2019 (2) TMI 316 - AT - Insolvency and Bankruptcy

Initiation of Corporate Insolvency Resolution Process against the two Corporate Guarantors - Principal Borrower is not a Corporate Debtor or Corporate Person - Section 7 of the I&B Code - initiation of the process against two Corporate Guarantors simultaneously for the same set of debt and default. Held that - From clause (h) of Section 5 (8) of the I&B Code it is clear that counter-indemnity obligation in respect of a guarantee comes within the meaning of financial debt and therefore there is no dispute that M/s. Piramal Enterprises Ltd. is a Financial Creditor of both Sunrise Naturopathy and Resorts Pvt. Ltd. - (Corporate Guarantor No.1) and Sunsystem Institute of Information Technology Pvt. Ltd. (Corporate Guarantor No.2). In Ram Bahadur Thakur vs. Sabu Jain Limited 1979 (5) TMI 117 - HIGH COURT OF DELHI the Hon ble High Court of Delhi relying on the decision of Hon ble Supreme Court in Kesoram Mills Case 1965 (11) TMI 41 - SUPREME COURT held that under the deed of guarantee the liability of the company to pay debt arose when the borrower defaulted in making payments and the creditor sent a demand/notice invoking the guarantee. Thus it is not necessary to initiate Corporate Insolvency Resolution Process against the Principal Borrower before initiating Corporate Insolvency Resolution Process against the Corporate Guarantors . Without initiating any Corporate Insolvency Resolution Process against the Principal Borrower it is always open to the Financial Creditor to initiate Corporate Insolvency Resolution Process under Section 7 against the Corporate Guarantors as the creditor is also the Financial Creditor qua Corporate Guarantor . Initiation of the process against two Corporate Guarantors simultaneously for the same set of debt and default - Held that - A Financial Creditor has been defined under sub-section (7) of Section 5 means any person to whom a financial debt is owed and financial debt is defined in sub-section (8) of Section 5 as a debt which is disbursed against the consideration for the time value of money. Admittedly for same set of debt claim cannot be filed by same Financial Creditor in two separate Corporate Insolvency Resolution Processes . If same claim cannot be claimed from Resolution Professionals of separate Corporate Insolvency Resolution Processes for same claim amount and default two applications under Section 7 cannot be admitted simultaneously. Once for same claim the Corporate Insolvency Resolution Process is initiated against one of the Corporate Debtor after such initiation the Financial Creditor cannot trigger Corporate Insolvency Resolution Process against the other Corporate Debtor(s) for the same claim amount (debt). There is no bar in the I&B Code for filing simultaneously two applications under Section 7 against the Principal Borrower as well as the Corporate Guarantor(s) or against both the Guarantors . However once for same set of claim application under Section 7 filed by the Financial Creditor is admitted against one of the Corporate Debtor (Principal Borrower or Corporate Guarantor(s)) second application by the same Financial Creditor for same set of claim and default cannot be admitted against the other Corporate Debtor (the Corporate Guarantor(s) or the Principal Borrower). The initiation of the Corporate Insolvency Resolution Process initiated under Section 7 of the I&B Code against Sunsystem Institute of Information Technology Pvt. Ltd. - (Corporate Guarantor No.2) by impugned order dated 24th May 2018 is upheld - further the impugned order dated 31st May 2018 initiating Corporate Insolvency Resolution Process under Section 7 against the Sunrise Naturopathy and Resorts Pvt. Ltd. - (Corporate Guarantor No. 1) for same very claim/debt is not permissible and the application under Section 7 was not maintainable. Application disposed off.

Summary

Issues Involved:
1. Whether the 'Corporate Insolvency Resolution Process' (CIRP) can be initiated against a 'Corporate Guarantor' if the 'Principal Borrower' is not a 'Corporate Debtor' or 'Corporate Person'.
2. Whether CIRP can be initiated against two 'Corporate Guarantors' simultaneously for the same set of debt and default.

Issue-wise Detailed Analysis:

1. Initiation of CIRP Against Corporate Guarantor Without Principal Borrower:

The appellant argued that CIRP cannot be initiated against the 'Corporate Guarantors' without first initiating CIRP against the 'Principal Borrower'. The 'Principal Borrower' not being a company, no application under Sections 7 or 9 of the Insolvency and Bankruptcy Code, 2016 (I&B Code) can be filed against it. Therefore, the same claim and debt cannot be filed against the 'Corporate Guarantors'.

The tribunal referred to Section 128 of the Indian Contract Act, 1872, which states that the liability of the surety is co-extensive with that of the principal debtor. The tribunal cited the Supreme Court's decisions in "Bank of Bihar v. Damodar Prasad" and "State Bank of India v. Indexport Registered," which held that the creditor can proceed against the guarantor without first exhausting remedies against the principal debtor. Thus, it is not necessary to initiate CIRP against the 'Principal Borrower' before initiating CIRP against the 'Corporate Guarantors'. The tribunal concluded that the Financial Creditor can initiate CIRP under Section 7 against the 'Corporate Guarantors' independently.

2. Simultaneous Initiation of CIRP Against Two Corporate Guarantors:

The appellant contended that for the same set of claim amount and debt, two CIRPs cannot be initiated against two different 'Corporate Guarantors'. The tribunal compared the Form-1 submissions for both 'Corporate Guarantors' and found that the total amount of debt, dates of disbursement, amount claimed to be in default, and the date of default were identical.

The tribunal referred to the Supreme Court's decision in "Innoventive Industries Ltd. v. ICICI Bank" which emphasized that once a default is established, the insolvency resolution process begins. However, the tribunal noted that the same claim cannot be filed by the same Financial Creditor in two separate CIRPs. Once CIRP is initiated against one 'Corporate Debtor', the Financial Creditor cannot trigger CIRP against another 'Corporate Debtor' for the same claim amount and default.

The tribunal held that while there is no bar in the I&B Code for filing two applications under Section 7 against the 'Principal Borrower' and the 'Corporate Guarantor(s)' simultaneously, once CIRP is initiated against one 'Corporate Debtor', the second application for the same claim and default cannot be admitted against another 'Corporate Debtor'.

Conclusion:

The tribunal upheld the initiation of CIRP against 'Sunsystem Institute of Information Technology Pvt. Ltd.' (Corporate Guarantor No.2) by the order dated 24th May 2018. However, it held that the initiation of CIRP against 'Sunrise Naturopathy and Resorts Pvt. Ltd.' (Corporate Guarantor No.1) for the same claim/debt by the order dated 31st May 2018 was not permissible, and the application under Section 7 was not maintainable.

The tribunal declared all orders and actions taken pursuant to the impugned order dated 31st May 2018 as illegal and set them aside. The application against 'Sunrise Naturopathy and Resorts Pvt. Ltd.' was dismissed, and the company was released from the CIRP, allowing it to function independently through its Board of Directors.

The tribunal directed the Adjudicating Authority to fix the fee of the Interim Resolution Professional for 'Sunrise Naturopathy and Resorts Pvt. Ltd.', which the company was ordered to pay.

Disposition:

- Company Appeal (AT) (Insolvency) No. 346 of 2018 was dismissed.
- Company Appeal (AT) (Insolvency) No. 347 of 2018 was allowed.
- No order as to costs.