Insta Capital Private Limited vs Ketan Vinod Kumar Shah

  Suchitra Kanuparthi, Member (Judicial)

The Court is convened through videoconference.

This Petition has been filed by the Applicant (Financial Creditor) Insta Capital Private Limited, under Section 95 of the Insolvency and Bankruptcy

Code, 2016 (hereinafter referred as Code) read with Rule 7(2) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for

Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 (Personal Guarantors Insolvency Rules) against Ketan

Vinod Kumar Shah, Personal Guarantor/Respondent of the Corporate Debtor S.K. Products LLP, for initiating Insolvency Resolution Process.

The brief facts of the case are that the Corporate Debtor S.K. Products LLP, had applied for sanction of loan from the Financial Creditor vide

application form dated 05.10.2018. The total amount due is Rs.31,52,781/- which includes principal outstanding of Rs.27,50,000/- alongwith interest of

Rs.4,02,781/- @18% p.a. from 12.04.2019 to 03.02.2020. The debt was due as on 12.04.2019, and the default occurred on 12.04.2019.

The Financial Creditor annexed the documents to prove the existence of debt and amount in default provided hereunder:

a. Copy of Board Resolution dated 05.10.2018

b. Copy of Loan application dated 05.10.2018

c. Copy of finance proposal dated 10.10.2018

d. Copy of discount letter dated 11.10.2018

e. Copy of loan recall notice dated 18.09.2019

f. Copy of demand notice dated 03.02.2020

S.K. Products LLP, vide letter dated 10.10.2018, proposed disbursal against Bill of Exchange. The financial creditor had advanced a cheque dated

11.10.2018 bearing No. 930048 and executed a demand Bill of Exchange dated 11.10.2018 alongwith the discount letter dated 11.10.2018, Post-dated

cheques issued by S.K. Products LLP to Financial Creditor which got dishonored on presentation. The Financial Creditor issued loan recall notice to

the guarantor and sent demand notice dated 03.02.2020 under Rule 7(1) of Insolvency and Bankruptcy (Application to Adjudicating Authority for

Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019.

The Applicant/Petitioner filed Affidavit to produce Board Resolution dated 04.03.2019 and certain judgement on record.

The Financial Creditor relied upon the judgments of Hon’ble Supreme Court and other courts and states that the rights of

surety are coextensive with that of the principal debtor. In view of the above settled law, the guarantor cannot insist that the creditor must first

exhaust all remedies against the principal debtor before recovering the debts from surety holders. The liability of principal debtor and the surety

though coextensive are separate liabilities arising out of the same transaction.

The Ld. Counsel for the Financial Creditor had relied upon the judgment of Hon’ble National Company Law Appellate Tribunal (hereinafter

referred as NCLAT) in the case of State Bank of India Vs. Athena Energy Ventures Private Limited, in which it is held that Corporate Insolvency

Resolution Process (hereinafter referred as CIRP) can be initiated against both the Corporate Debtor as well as personal guarantor simultaneously for

the same set of debt and default. The Hon’ble NCLAT relied upon the observations made by the Insolvency Law Committee at Para 14 which is

reproduced hereunder : -

“14. It would be appropriate now to refer to the observations made by Insolvency Law Committee in its Report of February 2020. Relevant part of the report

has been filed by the Appellant as Annexure-C (Diary No. 233/3). Para 7 of the report is as follows:

7.3 The Committee noted that while, under a contract of guarantee, a creditor is not entitled to recover more than what is due to it, an action against the surety

cannot be prevented solely on the ground that the creditor has an alternative relief against the principal borrower. 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 surety. 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.

7.5 However, the committee noted that the appellate authority has, in certain cases, taken a view contrary to its decision taken in the Piramal Enterprises Ltd. 31

Case. For example, in Edelweiss Asset Reconstruction Company Limited V. Sachet Infrastructure Private Limited & Others. 32, the Appellate Authority has

permitted simultaneous initiation of CIRP against the principal borrower and its corporate guarantors. Further, the appellate authority has also admitted a

petition to review its aforesaid judgment in the Piramal Enterprises Limited case 33 Give this, the Committee decided that no legal changes may be required at the

moment, and this issue may be left to judicial determination.â€​

The Hon’ble NCLAT at Para 19 has categorically held that in the matter of guarantee, CIRP can proceed against the principal borrower as

well as guarantor.

