A Critique of NCLAT's Decision in Piramal

Ankesh Kumar comments on the National Company Law Tribunal’s decision on whether the Corporate Insolvency Resolution Process could be initiated against the corporate guarantor when the principal borrower was not a body corporate and whether there could be simultaneous initiation of CIRP against two guarantors simultaneously.

  • Ankesh Kumar


The National Company Law Appellate Tribunal aroused a stir in the credit market in the preceding year by its decision in Dr. Vishnu Kumar Agarwal vs. M/s Piramal Enterprises Ltd. (hereinafter, ‘Piramal’). The case concerned a principal debtor, a registered society, having borrowed from a financial creditor, which was guaranteed by two corporate guarantors. The issues before the court were two-fold, viz. (a) whether the Corporate Insolvency Resolution Process (‘CIRP’) could be initiated against the corporate guarantor when the principal borrower was not a body corporate and (b) whether there could be simultaneous initiation of CIRP against two guarantors simultaneously. The court answered the first issue in the affirmative. However, while deciding on the second issue, it held, “There is no bar in the ‘I&B Code’ for filing simultaneously two applications under Section 7 against the ‘Principal Borrower’ as well as the ‘Corporate Guarantor(s)’ or against both the ‘Guarantors’. However, once for same set of claim application under Section 7 filed by the ‘Financial Creditor’ is admitted against one of the ‘Corporate Debtor’ (‘Principal Borrower’ or ‘Corporate Guarantor(s)’), a second application by the same ‘Financial Creditor’ for same set of claim and default cannot be admitted against the other ‘Corporate Debtor’ (the ‘Corporate Guarantor(s)’ or the ‘Principal Borrower’).”

Consequentially, if a creditor has recovered a portion of his claim from one debtor, he would be barred from claiming the rest from the other. This has, in turn, led to creditors facing hurdles in recovering full amount of their claims and being overly wary of giving out credit on third-person security. Piramal has been used as a precedent by various benches of NCLT and was very recently quoted by NCLAT again in Bijay Kumar Agarwal, Ex-Director of M/s Genegrow Commercial Pvt. Ltd. vs. State Bank of India and Anr. (‘Bijay Kumar Agarwal’) to deny creditors their rightful share of claim.

Rule of Double Dip: A Missed Opportunity

While Piramal has agreed on the principle of coextensive liability of surety and principal debtor, it has disregarded the reading of this principle in consonance with the IBC. It may be pertinent to note the Supreme Court’s decision in Industrial Investment Bank of India Ltd. v. Biswanath Jhunjhunwala, in which it had settled the law on a guarantee in the following words, “The very object of the guarantee is defeated if the creditor is asked to postpone his remedies against the surety. In the present case the creditor is a banking company. A guarantee is a collateral security usually taken by a banker. The security will become useless if his rights against the surety can be so easily cut down.” On the other hand, it missed out on the opportunity of entrenching the principle of ‘double dip’ used in the English insolvency law and in the Indian insolvency law framework. The rule of double dip has its origin in equity which has managed to survive the brunt of age. In 2011, the Supreme Court of the UK, while shedding light on these principles ‘In the matter of Kaupthing Singer and Friedlander Limited’, noted that while procuring double dividend on substantially the same debt against the same estate was barred (‘rule against double proof’), the same was allowed against two separate estates (‘double dip’). The court explained it further by exemplifying that, “there is a triangle of rights and liabilities between the principal debtor (PD), the surety (S) and the creditor (C). PD has the primary obligation to C and a secondary obligation to indemnify S if and so far as S discharges PD’s liability, but if PD is insolvent S may not enforce that right in competition with C. S has an obligation to C to answer for PD’s liability, and the secondary right of obtaining an indemnity from PD. C can (after due notice) proceed against either or both of PD and S. If both PD and S are in insolvent liquidation, C can prove against each for 100p in the pound but may not recover more than 100p in the pound in all.”

Interestingly, in a later case before NCLT Chennai, in October 2019, the court did not deny the absence of rule against double proof in India. The court expounded on the principle in the following words, “The principle is simple; no person is entitled to something that does not belong to him. No person will not get a right more than other side has agreed upon in an agreement, likewise no person shall be put to hardship beyond the obligation he agreed upon.” The court has not explicitly embraced the rule of double dip anywhere in the order. However, it may be pertinent to note here, that in a contract of guarantee, surety agrees to bear hardship on account of a default by the principal debtor. Therefore, the rule that only surety should pay through an insolvency resolution provides a backdoor exit to other guarantor(s).

At this juncture, when there appears a vacuum in Indian insolvency jurisprudence it is compelling to bring to light a decision by the High Court of Calcutta in 1871 which had noted, “But the rule as to double proof is always subject to another rule. If a creditor has realized his security before proving against the bankrupt's estate, he can only prove for the balance remaining after deducting the amount realized”. If we apply this principle to our context, it can be concluded that the rule against double proof is always subject to the rule of double dip.

Supreme Court’s Decisions Qua IBC on the Given Issue

On the lack of an evolved jurisprudence on the IBC, it may be pertinent to consider some decisions which have hitherto been settled by the SC. In Swiss Ribbons Pvt Ltd. and Anr. vs Union of India And Ors. (‘Swiss Ribbons’), the court observed that “financial creditors have specified repayment schedules, and defaults entitle financial creditors to recall a loan in totality”. It was observed that availability of credit was among the key objectives sought by code and agreed with the Bankruptcy Law Reform Committee’s report on the point that “India has some of the lowest credit compared to the size of the economy”, which the code sought to improve. In Chitra Sharma and Ors. vs Union of India (‘Chitra Sharma’) the apex court had observed that ‘Insolvency Law’ has now shifted from being a debtor-centric to a creditor-centric regime. It was also stated that “The resolution process is market driven”. In State Bank of India vs V. Ramakrishnan (‘Ramakrishnan’), the court affirmed that the object of IBC was not to allow guarantors “to escape from an independent and coextensive liability to pay off the entire outstanding debt”. The court went on to say that, “Section 31(1), in fact, makes it clear that the guarantor cannot escape payment as the Resolution Plan, which has been approved, may well include provisions as to payments to be made by such guarantor” which was re-emphasised again in Committee of Creditors of Essar Steel Ltd vs Satish Kumar Gupta and Satish Kumar Gupta and Ors. (‘Essar Steel’).

