Even proceedings under section 7 can be initiated against Corporate Debtor and co-borrowers though the recovery cannot be more than its total outstanding put together
Core Judicial Thesis: Dual CIRP Permissible, Double Recovery Strictly Barred
“The issue arises when there are two borrowers and/or two corporate bodies that fall within the ambit of corporate debtors, proceedings under Section 7 of the IBC can be initiated against both Corporate Debtors. Though the proceedings can be initiated against both persons, the amount cannot be realised from both Corporate Debtors. Total recovery of dues can never exceed the outstanding in the books of the lender. Yes, there are chances that part payment can be realised from one borrower and the remaining part from another borrower Corporate Debtor being the co-borrower. Therefore, the question of double recovery does not arise.”
1. Background of the IBC & The Statutory Framework
On 28th May 2016, the Insolvency and Bankruptcy Code (IBC) was published in the Official Gazette after its passage in the Parliament. It has been hailed as a major economic measure, aimed at aligning insolvency laws with international standards.
Part II: Corporate Insolvency Resolution
Titled ‘Insolvency Resolution and Liquidation for Corporate Persons’, it applies to matters relating to insolvency and liquidation of corporate debtors where the minimum amount of default as of today is ₹ 1 Crore.
A corporate debtor refers to a company, a limited liability partnership or any corporate person who owes a debt to its creditors. Financial Creditors, Operational Creditors, the Corporate Debtor itself or Directors of Corporate Debtors can initiate CIRP when the Corporate Person is in default. Part II has been notified since inception.
Part III: Individuals & Partnership Firms
Deals with provisions relating to Insolvency and Bankruptcy for Individuals and Partnership Firms. The provisions of this Part are yet to be notified except for personal guarantors of corporate debtors.
Central Government issued a Notification on 15th Nov 2019 making Part III effective from 1st December 2019 in so far as it relates to Personal Guarantors to Corporate Debtors. This notification was challenged, but the Hon’ble Supreme Court rejected the challenge in the landmark case of Lalit Kumar Jain Vs Union of India & Ors. (judgement dated 21st May 2021).
Perspective of Financial Institutions & Judicial Restraint on Excess Recovery
It is indeed noticeable that the Insolvency and Bankruptcy Code brought new energy into the veins of financial institutions. Before IBC, Financial Institutions had a very long route to recover money, and at times due to elapse of time, recovery was quite less or negligible. In the IBC era, which is a time-bound process, resolution is faster and revival is happening on a going concern basis.
Even though this created a positive vibe, a few financial institutions started looking at recovering more than their outstanding dues, requiring the Adjudicating Authority and Constitutional Courts to intervene for the betterment of stakeholders.
Supreme Court in Invent Asset Securitisation and Reconstruction Pvt. Ltd. Vs Girnar Fibres Ltd.:
“Time and again, it has been expressed and explained by this Court that the provisions of the Code are essentially intended to bring the corporate debtor to its feet and are not of money recovery proceedings as such. The intent of the appellant had only been to invoke the provisions of the Code so as to enforce recovery against the corporate debtor. We find no fault in the Tribunal and the Appellate Tribunal having declined the prayer of the appellant. However, in the interest of justice, it does appear appropriate and hence observed that if any other proceedings have been or are taken up by the appellant, the same shall be dealt with and proceeded on their own merits and in accordance with law.”
2. Case Study: Maitreya Doshi vs. Anand Rathi Global Finance Ltd. & Anr. (Supreme Court, Sep 2022)
Factual Matrix of the Dispute:
- Financial Creditor (Anand Rathi Global Finance Limited, “FC”) disbursed loans to the tune of ₹ 6 Crores to M/s Premier Limited (“Premier”) under three separate Loan-cum-Pledge Agreements.
- M/s Doshi Holdings Pvt. Ltd. (“Doshi Holdings”) pledged shares held by it in Premier in favour of the FC by way of security for the loan.
- The Appellant (Maitreya Doshi) was a common director of both Premier and Doshi Holdings.
- Premier defaulted on payments. On non-payment, the FC called upon both Premier and Doshi Holdings to repay the entire outstanding loan amount.
- Upon communication of inability to pay dues by Premier, the FC filed two separate Section 7 CIRP petitions—one against Premier and one against Doshi Holdings—for the same set of loans arising out of the same loan documents in NCLT Mumbai.