The Hon’ble NCLAT also clarified that in the matter of Dr. Vishnu Kumar Agarwal Vs. Piramal Enterprises Limited, it was held that once a

petition under section 7 of the Code is filed against the principal debtor and CIRP is initiated, the Financial Creditor cannot file another application on

the very same set of claims. The Hon’ble NCLAT therefore observed that they are unbale to interpret law in the manner. It was interpreted in

the matter of Dr. Vishnu Kumar Agarwal Vs. Piramal Enterprises Limited. Para 19 and 20 reproduced hereunder: -

“19. It is clear that in the matter of guarantee, CIRP can proceed against principal Borrower as well as Guarantor. The law as laid down by the Hon’ble

High Courts for the respective jurisdictions, and law as laid down by the Hon’ble Supreme Court for the whole country is binding. In the matter of Piramal,

the Bench of this Appellate Tribunal “interpretedâ€​ the law. Ordinarily, we would respect and adopt the interpretation but for the reasons discussed above, we

are unable to interpret the law in the manner it was interpreted in the matter of Piramal. For such reasons, we are unable to uphold the Judgment as passed by

the Adjudicating Authority.

It is not shown that the application was otherwise incomplete. We thus, proceed to pass the following order :-

ORDER

The Appeal is allowed. Impugned order passed by the Adjudicating Authority dated 4th March, 2020 is quashed and set aside. CP(IB) No.466/7/HDB/2019 filed

by the Appellant before Adjudicating Authority. The Adjudicating Authority is directed to admit the Application CP(IB)No.466/7/HDB/2019 and pass further

necessary Orders as per provisions of IBC. The Adjudicating Authority is requested to appoint the same IRP/RP as has been appointed in

CP(IB)No.616/7/HDB/2018 in the CIRP proceedings against M/s Athena Chattisgarh Power Limited. (Principal Borrower). The IRP/RP will act in accordance

with law keeping observations in this judgment in view.

No order as to costs.â€​

In view of the ratio laid down by the Hon’ble NCLAT in the matter of State Bank of India Vs. Athena Chhattisgarh Power Ltd, .the

Financial Creditor for initiate proceedings simultaneously against the principal borrower and the corporate guarantor. In the case of Edelweiss Asset

Reconstruction Company Limited Vs. Sachet Infrastructure Limited and others, the Hon’ble NCLAT permitted simultaneous initiation of

CIRP against the principal borrower and its corporate guarantor.

REPLY BY THE PERSONAL GUARANTOR

The Personal Guarantor/Respondent had filed Affidavit in reply and raised preliminary objections against the maintainability of Petition u/s 95 on

the following grounds: -

a. section 60(1) of the Code envisages that the National Company Law Tribunal will have jurisdiction in relation to Insolvency Resolution and liquidation of

Corporate Persons including Corporate Debtor and personal guarantors. But however;

b. section 60(2) categorically stipulate notwithstanding anything contained in the Code where the Insolvency Resolution Process or liquidation proceedings against

the Corporate Debtor is pending before National Company Law Tribunal.

c. The jurisdiction to entertain Insolvency and Bankruptcy proceedings against the individual will vest in the National Company Law Tribunal (hereinafter referred as

NCLT) only on the following conditions:

i. the individual is a personal guarantor to the debt availed by the corporate debtor;

ii. an Insolvency Resolution Proceedings with respect to said Corporate Debtor is pending before the said NCLT; or

iii. liquidation proceeding with respect to corporate debtor is pending before NCLT.

d. Unless the aforesaid connections are met, NCLT shall not have jurisdiction for the insolvency qua the individuals as the said jurisdiction is specifically vested with

the Debts Recovery Tribunals at part 3 of the Code.

