NCLAT holds that it is not necessary to Initiate IBC Proceedings against the Principal Borrower before Initiating CIRP against the Corporate Guarantors

The National Company Law Appellate Tribunal (‘NCLAT’), in its decision dated January 8, 2019, in Ferro Alloys Corporation Limited v. Rural Electrification Limited[1], has reasoned that the Insolvency and Bankruptcy Code, 2016 (‘IBC’) does not exclusively prescribe any inter-se rights, obligations and liabilities of a guarantor qua a financial creditor. Thus, the NCLAT has held that, in the absence of any express provisions to this effect, the same will have to be noticed from the provisions of the Indian Contract Act, 1872 and therefore it is not necessary to initiate Corporate Insolvency Resolution Process (‘CIRP’) under the IBC against the ‘Principal Borrower’ before initiating it against the ‘Corporate Guarantors’. Without initiating any CIRP against the ‘Principal Borrower’, it is open to the financial creditor to initiate CIRP against the ‘Corporate Guarantors’, as such financial creditor is also the ‘Financial Creditor’ qua the ‘Corporate Guarantor’ under Section 7 of the IBC.

[1] Ferro Alloys Corporation Limited v. Rural Electrification Limited, Company Appeal (AT) (Insolvency) No. 92 of 2017.

Published In:Inter Alia - Quarterly Edition - March 2019 [ English Chinese japanese ]
Date: March 31, 2019