Till recent the National Company Law Tribunal (The Adjudicating Authority) were admitting the petitions filed under Insolvency and Bankruptcy Code, 2016, when the default of debt was proved by the creditor, filing such petition. The aggrieved one’s approaches the Appellate Tribunal and then the Apex Court. The Insolvency Code came into force w.e.f. December 2016, but the question still remains unanswered as to who is the corporate debtor, the principal borrower, the guarantor to the principal borrower or both.

Initially, when the Insolvency Proceedings were initiated against the principal borrower on admission of such a case, moratorium is declared as mandated under Section 13 & 14 of the Insolvency and Bankruptcy Code, 2016 (IBC,2016) and the guarantors also took advantage of the same. The principal borrower (who is actually having the benefit of the moratorium) and the guarantors (who were misusing the benefit of the moratorium) again stalled the action even under the new Insolvency Code.

Interestingly, the said misuse of moratorium was also noticed by the Insolvency Law Committee and in the report dated 26.03.2018, the Committee had very categorically stated that all assets of the guarantors of the Principal Borrower shall be outside the scope of moratorium imposed under the Code. It was also noted by the committee that the remedy against both the surety and the corporate debtor without the obligation to exhaust the remedy against one of the parties is also of utmost importance to the creditor. In the said report, it was noted that Section 14 does not in any way intend to bar action against the Guarantors and the moratorium is only applicable to the Corporate Debtor. To bring clarity an amendment was also brought and Sub- Section 3 was inserted in Section 14, which clarified the said issue.

That the said issue also travelled upto the Apex Court in State Bank of India versus V. Ramakrishnan & Anr and the Apex Court held that the report of the Insolvency Law Committee and the amendment brought made it clear the interpretation of Section 14.

That by way of the said report, amendment and the ruling by the Apex Court, it was now clear that a creditor is at liberty to recover the amounts as due and payable from the Corporate Debtor and also from the Surety (Guarantor), which primarily meant that both are jointly and severally liable till the dues are not cleared. Now a creditor can file an application under the Code before the NCLT and can also pursue its action against the Principal Borrower and its Guarantors. Obviously, it was understood by then that any amount recovered from any action would be then reduced from the total amount, which is due and payable by the Principal Borrower to the Creditor initiated such an action.

However, peculiar situations were also faced by the Creditors, wherein the Principal Borrower virtually had nothing to pay off the debt which were due and payable and the Guarantors’ were the main entity, who were enjoying the status and loans availed by the Principal Borrowers. The Creditors to get their monies which were due and payable, instead of taking action against the Principal Borrower under the Code, started initiating action against the Guarantors’. The Courts/Tribunals also approved the same and had consented to the action taken by the Creditors against the Guarantors instead of the Principal Borrower, it seems the reason maybe the courts were also of the same view that the Principal Borrower were just a puppet and the main players are the Guarantors’, who were mainly enjoying the play.

In one of the instances, an application under the Code was filed against the Guarantor, as the Principal Borrower defaulted in repaying the loan amount on which it defaulted. The admission order passed in the said application was then challenged before the Appellate Tribunal. The issues raised were that the Code does not use the concept or the phrase “Corporate Guarantor” so there cannot be any action under the Code against the Guarantor; it was also urged that no insolvency proceedings could be initiated against the Guarantor without exhausting against the Principal Debtor.

It’s being seen that as per the term of most of the Guarantees, the obligation of the guarantor is joint and several and co – extensive with that of the Principal Debtor and therefore any action can be taken against either of the parties. The Apex Court in one of the cases has also held that the object of the guarantee would be defeated if the creditor is asked to postpone the remedies against the Guarantor/ Surety.

The Appellate Tribunal while hearing the said issue held, that a ‘Corporate Debtor’ must be a ‘Corporate Person’, who owes a debt (which is a liability and/or the obligation) to any person. It was also noted that a guarantee becomes a debt as soon the same is invoked and then the guarantor becomes a corporate debtor in terms of the Code and therefore under the Code there, is no bar from initiating “Corporate Insolvency Resolution Process” against the guarantor who becomes a Corporate Debtor. While upholding the admission order passed by NCLT, it was held by the Appellate Tribunal that it is at the option of the creditor to initiate action against the Guarantor without initiating the same against the Principal Borrower.

