.

ISSUE [1.1] THE NOTIFICATION DATED 15.11.2019 EMPOWERS THE FINACIAL

CREDITOR TO INITIATE CONCURRENT CIRP AGAINST THE GURANTOR OF
THE CORPORATE DEBTOR

Central govt. issued notification empowered under sub section 3 of section 1 stating that the part
3 shall be applicable to the personal guarantor of the debtor before NCLT. ( Essar Judgement)
for debt that has not been settled under resolution plan.

In Edelweiss Asset Reconstruction Company Limited v Sachet Infrastructure Pvt. Ltd. & Ors.,32
the Appellate Authority has permitted simultaneous initiation of CIRP against the principal
borrower and its corporate guarantors. Essar Steel India Ltd. v. Satish Kumar Gupta suggests
that insolvency of the personal guarantor can occur simultaneously to that of corporate debtor
and also deviated from the principle under the contract act that guarantor are not entitled to
subrogation, if the plan resolution states so. court ruling in Maharashtra Electricity Board
Bombay v. Official Liquidator High Court, Ernakulum and Ors,- a discharge secured by
operation of law by the principal debtor in a bankruptcy or liquidation proceeding in the case of
company does not absolve the surety of his liability

[1.1.a] SUSPENSION OF PROCEEDING WOULD BE ANETHEMA TO THE SCHEME OF

CODE MORE PARTICULARLY TO THE PROVISION OF SECTION 60 (2) AND 95 and object
of the code

“The object of the code is not to allow such guarantors to escape from an independent and co-
extensive liability to pay off the entire outstanding debt, which is why section 14 is not applied to
them” this was held in SBI v. Ramkrishna and Anr.

“ GUARI SHANKAR JAIN v. Punjab National Bank 2019 SCC OnLine Calcutta 7288”
Notwithstanding the pendency of Resolution Plan, a personal guarantor can be proceeded
against under section 60 (2) read with 95 and 97 (3) of the code.
Section 60(2) of the Code provides that “where a corporate insolvency resolution process or
liquidation proceeding of a corporate debtor is pending before a National Company Law Tribunal, an
application relating to the insolvency resolution or liquidation or bankruptcy of a corporate
guarantor or personal guarantor, as the case may be, of such corporate debtor shall be filed before
 the National Company Law Tribunal.” Given this, there is legislative clarity that concurrent
insolvency proceedings can be maintained in respect of the corporate debtor and a guarantor.
Section 60(2) and (3) of the Code does require proceedings against a corporate debtor and its
guarantors to be simultaneously heard by the same Adjudicating Authority, the Committee
was of the view that the Code in fact, envisages initiation of concurrent proceedings against
both a corporate debtor and its sureties. Given this, the Committee recommended that a
creditor should not be prevented from proceeding against both the corporate debtor and its
sureties under the Code
Section 238 the provision of this code shall have effect, notwithstanding anything
inconsistent therewith the contained in any other law for the time being in force or any
instrument having effect by virtue of any such law.

[1.1.b] THERE IS NO EXCLUSIVE PROVISION IN IBC WHICH BARS INITIATING

PROCEEDING AGAINST THE GUARANTOR:
Code does not place a bar upon the creditor to proceed against a personal guarantor prior to
exhausting their remedies against the corporate debtor. On the contrary it provides for the
parallel proceeding before the same forum. Simultaneous proceeding will not only honor the
intent of the legislature but also safeguard the interest of stakeholder. It is plausible that in
the proceeding against the first corporate guarantor the creditor is unable to realize the
complete debt payable and the limitation to proceed against the other debtor expires. In the
meantime such a practice that forces the creditor to wait around before initial proceedings
against the other debtor, shall give enough time to the corporate debtor, personal and or
corporate guarantor to alienate their asset and wriggle out of their obligation towards the
creditor.
[1.2] THE PRINCIPLE OF CONTRACT ACT CANNOT BE UNDERMINED

Under Section 128 of the Indian Contract Act, 1872, the liability of a surety towards a
creditor is coextensive with that of the principal borrower. When a default is committed, the
principal borrower and the surety are jointly and severally liable to the creditor, and the
creditor has the right to recover its dues from either of them or from both of them
simultaneously.26 The very object of taking a personal guarantee is to ensure that the
creditor is not asked to sit on his rights against the guarantor till the time his remedies against
the debtor are not exhausted.

THEREFORE the creditor has the option to sue the borrower or the guarantor separately or
jointly or simultaneously to recover the debt
`action against the surety cannot be prevented solely on the ground that the creditor has an
alternative relief against the principal borrower.29 Further, as discussed above, the creditor is
at liberty to proceed against either the debtor alone, or the surety alone, or jointly against
both the debtor and the surety.30 Therefore, restricting a creditor from initiating CIRP
against both the principal borrower and the surety would prejudice the right of the creditor
provided under the contract of guarantee to proceed simultaneously against both of them.

in the First ILC Report, this Committee, while discussing the scope of moratorium under
Section 14 vis-à-vis the assets of a surety of the corporate debtor, had observed that the
“characteristic of such contracts i.e. of having remedy against both the surety and the
corporate debtor, without the obligation to exhaust the remedy against one of the parties
before proceeding against the other, is of utmost important for the creditor and is the
hallmark of a guarantee contract, and the availability of such remedy is in most cases the
basis on which the loan may have been extended.

