Introduction

The case of Bijay Kumar Agarwal v. State Bank Of India And Another adjudicated by the National Company Law Appellate Tribunal (NCLAT) on January 23, 2020, marks a significant development in the interpretation and enforcement of guarantee deeds under the Insolvency and Bankruptcy Code (IBC), 2016. The dispute arose between Bijay Kumar Agarwal, the appellant and former director of M/s. Genegrow Commercial Pvt. Ltd. (the Corporate Guarantor), and State Bank of India (SBI) along with another respondent (the Financial Creditor). The core issue revolved around the enforceability of the guarantee deed executed by the Corporate Guarantor against the Principal Borrower, Gee Pee Infotech Pvt. Ltd., and the implications of co-extensive liability under the IBC.

Summary of the Judgment

The NCLAT upheld the decision of the National Company Law Tribunal (NCLT) Kolkata, which dismissed the application filed by SBI against the Corporate Guarantor under Section 7 of the IBC. The Tribunal concluded that the application was not maintainable as the Corporate Guarantor and the Principal Borrower were co-extensively liable for the debt. Furthermore, the Tribunal set aside the actions taken against the Corporate Guarantor, including the appointment of an Interim Resolution Professional (IRP) and the declaration of a moratorium, thereby releasing M/s. Genegrow Commercial Pvt. Ltd. from the proceedings related to this case.

Analysis

Precedents Cited

The Judgment extensively references several key cases and circulars to substantiate its stance:

• Dharam Sugars and Chemicals Limited vs. Union of India: Highlighted by the Adjudicating Authority as inapplicable due to distinguishable facts.
• Binani Industries Limited vs. Bank of Baroda: Emphasized that IBC proceedings are not recovery proceedings, influencing the Tribunal's perspective on the nature of the application.
• Dr. Vishnu Kumar Agarwal vs. M/s. Piramal Enterprises Ltd.: Provided insights into the admissibility of multiple applications under Section 7 against both Principal Borrowers and Corporate Guarantors.
• Ram Kishun Vs. State of U.P.: Underlined the co-extensive liability of guarantors with principal debtors.
• Industrial Investment Bank of India Ltd. vs. Bishwanath Jhunjhunwala: Reinforced the principle that the liability of guarantors is co-extensive and not alternative.

Legal Reasoning

The Tribunal’s legal reasoning encompassed several pivotal points:

• Co-Extensive Liability: Affirmed that both the Principal Borrower and the Corporate Guarantor share liability equally, as per Section 128 of the Indian Contract Act, 1872.
• Maintainability of Applications: Asserted that simultaneous applications under Section 7 against both entities for the same claim are impermissible, aligning with prior judgments.
• Limitation Issues: Although the issue of limitation was raised, the Tribunal dismissed it on the grounds that the application against the Corporate Guarantor was not maintainable.
• Nature of IBC Proceedings: Emphasized that corporate insolvency proceedings under IBC are distinct from recovery proceedings, affecting the admissibility of certain defenses.

Impact

This Judgment has significant implications for future insolvency and bankruptcy cases, particularly in scenarios involving corporate guarantors:

• Clarity on Liability: Reinforces the principle that guarantors are equally liable alongside principal debtors, preventing financial creditors from selectively pursuing one over the other.
• Procedural Compliance: Highlights the necessity for financial creditors to adhere strictly to procedural norms under the IBC, especially concerning the filing of applications under Section 7.
• Limitation Claims: Although not directly addressed due to the application’s non-maintainability, the Judgment underscores the applicability of the Limitation Act to IBC proceedings.
• Judicial Interpretation: Provides a judicial interpretation that distinguishes between recovery proceedings and insolvency proceedings, influencing future legal strategies.

Complex Concepts Simplified

Conclusion

The NCLAT's decision in Bijay Kumar Agarwal v. State Bank Of India And Another underscores the critical principle of co-extensive liability between principal debtors and their guarantors under the IBC. By dismissing the maintainability of multiple applications for the same debt, the Tribunal ensures procedural integrity and fairness in insolvency proceedings. This Judgment not only clarifies the legal stance on guarantor liability but also sets a precedent that will guide financial creditors and corporate entities in future insolvency cases, promoting adherence to the IBC’s procedural framework.