To this end, NCLAT’s decisions in Piramal and Bijay Kumar Agarwal go against settled points of law entrenched by the SC. They not only hamper the credit market and disturb the resolution process (Chitra Sharma), but also allow an escape route to Guarantors. It must be borne in mind, that after the NBFC crisis and the following liquidity crunch in the credit market, decisions like those mentioned herein, would only sicken the credit market further.

Piramal Ought Not to be Binding

On a clear reading of sections 5 (8) (a) & (h) of the ‘Code’, it would appear that both the ‘Principal Borrower’ and ‘Guarantor’ fit in the definitions of financial debtors with respect to one debt, a fact which hasn’t been denied by NCLAT in Piramal. However, it went on to hold that CIRP cannot proceed against both debtors on substantially the same debt. Notably, there is no express bar in the IBC or under its rules for initiation of CIRP against two debtors, on the grounds laid down in Piramal. It may be fascinating to the readers that this principle was laid without any reasoning first in Piramal, then again in Bijay Kumar Agarwal. It is a settled principle among jurisdictions across the globe that judicial decisions without appropriate and sturdy reasoning to back their assertions are inherently flawed. This point has been affirmed by a plethora of Supreme Court decisions, some of which include B. Shama Rao vs The Union Territory, Pondicherry wherein the court observed, "It is trite to say that decision is binding not because of its conclusion but in regard to its ratio and the principle laid down therein" and State of Punjab vs Jagdev Singh Talwandi where the court observed, “We would like to take this opportunity to point out that serious difficulties arise on account of the practice increasingly adopted by the High Courts, of pronouncing the final order without a reasoned judgment. It is desirable that the final order which the High Court intends to pass should not be announced until a reasoned judgment is ready for pronouncement. … The result inevitably is that the operation of the order passed by the High Court has to be stayed pending delivery of the reasoned judgment.”. On these accounts, the unreasoned finding of the NCLAT in the aforementioned cases ought to be set aside by the apex court.

On a second and entirely unrelated note, the decision in Piramal ought not to be taken as binding for it not being the operative part of the decision. Dr. A.R. Biswas in his article has explained what would constitute ratio decidendi in a case. He states, “But there is an important limitation on the rule-making power vested in Judges. And this is the principle which denies them the power to make binding rules unless they are relevant to the determination of actual litigation before the court. … No Judge ever lays down any general proposition of law and therefore one has to discover or abstract a ratio or principle from the facts of the case decided. Hence with the introduction of new facts, an extension of the ratio or principle takes place, though the authority of the previous cases is not thereby disavowed.” He refers to Goodhart to further augment his point. Goodhart, therein, states that the ratio of a case is a correlation between material facts of the case and the reasons of the court for its decision thereon. He lays down a five-point rule to find out the ratio of the case:

  • "The principle of a case is not found in the reasons given in the opinion.
  • The principle is not found in the rule of law set forth as the opinion.
  • The principle is not necessarily found by a consideration of all the ascertainable facts of the case, and the Judge's decision.
  • The principle of the case is found by taking account
    • of the facts treated by the Judge as material, and
    • his decision as based on them.
  • In finding the principle it is also necessary to establish what facts were held to be immaterial by the Judge, for the principle may depend as much on exclusion as it does on inclusion."

At this juncture, it would be pertinent to note that while Piramal’s case had to deal with simultaneous CIRP initiation against two corporate guarantors, which have been expressed to be treated as a material in the case, it went on to lay a blanket principle covering every specie of corporate debtors. Ergo, insofar as the judgement covers other species of corporate debtors with respect to simultaneous initiation of CIRP (for instance, initiation of CIRP against principal debtor and guarantor/surety- which has also been safeguarded under the rule of double dip), it ought to be considered as obiter dicta of the decision. Therefore, decision apart from not being based on material facts was also devoid of reasoning, ergo does not form ratio.

Conclusion and the Way Forward

The foregoing arguments have tried to bring out loopholes in the aforementioned NCLAT decisions. It should not be forgotten that while the IBC is debtor-friendly legislation. Further, it places paramount significance on easy credit availability, which would, in turn, boost the economy (recognised as one of the objectives of IBC in Swiss Ribbons). Credit market is replete with sophisticated tools. Courts must refrain from erecting unwanted hurdles in the flow of heavy day-to-day commercial transactions for its limited understanding and lack of expertise. Piramal has been appealed before the SC and awaits its decision. It would be interesting to see if the apex court devises an equitable rule unique to Indian law in consonance with principles of guarantee and objectives of IBC. If not, it would only mollify creditors’ predicament if the Supreme Court does not miss out on the opportunity of implanting the equitable rule of double dip in Indian insolvency law.

A better way, however, in the present scenario would be to initiate CIRP against the principal debtor and list out the claims against the guarantor in the resolution plan. While in Essar Steel it was held that negotiations with the resolution applicant are permissible to fine-tune the plan, in Ramakrishnan, it was held that guarantor can’t escape liability imposed on him in a resolution plan.

ANKESH KUMAR is a law student at National Law Institute University, Bhopal.