[1.3] THE GURANTOR IS NOT ENTITLED TO THEORY OF ABROGATION

ANYMORE
In Essare judgment based on the sbi v. ramkrishna held that guarantor’s liability remained
intact even after the approval of resolution plan and approved the resolution plan that rest the
guarantor devoid of the right of subrogation . STATE BANK OF INDIA v. Rama Krishna
case,(2018) observed that enforcement of guarantee may not have a significant impact on the
debt of corporate debtor( asset of surety are different from that of debtor) NCLT Mumbai in
the case of SBI v. Calyx Chemicals & Pharmaceutical Ltd. and IDBI Bank Ltd. v. EPC
Constructions India Ltd. approved a resolution plan that had not given the right of
subrogation to the guarantor of the corporate debtor on whose behalf the payment was done.
Therefore initiating proceeding against the guarantor will not affect the principal debtor’s
assets hence parallel proceeding should be allowed.
PETITIONER
ISSUE [1.1] CASE- “Dr. Vishnu Kumar Agarwal v. PIRAMAL ENTERPRISE
CASE:”{ respondent will say that judgment is impugned and is pending before the apex court in
appeal , the court }

A claim cannot be filed by a financial creditor in two separate CIRPs of the debtor and the
guarantor. Following the Piramal Judgement various adjudicating authority in the matter of M/s.
SEW Infrastructre Ltd. v. M/s. Mahendra Investment Advisor Pvt. Ltd and ICICI Bank v. Era
Infrastructure Ltd. have passed similar order and same has been held by the Honble NCLAT.

[1.2] under section 31 (1) of IBC liability of personal guarantor stands extinguished upon the
approval of resolution plan:
However, a cursory reading of Section 31(1) of the IBC suggests that liability of a personal
guarantor stands extinguished upon the approval of a resolution plan since it is binding on the
guarantors. It is contended that when a resolution plan is approved, the principle debt
becomes zero and subsequently, as per Section 128 of the Indian Contract Act, 1872 (ICA),
the guarantor stands discharged of its liability.
Liability of personal guarantor stands extinguished upon the approval of resolution plan (as it
is binding on guarantor too) under section 31 (1) of IBC so as to be in consonance with the
principle of discharge under sec 133 of ICA
Allowing the financial creditor to invoke guarantee against the guarantor after the approval
of the resolution plan in the light of absence of right of subrogation, would create anomaly as
the guarantor cannot recover the amount paid on behalf of the debtor.

In the case of “Kundanmal Dabriwala v. Haryana Financial Corporation and Ors.”, the
High Court of Punjab and Haryana discussed the liability of the surety where the liability of
the principle borrower stands extinguished through a sanctioned scheme of arrangement
under section 391 of companies act, 1956. The court absolved the surety of the ground inter
alia that the surety cannot be placed in the shoes of the creditor i.e., subrogation. In the
absence of which, the liability of the surety stands pointless.

NCLAT has taken similar view in the case of Lalit Mishra &Ors. v. Sharon Bio Medicine
Ltd stating the personal guarantor cannot resort to right to subrogation under the Indian
Contract Act, 1872 to reimburse itself for the payment made on behalf of the corporate
debtor. This is because such right to subrogation would completely defeat the purpose of IBC
Code which is “maximization of value of corporate debtor’s assets” and not to ensure that the
credit is available to all stakeholders. The aim of the IBC is to revive the company and not to
make certain that credit is available to all stakeholders. Moreover, it should also be
considered that allowing the exercise of subrogation right will mean that the debt remains as
it is and this will act as an obstruction in the revival of the corporate debtor. Thus with the
new laws where in simultaneous proceedings against such guarantors has been allowed, the
right to recovery of the amounts (to the extent) of debt paid by the personal guarantors on
behalf of the corporate debtors becomes quite murky. Parallel proceeding should not be
allowed as in the present scenario since the guarantors are no more entitled to right of
subrogation the right of financial creditor to invoke guarantee against the personal guarantor
but the guarantor not being in position to recover the amount paid from the corporate debtor.
How can two parties take away the right of third party who is not even a party to the
contract?

[1.2] PARALLEL PROCEEDINGS WILL LEAD TO MULTIPLICITY OF PROCEEDING

IN SBI v. Videocon Industries Ltd.- The NCLT Mumbai allowed for the consolidation of
proceeding s against the debtors and guarantor observing the exercise is beneficial to the
stakeholders help in maximization of the value during liquidation ( contrary ( object is the
revival of the company and not securing the claim of creditors)
Mrs. Mamatha v. AMB infrabuild Pvt. Ltd., Held that if two corporate debtors collaborate
then application under section 7 of the code would be maintainable against both the debtors
jointly as one.