Tribunal Confirms Right of Financial Creditors to Simultaneously Initiate CIRP Against Principal Borrowers and Corporate Guarantors
In a landmark decision, the National Company Law Tribunal (NCLT) in New Delhi has admitted the insolvency application filed by Pashupati Facility and Management Service Pvt. Ltd. against Prodot Media Pvt. Ltd. The tribunal's decision reaffirms the legal stance that corporate guarantors can be held coextensively liable alongside principal borrowers under the Insolvency and Bankruptcy Code (IBC) of 2016.
The case revolves around a financial agreement where Pashupati Facility and Management Service Pvt. Ltd., the financial creditor, extended a loan of Rs. 1.35 crore to Teriyaki Builders Pvt. Ltd., the principal borrower. Prodot Media Pvt. Ltd. stood as a corporate guarantor for this loan. Despite the ongoing Corporate Insolvency Resolution Process (CIRP) against Teriyaki Builders, the NCLT ruled that the financial creditor could initiate CIRP against Prodot Media as well.
The tribunal, comprising Shri Mahendra Khandelwal and Shri Atul Chaturvedi, emphasized the coextensive liability of corporate guarantors under Section 128 of the Indian Contract Act, 1872. The judgment clarified that financial creditors have the right to proceed against both the principal borrower and the corporate guarantor simultaneously, a stance supported by previous judgments such as State Bank of India vs. Athena Energy Ventures.
The tribunal also addressed the objections raised by Prodot Media Pvt. Ltd., which argued that the insolvency proceedings against them should not proceed given the partial recovery proposed in the resolution plan for Teriyaki Builders. However, the tribunal dismissed these objections, stating that partial recovery does not extinguish the liability of the guarantor, thereby upholding the financial creditor's right to recover the entire debt.
With the admission of the insolvency application, the tribunal has declared a moratorium under Section 14 of the IBC, effectively halting any further legal proceedings against Prodot Media Pvt. Ltd. This decision is a significant reinforcement of the legal framework governing corporate insolvency and the obligations of guarantors in financial transactions.
Bottom line:-
Insolvency and Bankruptcy Code (IBC), 2016 - Application under Section 7 - Corporate Insolvency Resolution Process (CIRP) initiated against the Corporate Guarantor even when CIRP proceedings are ongoing against the Principal Borrower - Coextensive liability of Corporate Guarantor established under Section 128 of the Indian Contract Act, 1872 - Right of Financial Creditor to proceed simultaneously against both the Principal Borrower and the Corporate Guarantor recognized.
Statutory provision(s):
- Insolvency and Bankruptcy Code, 2016, Section 7, 5(8), 14
- Indian Contract Act, 1872, Section 128