It was now clear that the Creditors were at liberty to take action against the Principal Borrower and the Guarantor, for recovery of the dues. The Code till now was successful as it gave options to the Creditors to take appropriate steps against the defaulters. By the above judgment, it was also clear that the courts were also aware, the difficulties faced by the Creditors against the defaulting borrowers, their guarantors and therefore till now it was clear that any actions can be taken against the defaulters so there is no escape route.

However, on one hand when the Appellate Tribunal has held that action can be taken against the Guarantors without exhausting the remedies against the Principal Borrower and actions can be taken, on the other hand the Appellate Tribunal in one of the cases held at a time only one Insolvency Proceeding can be initiated against Corporate Guarantor6.

The Appellate Tribunal while deciding, held that although there is no bar in filing simultaneously petitions against the Principal Borrower, Guarantors and/or the Corporate Guarantors but if one petition is admitted another petition cannot be entertained.

Let us now, take a situation, wherein the Defaulters by using the said judgment may try to derail the whole process, if a petition is admitted against a dummy company, which virtually have nothing with it.

A situation, which needs to be assessed, is when a company being a principal borrower had nothing with it and only the corporate guarantor is the one giving all the securities to secure the loan. Subsequently, there is a default and the Corporate Guarantor, who has given the securities, may then try that a petition against the main Principal Borrower should be admitted so that there is no action, which can be taken against it.

When on one hand the Courts are allowing that different actions can be taken against the defaulters viz. Principal Borrower/Guarantor/Both, then why cannot the Code be used against them. Even if different applications under the Code is admitted against the defaulters (Principal Borrower/Guarantor) for the same amount, which was borrowed by the Principal Borrower on the securities mortgaged by the Guarantor. The amount recovered by the Creditor, will be adjusted towards the defaulted amount for which actions were initiated and there cannot be any thought by any imagination that the creditor would be able to recover twice both from the Principal Borrower/Guarantor.

The situation will worsen if the creditor is not allowed to take action against both Principal Borrower/Guarantor, as the defaulters will then try to derail the whole process under the code which is initiated by the Creditor, by trying to get the petition against the main principal borrower admitted, who virtually have nothing with them to pay off the debts.

To conclude, one may go back to the object of the IBC, which is rooted in resolution and not merely recovery. For this reason, as long as there is proof of default for non-payment of debt, a CIRP is admissible on minimum default of Rs. 1 Lakh as mandated under IBC, against one, or even more than one guarantors. To stick by the plain mandate of the IBC, there should be no bar to the simultaneous admission of insolvency proceedings against multiple guarantors. By setting aside insolvency proceedings in respect of some guarantors, one goes against the objective of maximum and speedy recovery.

The Hon’ble Supreme Court, in its recent judgment of Swiss Ribbons Pvt. Ltd. & Anr. Vs. Union of India7, while upholding the constitutional validity of various provisions of the IBC, has prominently highlighted figures that depict the magnificent rate of recovery achieved by the IBC since its coming into force in December, 2016. Amounts up to Rs. 1,20,390 Crores have been realized even before initiation of CIRP, by way of settlements alone. Further, the amounts realized from the resolution process comprise over 202% of the liquidation value of Corporate Debtors. The judgment draws attention to the substantial amount of credit that has been freed up, increasing the total flow of resources to both bank and non-bank, domestic and foreign sectors.

In this light, it is worth stressing the point of this article, that the ultimate goal of the IBC is to facilitate resolution, even if the amounts that are to be recovered from the guarantors are the same. Instead of setting aside insolvency proceedings against any one or more of the guarantors, the IBC must allow simultaneous resolution of such multiple guarantors. Here, it may be prudent to clarify that where, as an outcome of the CIRP, there is resolution / liquidation of one of the guarantors, then whatever payments are received by the creditor should not be considered as a ‘full and final settlement’ of amounts. The said amounts can be set off from the amounts that are claimed from the CIRP of the other guarantor, and hence, in this manner, the dues of the Creditors can be realized, without double recovery, while at the same time, allowing for resolution of all defaulting guarantors, in line with the objects and purposes of the IBC.

At the end, it can be said that as rightly said by the Hon’ble Apex Court “The defaulter’s paradise is lost. In its place, the economy’s rightful position has been regained.”