Introduction

The case of Maitreya Doshi v. Anand Rathi Global Finance Ltd. & Anr adjudicated by the National Company Law Appellate Tribunal (NCLAT) on August 25, 2021, serves as a pivotal judgment in the interpretation of co-borrower liabilities under the Insolvency and Bankruptcy Code, 2016 (IBC). The appellant, Maitreya Doshi, a suspended director of Doshi Holdings Pvt. Ltd. (the Corporate Debtor), challenged the initiation of the Corporate Insolvency Resolution Process (CIRP) against his company by Anand Rathi Global Finance Ltd. (Respondent No.1). The crux of the dispute revolves around whether Doshi Holdings qualifies as a financial debtor under IBC, given its role as a co-borrower and pledgor in loan agreements with Respondent No.1.

Summary of the Judgment

The National Company Law Tribunal (NCLT) had admitted Anand Rathi Global Finance Ltd.'s application under Section 7 of the IBC, initiating the CIRP against Doshi Holdings Pvt. Ltd. Doshi Holdings, merely a pledgor of shares in M/s Premier Ltd., contended that it should not be deemed a financial debtor liable for the loans disbursed solely to Premier Ltd. The NCLAT, after considering the arguments and precedents, upheld the NCLT's decision. The appellate tribunal concluded that Doshi Holdings, as a co-borrower who jointly executed loan agreements and received financial facilities, falls within the ambit of a financial debtor under the IBC. Consequently, the appeals were dismissed, reinforcing the liabilities of co-borrowers in insolvency proceedings.

Analysis

Precedents Cited

The judgment extensively engaged with several precedents to elucidate the responsibilities of co-borrowers under the IBC:

• Dr. Vishnu Kumar Agarwal Vs. M/s Piramal Enterprises Ltd. (2019) SCC Online NCLAT 542: This case dealt with the impossibility of initiating multiple CIRPs for the same debt against multiple debtors, specifically a principal borrower and its guarantor.
• State Bank of India v. Athena Energy Ventures Pvt. Ltd. (2020) SCC Online NCLAT 774: This judgment was distinguished from Piramal, especially in light of provisions under Section 60 of the IBC.
• Phoenix ARC Pvt. Ltd. v. Ketulbhai Ramubhai Patel (2021) SCC Online SC 54: The Supreme Court clarified that a security interest, such as pledging shares, does not equate to being a financial creditor under IBC.
• Anuj Jain v. Axis Bank Ltd. (2020) 8 SCC 401: This case reinforced that providing collateral security without being a guarantor does not classify one as a financial creditor.
• Lalit Kumar Jain v. Union of India & Ors: Reinforced that resolution plans for corporate debtors do not discharge guarantors.

Legal Reasoning

The NCLAT meticulously dissected the arguments surrounding the classification of Doshi Holdings. The primary contention by the appellant was that as Doshi Holdings only pledged shares held in Premier Ltd. and did not directly receive any loans, it should not be held liable as a financial debtor.

However, the tribunal observed that Doshi Holdings was not merely a pledgor but also a co-borrower, jointly entering into loan agreements with Premier Ltd. The execution of joint documents, including Loan Cum Pledge Agreements, by Maitreya Doshi as the authorized signatory for both entities, established that Doshi Holdings was equally liable for the repayment of the loans. The tribunal emphasized that under the IBC, co-borrowers bear joint and several liabilities, meaning each borrower is individually responsible for the entire debt.

Furthermore, the tribunal addressed the applicability of the Piramal judgment, distinguishing it based on the provisions of Section 60(2) and (3) of the IBC, which permit concurrent CIRPs against both corporate debtors and their guarantors. Given that Doshi Holdings was a co-borrower rather than a guarantor, the Piramal precedent did not preclude initiating CIRP against it.

"There is no bar in IBC to file separate applications against two entities liable to pay same debt. ... There can be separate proceedings for the same debt and default against Principal Borrower as well as Guarantor."

The court concluded that the execution of joint loan agreements and the co-receipt of funds substantiate the status of Doshi Holdings as a financial debtor, thereby affirming the initiation of CIRP against it.

Impact

This judgment has significant implications for the interpretation of liabilities under the IBC, particularly concerning co-borrowers and pledgors:

• Clarification of Co-Borrower Responsibilities: It reinforces that co-borrowers, who jointly enter into loan agreements, are equally and fully liable for the repayment of debts, irrespective of how the funds are disbursed among them.
• Distinction Between Guarantors and Co-Borrowers: The judgment delineates the boundaries between guarantors and co-borrowers, ensuring that only those entities that directly partake in the borrowing are subjected to CIRP.
• Precedent for Future Cases: It sets a precedent that in scenarios involving joint borrowing, all co-borrowers can be independently targeted for insolvency proceedings, thereby mitigating the risk of leniency toward entities that might otherwise seek to distance themselves from financial obligations.
• Strengthening of IBC's Framework: By upholding the initiation of CIRP against all liable parties, the judgment fortifies the IBC's objective of expeditious and fair resolution of insolvency cases.

Complex Concepts Simplified

Co-Borrower vs. Guarantor

A co-borrower is an entity or individual that jointly borrows money with another party and is equally responsible for repayment. In contrast, a guarantor is someone who agrees to repay the debt if the primary borrower defaults, without having a direct obligation unless the borrower fails to fulfill their repayment obligations.

Financial Creditor Under IBC

Under Section 5 of the IBC, a financial creditor is defined as any person who has provided financial support or claims related to financial debts under specified conditions. This includes entities that have extended loans, credit facilities, or similar financial instruments.

Corporate Insolvency Resolution Process (CIRP)

The CIRP is a process initiated under the IBC to resolve the insolvency of corporate entities. It involves restructuring the company's debts, potentially leading to its revival or liquidation, depending on the resolution plan's viability.

Conclusion

The NCLAT's decision in Maitreya Doshi v. Anand Rathi Global Finance Ltd. & Anr underscores the judiciary's commitment to upholding the objectives of the IBC by ensuring that all liable parties in a debt agreement are held accountable. By affirming that co-borrowers are fully liable under joint loan agreements, the tribunal not only reinforces the legal framework governing insolvency but also provides clarity to financial institutions and borrowers alike. This judgment serves as a crucial reference point for future insolvency proceedings, emphasizing the importance of clearly defined roles and responsibilities in financial contracts.