FINDINGS

We have carefully gone through the pleadings available on record, and opine that, though it is settled law that the liability of principal borrower and

guarantor is coextensive as enunciated u/s 128 of the Contract Act, 1872, and the Creditor may proceed against the principal borrower or the

guarantor simultaneously, however, the judgement of Hon’ble NCLAT in the case of Dr. Vishnu Kumar Agarwal Vs. Piramal Enterprises

Limited, it was laid down that there cannot be two CIRP proceedings, one against the borrower and one against the guarantor.

The judgment of Hon’ble NCLAT in State Bank of India Vs. Athena Energy Ventures Private Limited,f urther clarified that CIRP can be

initiated against the principal borrower and the guarantor.

The issue for consideration is whether a Financial Creditor can initiate CIRP against the personal guarantor in the absence of any resolution

process/liquidation process against the corporate debtor.

It is pertinent to refer to section 60 of the code. Section 60 is reproduced as follows;

Section 60 : Adjudicating Authority for Corporate Persons.

60(1) The Adjudicating Authority, in relation to insolvency resolution and liquidation for corporate persons including corporate debtors and personal

guarantors thereof shall be the National Company Law Tribunal having territorial jurisdiction over the place where the registered office of the corporate persons

located.

(2)Without prejudice to sub-section (1) and notwithstanding anything to the contrary contained in this Code, 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 such National

Company Law Tribunal.

(3) An insolvency resolution process or [liquidation or bankruptcy proceeding of a corporate guarantor or personal guarantor, as the case may be, of the

corporate debtor] pending in any court or tribunal shall stand transferred to the Adjudicating Authority dealing with insolvency resolution process or

liquidation proceeding of such corporate debtor.

(4) The National Company Law Tribunal shall be vested with all the powers of the Debt Recovery Tribunal as contemplated under Part III of this Code for the

purpose of sub-section (2).

(5) Notwithstanding anything to the contrary contained in any other law for the time being in force, the National Company Law Tribunal shall have jurisdiction

to entertain or dispose ofâ€

(a) any application or proceeding by or against the corporate debtor or corporate person;

(b) any claim made by or against the corporate debtor or corporate person, including claims by or against any of its subsidiaries situated in India; and

(c) any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate

debtor or corporate person under this Code.

Notwithstanding anything contained in the limitation Act, 1963 or in any other law for the time being in force, in computing the period of limitation specified

for any suit or application by or against a corporate debtor for which an order of moratorium has been made under this Part, the period during which such

moratorium is in place shall be excluded.â€​

Upon conjoined reading of section 60 r/w section 128 of the Contract Act, 1872, it is clear that the CIRP can be initiated against the Corporate

Debtor as well as corporate guarantor. But however, in the instant case, section 60(2) contains a non-obstante clause which specifies that only where

a CIRP process or liquidation process of a Corporate Debtor is pending before NCLT, an application initiating Insolvency Resolution Process against

the Personal Guarantor, of such Corporate Debtor shall be filed before such NCLT. Further, the code also provides the definition of personal

guarantor which includes the surety in a contract of guarantee to a Corporate Debtor which means that Financial Creditor can initiate proceedings of

CIRP against the personal guarantor of Corporate Debtor. While Section 7 petition can be filed by the Financial Creditor against the Corporate Debtor

and Corporate Guarantor, but under Section 95 of the Code can be filed by Financial Creditor only against personal guarantor of Corporate Debtor,

which is already been undergoing CIRP or is in Liquidation.

In view of the judgement of Hon’ble NCLAT in State Bank of India Vs. Atheena Energy Ventures Limited and the law as entailed in

section 60(2), this bench is of the considered view that an application for insolvency for resolution against the personal guarantor is not maintainable

unless that CIRP/liquidation is ongoing against the Corporate Debtor. It is further observed that filing of applications seeking resolution of personal

guarantors without the Corporate Debtor undergoing CIRP, would tantamount to vesting of jurisdiction on two course one is NCLT and another is the

Debts Recovery Tribunal.

In view of the above observation, the petition is dismissed with no costs.