In this case, which is a landmark decision, the NCLAT had to decide whether a financial creditor could file a claim under Section 7 of the Code against both the principal debtor and the guarantor for the same set of claims.
In the instant case titled Bijay Kumar Agarwal, Ex-Director of M/s Genegrow Commercial Pvt. Ltd. vs. State Bank of India & Anr the issue raised for clarification before the NCLAT was:
Whether two applications under Section 7 can be pursued or not?
With regard to this issue, the NCLAT made it clear that the Code does not prohibit simultaneously filing two petitions under Section 7 of the Code against the corporate guarantor and the principal borrower (s). However, if a financial creditor's application for the same set of claims is approved against one of the corporate debtors (the principal borrower or corporate guarantor), that financial creditor may not submit another application for the same set of claims and default against the other corporate debtor (the principal borrower or the corporate guarantor, as the case may be).
According to the NCLAT, every contract of guarantee contains an implied promise by the principal debtor to compensate the surety in accordance with Section 145 of the Indian Contract Act, 1872, and a financial debt includes debt owing to the creditor by both the principal and the guarantor. Furthermore, it was decided that default under Section 3(12) of the Code would occur even if the guarantor simply failed to pay the financial creditor when the principal sum was demanded. Section 3(11) of the Code refers to a sum that is due from any person, including a corporate debtor.
The NCLAT further concluded that if the guarantor of the debt in question fails to return the amount borrowed by the principal borrower, the financial creditor who holds a guarantee on the debt may file a lawsuit under Section 7 of the Code against the guarantor. It was made clear that the only caveat to this was that a creditor couldn't sue the principal debtor and assert the insolvency of the guarantor at the same time.
The NCLAT categorically stated that,
"For the reasons aforesaid, while we uphold the initiation of the 'Corporate Insolvency Resolution Process' initiated under Section 7 of the 'I&B Code' against 'Sunsystem Institute of Information Technology Pvt. Ltd.' - ("Corporate Guarantor No. 2") by impugned order dated 24th May, 2018, we hold that the impugned order dated 31st May, 2018 initiating 'Corporate Insolvency Resolution Process' under Section 7 against the 'Sunrise Naturopathy and Resorts Pvt. Ltd.' - Company Appeal (AT) Insolvency No. 993 of 2019 7 ('Corporate Guarantor No. 1') for the same very claim/debt is not permissible and the application under Section 7 was not maintainable."