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ARK ARTICLE: ANALYSIS OF THE RIGHTS OF THE GUARANTOR VIS-À-VIS THE INSOLVENCY AND BANKRUPTCY CODE


ARTICLE- ANALYSIS OF THE RIGHTS OF THE G
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ARTICLE: Analysis of the rights of the Guarantor vis-à-vis the Insolvency and Bankruptcy Code


INTRODUCTION


The existence of a guarantor or a contract of guarantee is a common phenomenon in the commercial world. A guarantor was first defined under the Indian Contract Act, 1872[1] and the proceedings under the Insolvency and Bankruptcy Code, 2016[2] (IBC) were later extended to them. The Contract Act does not use the term guarantor but rather prefers the term “surety”.


A synergistic reading of the provisions of the Contract Act under Section 126, 127 and 128 would elicit that the privity of contract, which was earlier limited to two parties, is now extended to a third party. The contractual relationship now goes beyond the creditor and the debtor to include the guarantor. The guarantor ensures the discharge of contractual obligations of the debtor against the creditor through a contract of guarantee; thus, a guarantee is given on behalf of the debtor and to the creditor in oral or written form. The surety’s liability is co-extensive to that of the debtor’s unless there is a contract to the contrary.


Under Section 5(22) of the Insolvency and Bankruptcy Code, a personal guarantor is defined as the surety to a corporate debtor bound by a contract of guarantee.


For instance, Naresh Goyal, the founder of Jet Airways, had given a personal guarantee for some of the loans when the company owed lenders more than Rs. 11,000 Crore.[3]


The purpose of IBC is not that of a recovery suit but rather aims to promote the spirit of entrepreneurship in the country by maximizing the assets of the debtor whilst balancing the interests of the creditor[4]. The provisions of the IBC, nevertheless, also provide an easier and quicker time bound process for the recovery of debts by the creditors by initiation of insolvency proceedings against the debtor as well as the guarantor. The rights and liabilities of the guarantors under the IBC are quite nebulous. Thus, the determination of the rights of the guarantor would require articulation of the provisions of the IBC with a plethora of judicial pronouncements and interpretation provided in the field.


GUARANTOR UNDER IBC - THEIR RIGHTS AND LIABILITIES


Whenever the guarantor pays the defaults of the principal debtor, under the Contract Act, he is subrogated to the position of the previous creditor. Thus, the guarantor now has the same right as the previous creditor against the debtor. In the case of Craythorne v. Swinburne [5], the Court of Chancery had expounded the position by clearly stating that the guarantor would be entitled to every remedy that the creditor had against the debtor including the debtor’s property. Under Section 7 of the IBC, the financial creditor can initiate Corporate Insolvency Resolution Process (CIRP) proceedings against the debtor when a default has occurred. The IBC provides the same right to the guarantor to initiate insolvency proceedings against the debtor in recovery of his debt. In Davinder Ahluwalia and Ors. v. Sumit Aviation [6], the National Company Law Tribunal (NCLT) held that guarantors can issue CIRP proceedings under Section 7 of the IBC against the principal debtor for recovery of the amount paid by the guarantor for default committed by the debtor.


Prior to the amendment of the IBC with respect to Sec. 60, insolvency and bankruptcy proceedings against the personal guarantors were with the Debt Recovery Tribunal, but with the amendment the jurisdiction of such proceedings now vest with the NCLT. In Axis Bank Ltd. v. Lotus Three Developments Ltd.[7], the National Company Law Appellate Tribunal held that the insolvency and bankruptcy proceedings can be filed against the debtor and the guarantor before the same adjudicating authority and in these cases the guarantor is to be afforded the same right of hearing when the application is filed against the guarantor and when CIRP proceedings are initiated against the debtor.


In Dr. Vishnu Kumar Agarwal v. Piramal Enterprises Ltd.[8], the National Company Law Appellate Tribunal held that though simultaneous proceedings are not prohibited under Sec. 7 of IBC, however if, for a set of claims an application is admitted against the debtor, a second application against the guarantor for the same set of claims cannot be admitted and this can go vice-versa. This position or right of being absolved from proceedings in case there is an earlier application with the same set of claims was again considered by the Supreme Court in Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta[9], where the Court gave the contrary opinion that simultaneous proceedings may be initiated against the debtor as well as the guarantor. However, the Piramal[10] case is pending under appeal before the Supreme Court. Thus, the position of whether the guarantor has the right to be excluded from proceedings, when the set of claims are the same, under Sec. 7 of the IBC when proceedings have already been initiated against the debtor is unresolved.


CONCLUSION


In conclusion, not all the rights of the guarantors under the IBC have been substantially elucidated yet and still requires much of judicial interpretation to conspicuously establish their rights as well as their liabilities.

Author: Arpit Maheshwari (Partner) & Sulagna Chatterjee

Date: 24.12.2020


[1] Section 126 of the Indian Contract Act, 1872, No. 9 of 1872, Acts of Parliament, 1872 (India) defines ‘Contract of Guarantee’, ‘Surety’, ‘Principle Debtor’ and ‘Creditor’.

[2] The Insolvency and Bankruptcy Code, 2016, No. 31 of 2016, Acts of Parliament, 2016 (India).

[3] Apoorva Mandhani, Why personal guarantors will now face problems if their companies can’t repay debt, THE PRINT (Dec. 5, 2019, 12:32 PM), https://theprint.in/theprint-essential/why-personal-guarantors-will-now-face-trouble-if-their-companies-cant-repay-debt/330473/.

[4] Lalit Mishra v. Sharon Bio Medicine Ltd., Company Appeal (AT) (Insolvency) No. 164 of 2018 (India).

[5] Craythorne v. Swinburne, [1807] EngR 343.

[6] Davinder Ahluwalia v. Sumit Aviation, (2017) IB No. (IB)-229 (ND)/2017 (India).

[7] Axis Bank Ltd. v. Lotus Three Developments Ltd., Company Appeal (AT) (Insolvency) No. 246 of 2018 (India).

[8] Dr. Vishnu Kumar Agarwal v. Piramal Enterprises Ltd., Company Appeal (AT) (Insolvency) No. 347 of 2018 (India).

[9] Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta, Civil Appeal No. 8766-67 of 2019 (India).

[10] Supra Note 8