Corporate guarantor's liability coextensive with principal borrower, simultaneous CIRP proceedings under Section 7 permitted

NCLAT Chennai dismissed an appeal challenging admission of Section 7 application against a corporate guarantor. The financial creditor had filed CIRP proceedings against both the principal borrower and corporate guarantor for the same debt. The tribunal held that liability of corporate guarantor is coextensive with principal borrower, and the guarantor committed default by failing to discharge obligations under the guarantee deed dated 05.07.2016. The tribunal ruled that IBC 2016 permits simultaneous proceedings against both principal borrower and guarantor by the same financial creditor, upholding the adjudicating authority's admission order.

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Issues Involved:
1. Legal Infirmity in the Impugned Order
2. Initiation of Corporate Insolvency Resolution Process (CIRP) against Corporate Guarantor
3. Liability of Corporate Debtor as Guarantor
4. Discretionary Power of Adjudicating Authority
5. Simultaneous Proceedings against Principal Borrower and Guarantor

Summary:

1. Legal Infirmity in the Impugned Order:
The Appellant, a suspended director of the Corporate Debtor, challenged the order dated 15.06.2023, passed by the National Company Law Tribunal (NCLT), Chennai, admitting the Section 7 application filed by the Financial Creditor (State Bank of India) and appointing an Interim Resolution Professional. The Appellant contended that the order suffers from "Legal Infirmity" and overlooked the judgment in Dr. Vishnu Kumar Agarwal v. M/s. Piramal Enterprises Ltd., which held that a second application under Section 7 for the same claim cannot be admitted against another Corporate Debtor.

2. Initiation of Corporate Insolvency Resolution Process (CIRP) against Corporate Guarantor:
The Appellant argued that CIRP cannot be initiated against a Corporate Guarantor if CIRP has already been initiated against the Principal Borrower by the same Financial Creditor for the same claim. The Appellant also claimed that the amount in default is incorrect and that the Corporate Debtor has not committed any default on its own.

3. Liability of Corporate Debtor as Guarantor:
The Appellant pointed out that the Corporate Debtor's liability was limited to the value of lands provided as security, as per the Deed of Guarantee dated 05.07.2016. The Financial Creditor argued that the liability of the Guarantor is co-extensive with that of the Principal Borrower, and CIRP can be initiated simultaneously against both. The Financial Creditor cited multiple judgments, including Laxmi Pat Surana v. Union of India, to support this claim.

4. Discretionary Power of Adjudicating Authority:
The Appellant cited the Supreme Court judgment in Vidarbha Industries Power Limited v. Axis Bank Limited, emphasizing that the IBC is not meant to penalize solvent companies capable of repaying their debts. The Appellant argued that the Adjudicating Authority has discretionary power to admit or reject a Section 7 application based on the facts and circumstances of the case.

5. Simultaneous Proceedings against Principal Borrower and Guarantor:
The Financial Creditor and the Resolution Professional contended that there is no prohibition under the IBC to initiate simultaneous CIRP proceedings against both the Principal Borrower and the Corporate Guarantor. They cited judgments, including the one in Dr. Vishnu Kumar Agarwal v. Piramal Enterprises Ltd., which allowed for such simultaneous proceedings.

Conclusion:
The Tribunal concluded that the liability of the Corporate Debtor as a Guarantor is co-extensive with that of the Principal Borrower. It found no legal infirmities in the NCLT's order admitting the Section 7 application against the Corporate Debtor. The appeal was dismissed, and the NCLT's order was affirmed.

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