NISHANT
Can the Financial Creditor file an application for initiating corporate insolvency resolution process directly against Corporate Guarantor under section 7 IBC, 2016?
NISHANT MEHROTRA 13 Jan 2018

Can the Financial Creditor file an application for initiating corporate insolvency resolution process directly against Corporate Guarantor under section 7 IBC, 2016?

Section 3, sub-section 8 of Insolvency and Bankruptcy Code, 2016 (here in after also referred to as "the Code") defines "corporate debtor" as a corporate person who owes a debt to any person. Section 3 sub-section 7 defines "corporate person" as a company as defined in clause (20) of section 2 of the Companies Act, 2013, a limited liability partnership, as defined in clause (n) of sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008, or any other person incorporated with limited liability under any law for the time being in force but shall not include any financial service provider. Sub-section (8) of Section 5 of the Code defines "financial debt" and it's clause (i) includes ‘the amount of any liability in respect of any of the guarantee for any of the items referred to in sub-clauses (a) to (h) of the sub-section 8' as a financial debt. Hence, where the Principal Borrower borrowed money from the Creditor against the payment of interest by executing the Loan Agreement, Mortgage Deeds etc. And for such loan transaction, another Company stood as a Guarantor, then such a Guarantor Company shall be under a legal obligation to repay the loan amount borrowed from the Principal Borrower. Therefore, the amount due to the Financial Creditor from the Principal Borrower is a financial debt and as the other company stood as a Guarantor for the financial debt, then such a guarantor company shall be treated as a Corporate Debtor because the financial debt is due from it also to the Financial Creditor.

It is a settled law (United Bank Of India vs Satyawati Tondon & Ors) that liability of the Guarantor is co-extensive with that of the Principal Borrower. It is for the Creditor to choose against whom he wants to proceed. There is no bar in the Law which prevents any Creditor to proceed both against the Principal Borrower and Guarantor. Creditor can demand the payment directly from the Guarantor or can demand from both the principle borrower and corporate Debtor.

NCLAT, in Company Appeal (AT) (Insolvency) No. 1 & 2 of 2017, vide order dated 17.01.2017, in the matter of Innoventive Industries Ltd. v. ICICI Bank, has held that in an application filed by the Financial Creditor under Section 7 for initiation Corporation Insolvency Resolution Process, the Adjudicating Authority is required to satisfy ::

(a) Whether a default has occurred;

(b) Whether an application is complete; and

(c) Whether any disciplinary proceeding is against the Proposed Insolvency Resolution Professional.

Hence, where the Borrower Company committed a default in repayment of the outstanding amount, and the Application is complete in all respects, and no disciplinary proceeding is pending against the proposed Interim Resolution Professional, then an Application filed by the Financial Creditor under section 7 of the Code against the Guarantor Company should be admitted by Adjudicating Authority.

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