Section 7 insolvency claim on same debt against corporate guarantor after borrower CIRP admitted-dismissal set aside, remanded

A dominant issue was whether a s.7 IBC application is maintainable against a corporate guarantor where CIRP against the principal borrower has already been admitted on the same debt. Relying on SC authority holding that a financial creditor may proceed under s.7 against a guarantor notwithstanding proceedings against the borrower, and rejecting reliance on contrary NCLAT precedent, the AT held that dismissal of the s.7 application as non-maintainable was legally erroneous; the impugned order was set aside, the s.7 applications were restored, and the matters were remanded for fresh adjudication in accordance with law.

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1. ISSUES PRESENTED AND CONSIDERED

(i) Whether an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 is maintainable when filed against the principal borrower and also against the corporate guarantor simultaneously on the same set of debt and default, and whether dismissal solely on the basis that only one such application can be maintained is legally sustainable.

(ii) Whether the Adjudicating Authority's order dismissing the Section 7 applications only by relying on the Tribunal's earlier view (that a second Section 7 application on the same debt cannot be admitted against the guarantor once filed/admitted against the principal borrower) was contrary to the binding position accepted and applied by the Court.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Maintainability of simultaneous Section 7 proceedings against principal borrower and corporate guarantor for the same debt

Legal framework (as discussed/applied by the Court): The Court proceeded on the basis that Section 7 permits initiation of CIRP upon "default", and applied the principle accepted in the decision relied upon by it that the guarantor's liability is coextensive with the principal borrower and that default by the principal borrower triggers a default by the guarantor for purposes of proceeding under the Code.

Interpretation and reasoning: The Court treated the question as already conclusively answered by the Supreme Court decision it relied upon, which recognized that the lender has a right/cause of action to proceed against the principal borrower as well as the guarantor "in equal measure" on a joint and several basis, and that the guarantor's obligation being coextensive makes it a case of default by the guarantor when the principal borrower does not pay. The Court further noted that this Tribunal had already followed that Supreme Court position in a later Tribunal decision and, in that later decision, expressly declined to follow the earlier Tribunal view which had been used to reject simultaneous proceedings.

Conclusion: The Court held that there is no bar to maintainability of Section 7 proceedings against the principal borrower and the corporate guarantor simultaneously on the same set of debt and default. Accordingly, rejection of the applications on the premise that such simultaneous proceedings are not maintainable was unsustainable.

Issue (ii): Legality of dismissal based solely on the earlier Tribunal view, despite binding/accepted position applied by the Court

Legal framework (as discussed/applied by the Court): The Court applied the binding effect of the Supreme Court's position on the question of proceeding against principal borrower and guarantor, and applied its own later Tribunal decision which had followed that position and declined to follow the earlier Tribunal view.

Interpretation and reasoning: The Court found that the Adjudicating Authority dismissed the applications only by relying upon the earlier Tribunal decision. The Court held that, since the Supreme Court's decision had already answered the maintainability question, and since the Tribunal had already followed that Supreme Court view (and declined to follow the earlier Tribunal view), the Adjudicating Authority's reliance on the earlier Tribunal decision rendered the dismissal legally erroneous. The Court therefore characterized the impugned dismissal as "patently illegal".

Conclusion: The impugned order dismissing the Section 7 applications was set aside. The original applications were restored and remanded to the Tribunal for fresh decision in accordance with law.

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