Section 7 of against the principal debtor as well as the guarantor, for the same set of claim?

Bijay Kumar Agarwal, Ex-Director of M/s Genegrow Commercial Pvt. Ltd. vs. State Bank of India & Anr.

Company Appeal (AT) Insolvency No. 993 of 2019; Citation: MANU/NL/0032/2020

NCLAT

Decided on: 23.01.2020

The question that arose before the NCLAT was whether a financial creditor is permitted to commence proceedings under Section 7 of the Code against the principal debtor as well as the guarantor, for the same set of claims.

The NCLAT clarified that there is no fetter in the Code for simultaneously projecting two applications under Section 7 of Code against the principal borrower, as well as the corporate guarantor(s). However, for the same set of claims, if an application filed by the financial creditor is admitted against one of the corporate debtors (i.e., the principal borrower or corporate guarantor), a second application filed by the same financial creditor for the same set of claims and default is not to be admitted against the remaining corporate debtor (the principal borrower or the corporate guarantor, as the case may be).

The NCLAT opined that as per Section 145 of the Indian Contract Act, 1872 in every contract of guarantee, there is an implied promise by the principal debtor to indemnify the surety and a financial debt includes debt owed to the creditor by both the principal and the guarantor. It was further held that Section 3(11) of the Code refers to a sum that is due from any person including a corporate debtor and that even a mere failure of the guarantor to pay the financial creditor when the principal sum is demanded will come within the purview of default under Section 3(12) of the Code.

The NCLAT further held that a financial creditor who has a guarantee on the debt in question can commence proceedings under Section 7 of Code against the guarantor for failure to repay the sum borrowed by the principal borrower. However, it was clarified that the only rider to this is that a creditor is not permitted to sue the principal debtor and claim the guarantor's insolvency at the same time.