ICICI Bank Limited vs. ERA Infrastructure (India) Limited and Connected Matters has clarified that there is no bar under the Insolvency and Bankruptcy Code, 2016 to initiate simultaneous Corporate Insolvency Resolution Process (CIRP) proceedings against a corporate debtor and its corporate guarantor for the same debt. The Hon’ble Supreme Court of India held that the liability of a guarantor is co-extensive with that of the principal borrower and the IBC does not mandate election of remedies.
The batch of appeals arose from conflicting orders passed by the National Company Law Tribunal and the National Company Law Appellate Tribunal, wherein applications filed under Section 7 of the IBC against the principal borrower were rejected on the ground that CIRP had already been admitted against the corporate guarantor.
In the lead matter, ICICI Bank had extended credit facilities to ERA Infrastructure (India) Limited backed by corporate guarantees. While CIRP had been admitted against the guarantor entity, the Section 7 application against the principal borrower was rejected relying upon Vishnu Kumar Agarwal v. Piramal Enterprises Limited.
The Hon’ble Supreme Court examined the statutory framework under Sections 7 and 60 of the IBC along with Section 128 of the Indian Contract Act, 1872 and made the following observations:
The IBC contemplates parallel insolvency proceedings against a corporate debtor and its corporate guarantor.
The liability of the guarantor under Section 128 of the Indian Contract Act is co-extensive with that of the principal debtor.
There is no statutory provision under the IBC requiring a creditor to elect between proceeding against the borrower or the guarantor.
The apprehension of double recovery is unfounded as the CIRP Regulations require creditors to update recoveries and prevent double enrichment.
The contrary view taken in Vishnu Kumar Agarwal does not lay down the correct law.
The Hon’ble Court held that restricting a creditor to proceed against only one obligor would defeat the very purpose of a guarantee and would curtail a statutorily vested right in the absence of any legislative mandate.
Accordingly, the appeals were allowed and the impugned orders rejecting the Section 7 applications were set aside. The judgment reiterates that the Insolvency and Bankruptcy Code preserves the concurrent remedies available to financial creditors and permits simultaneous CIRP proceedings against both borrower and guarantor, subject to safeguards against double recovery.