- NCLT Mumbai admitted both petitions. The Appellant appealed under Section 61 to NCLAT, which dismissed the appeal. An appeal was then preferred before the Supreme Court under Section 62 of the IBC.
Contentions of the Appellant (Maitreya Doshi):
- Two Distinct Transactions: The Agreements contemplated two distinct transactions under one document: (1) grant of loan to Premier, and (2) creation of pledge by Doshi Holdings.
- No Disbursement / Financial Debt: Loan was disbursed solely to Premier and never utilised by Doshi Holdings. Reference to Doshi Holdings as ‘borrower’ was only done for convenience. Since no disbursement was made, no financial debt was owed by Doshi Holdings.
- Pledge vs. Guarantee: Distinguishing Contract of Indemnity, Guarantee, and Pledge under the Indian Contract Act, 1872, creation of a share pledge does not amount to a guarantee or indemnity under Section 5(8) of IBC.
- Reliance on Phoenix ARC: In Phoenix ARC Pvt. Ltd. v. Ketulbhai Ramubhai Patel, the Supreme Court held that where a CD had only extended security by pledging shares, the applicant was at best a secured debtor qua security, but not a Financial Creditor under Section 5(7) & 5(8).
- Conflicting Benches: When one bench of NCLT admitted CIRP against Premier, it observed that “for the same set of loans, arising under the same loan documents, the same debt/claim against Doshi will not be permissible”; hence a subsequent bench admitting CIRP against Doshi Holdings disregarded the previous bench order.
Contentions of the Respondent (Anand Rathi FC):
- Dual Capacity: Doshi Holdings was a party to the Agreements in its dual capacity as both co-borrower and pledger.
- Signatures by Common Director: The Appellant, as common director of both entities, signed the loan documents on behalf of Doshi Holdings specifically in its capacity as co-borrower.
- Loan Receipts & Promissory Notes: Doshi Holdings had expressly acknowledged receipt of monies disbursed under the Agreements by executing loan receipts and had issued promissory notes promising repayment to the FC.
- Demand Notice: Following default by Premier, demand notice was issued to Doshi Holdings to repay the loan in its capacity as co-borrower.
- Legal Definition of Corporate Debtor: The sine qua non for an entity to be a Corporate Debtor is that such person/entity should owe a debt to any person; it is not necessary that disbursal has to be made directly to that specific person. Doshi Holdings fully satisfied this criteria.
3. Supreme Court Verdict: The Plausibility Test & The Rule Against Double Recovery
Judicial Findings of the Apex Court:
Prima facie, it appears that Doshi Holdings was a party to the Agreements in its dual capacity of borrower and pledgor of shares. The Hon’ble NCLT found that Doshi Holdings was also a borrower under the Agreements, which is a plausible interpretation and shall not be interfered with in an appeal under Section 62 of the IBC.
The Court relied on its earlier landmark judgement in Lalit Kumar Jain v. Union of India to rule that the approval of a resolution plan in respect of one borrower cannot discharge a co-borrower.
However, the Court explicitly circumscribed this right with the doctrine against unjust enrichment / double recovery:
Absolute Prohibition on Double Recovery:
“However, the same amount cannot be realised from both the Corporate Debtors. If the dues are realised in part from one Corporate Debtor, the balance may be realised from the other Corporate Debtor being the co-borrower. And once the claim of the Financial Creditor is discharged, there can be no question of recovery of the claim twice over.”
4. Analytical Takeaways & Conclusion
The Code is essentially intended to bring the corporate debtor to its feet and is not of money recovery proceedings as such. The Proceedings under IBC can be initiated against Borrowers, Co-borrowers and Personal Guarantors to Corporate Debtor.
Having possibilities of initiating IBC proceedings against each of the above persons does not mean recovering the same amount from all the persons put together. The recovery of amount cannot be more than the outstanding dues from all the parties put together.
“The Proceedings under IBC can be initiated against Borrowers, Co-borrowers and Personal Guarantor to Corporate Debtor. Having possibilities of initiating IBC proceedings against each of the above person, it does not mean to recover the same amount from all the persons put together. The recovery of amount cannot be more than outstanding dues from all the parties put together.” ❖❖❖