnu Kumar Agarwal' judgment. The Tribunal distinguished this precedent in light of later authoritative decisions favoring simultaneous proceedings. The Respondent's reliance on more recent and consistent judgments was accepted.Conclusion: The Tribunal concluded that simultaneous proceedings under Section 7 against both Principal Borrower and Corporate Guarantor are permissible and that the Adjudicating Authority did not err in admitting the application against the Corporate Guarantor.Issue 2: Non-filing and non-examination of Corporate Guarantee documentRelevant legal framework and precedents: The existence of a Corporate Guarantee is a factual and documentary matter relevant to the Financial Creditor's entitlement to initiate proceedings against the Guarantor. Generally, the guarantee document is placed on record to establish the liability of the Guarantor.Court's interpretation and reasoning: The Tribunal observed that the Corporate Guarantor had never disputed the existence of the Corporate Guarantee throughout the proceedings. The Tribunal held that since the Corporate Guarantee was never challenged, the necessity to place the document on record or examine it did not arise.Key evidence and findings: The Tribunal noted the reply dated 17.03.2018 from the Corporate Guarantor, which contested the Financial Creditor's due diligence but did not deny the guarantee's existence.Application of law to facts: The Tribunal reasoned that the Appellant could not raise the issue of absence of the Corporate Guarantee on record at this stage, as the existence of the guarantee was not disputed and was implicitly admitted by the conduct of the parties.Treatment of competing arguments: The Appellant contended that the absence of the guarantee document vitiated the proceedings. The Tribunal rejected this contention on the ground that the Corporate Guarantor's own conduct negated any dispute over the guarantee's existence.Conclusion: The Tribunal held that the absence of the Corporate Guarantee document on record did not constitute an error, and the Adjudicating Authority was justified in admitting the Section 7 application against the Corporate Guarantor.Issue 3: Effect of Corporate Guarantor's reply disputing Financial Creditor's due diligenceRelevant legal framework and precedents: A Corporate Guarantor may raise defenses against the claim, including allegations of irregularities or lack of due diligence by the Financial Creditor. However, such defenses do not negate the existence or enforceability of the guarantee unless specifically pleaded and proved.Court's interpretation and reasoning: The Tribunal noted that the Corporate Guarantor's reply contested the Financial Creditor's due diligence but did not amount to a denial of the guarantee or the default. The Tribunal held that such a contention does not bar admission of the Section 7 application.Key evidence and findings: The reply dated 17.03.2018 was considered and found insufficient to dispute the guarantee or the default.Application of law to facts: The Tribunal applied the principle that procedural or substantive defenses must be adjudicated during the resolution process and do not preclude admission of the application.Treatment of competing arguments: The Appellant's argument that due diligence issues should prevent admission was rejected as premature and not a ground to dismiss the application at the admission stage.Conclusion: The Tribunal held that the Corporate Guarant