SIMULTANEOUS INSOLVENCIES UNDER THE IBC: WHERE IS THE PROCEDURAL LAW?
This post, the entry winning the Second Position of the RFMLR-IBBI Blog Series Competition, 2021, is authored by Tanvi Apte, a fifth-year B.A.LL.B. (Hons.) student at the NALSAR University of Law, Hyderabad.
The Insolvency & Bankruptcy Code 2016 was, at its inception, silent regarding the admission of simultaneous insolvency proceedings (or, filing of simultaneous claims) against the principal borrower as well as the guarantor(s). Post a 2018 amendment, the Code’s Sections 60(2) and 60(3) now provide that corporate insolvency resolution proceedings ("CIRP") against personal and corporate guarantors will take place before the same NCLT that is adjudicating upon the proceedings of the principal borrower. This seems to indicate that the Code does envision simultaneous proceedings. However, in Dr. Vishnu Kumar Agarwal v. M/s. Piramal Enterprises Ltd. (January 2019) ("Piramal") the NCLAT did not permit simultaneous initiation of proceedings against the principal debtor and its two corporate guarantors, citing danger of double recovery of the debt. This judgment received sharp criticism on grounds that it ignores the Code’s Sections 60(2) and (3), and goes against the established contract law principle of co-extensive liability of the principal borrower and the guarantor(s). Overall, Piramal dealt a blow to the established commercial practice of guarantees itself, since it made recovery by creditors in case of default tougher.
The criticisms against Piramal found immediate reflection in subsequent law. Significantly, the Insolvency Law Committee (ILC) Report (Feb. 2020) directly took note of Piramal and disagreed with its findings, toeing the line of the aforesaid criticism. Ultimately, it noted, “the right to simultaneous remedy is central to a contract of guarantee, the Committee suggested that in cases where both the principal borrower and the surety are undergoing CIRP, the creditor should be permitted to file claims in the CIRP of both of them. Since, as the Code does not prevent this, the Committee recommended that no amendments were necessary….”. Furthermore, the same year, in State Bank of India v. Athena Energy Ventures (November 2020) ("Athena Energy Ventures"), the NCLAT extensively referred to ILC’s Report to permit simultaneous insolvency proceedings against the principal debtor and its corporate guarantor. A host of subsequent cases affirm Athena Energy Ventures and denounce Piramal. Some recent examples include State Bank of India v. Animesh Mukhopadhyay (NCLAT, March 2021), Kanwar Raj Bhagat v. Gujarat Hydrocarbons (NCLAT, May 2021) and Maitreya Doshi v. Anand Rathi Global Finance Ltd. (NCLAT, August 2021). Hence, it is clear that Piramal is the odd one out.
Presently, an appeal against Piramal is pending in the Supreme Court (Diary No. 2220/2019), which has, in the meanwhile, directed the parties to maintain status quo. While Piramal has still not been formally overruled, its status as bad law is a foregone conclusion. Hence, today, the position of law is that simultaneous initiation of insolvency proceedings (and simultaneous filing of claims) against the principal borrower and guarantor(s) is permissible, with the caveat that there should be no double recovery. Though the cases have been in the context of corporate guarantors, logically, the law is the same in case of personal guarantors too.
This position of law, while laudable, meets with a glaring problem that has not received much attention: procedural roadblocks. At this point, it is important to note that simultaneous proceedings are interlinked insolvencies, that is, the developments in one CIRP affect the other CIRP. For instance, if the creditor manages to recover a part of the debt from the principal borrower (either through a resolution plan or through liquidation), its claim amount will proportionately reduce in the guarantor’s CIRP. Consequently, its voting power in the Committee of Creditors ("COC") will reduce too. A potential/actual resolution applicant may have to alter the resolution plan accordingly. In this manner, the dynamic nature of the proceedings demand that the CIRPs run parallelly with perfect administrative coordination throughout. All this is not easy to coordinate. Even if everything manages to be perfect, one litigation in one CIRP can cause a cascading effect, especially when there are multiple guarantors. Sadly, after almost two years since the ILC’s Report and a year and a half since Athena Energy Ventures, all we still have is the Code’s Section 60 saying that simultaneous CIRPs have to be before the same NCLT. There are no other stipulated procedures.
This procedural black hole presents a particular headache in relation to two aspects. The first aspect is prevention of double recovery. The ILC Report notes, “the right to simultaneous remedy does not entitle a creditor to recover more than what is due to her…. upon recovery of any portion of the claims of a creditor in one of the proceedings, there should be a corresponding revision of the claim amount recoverable by that creditor from the other proceedings...”. In the same vein, all cases note that the creditor cannot make double recovery. However, the problem is that, by the time the creditor knows the amount likely to be recovered in one CIRP, the other CIRP will already be at an advanced stage. Now, how to go about revising the claim amounts? When the COC’s voting power changes post the revision, what happens to its past decisions? How can a prospective resolution applicant commercially decide upon the plan if claim amounts are in limbo or dynamic? All these questions need answers.
Further, the procedural blackhole on simultaneous insolvencies also cause major problems in the second aspect: subrogation. Simply put, the principle of subrogation states that once the guarantor pays off the debt, he comes into the shoes of the creditor and can then recover the debt from the principal debtor. It is very difficult to implement proper subrogation in simultaneous insolvencies. This is because by the time the guarantor is in a position to subrogate, it will simply be too late. The principal borrower may have already got a successful resolution applicant by that time. The recent Supreme Court case of Ghanshyam Mishra v. Edelweiss ARC (April 2021) makes it clear that once the resolution plan is approved, the principle of clean slate bars the guarantor from claiming the subrogated debt. This situation is more unfortunate if the guarantor would have remained a going concern had the subrogation been possible. Overall, it is clear that simultaneous insolvencies make subrogation very difficult, if not entirely illusory.
Thus, due to these problems, it is imperative that the IBBI comes up with comprehensive procedural rules on simultaneous insolvencies. Even in Athena Energy Ventures, the NCLAT notes, “Under the Contract of Guarantee, it is only when the Creditor would receive amount, the question of no more due or adjustment would arise. It would be a matter of adjustment when the Creditor receives debt due from the Borrower/Guarantor in the respective CIRP that the same should be taken note of and adjusted in the other CIRP. This can be conveniently done, more so when IRP/RP in both the CIRP is same. Insolvency and Bankruptcy Board of India may have to lay down regulations to guide IRP/RPs in this regard...” Hence, the IBBI must consider coming up with rules on simultaneous insolvencies. Such rules will help foster smoother insolvencies by ensuring proper administrative coordination, development of a double recovery prevention mechanism, prior provision for subrogation etc. The following are some suggestions as to the content of these rules.
Firstly, the IBBI can borrow from the discussions around the law on group insolvency to stipulate that there should be a common resolution professional in case of simultaneous insolvencies. This will help cope with the dynamicity of the process by ensuring greater administrative coordination and information symmetry regarding debt amounts. Such symmetry might particularly help potential resolution applicants to come up with better plans.
Secondly, in relation to double recovery, the IBBI can take inspiration from case law on execution of civil decrees against multiple persons. For instance, in PAFCO vs. Kingfisher Airlines Limited (April 2016), the Karnataka High Court notes, “to allay the apprehension of Judgment debtors that decree holder may suppress the fact of amounts realized, it would suffice if decree holder is directed to file an affidavit of undertaking indicating thereunder that as and when amounts are realised in any of the execution petitions.” In a similar vein, the IBBI can mandate that creditors file affidavits before the NCLT as and when they have a reasonable estimate of the probable recovery amount, and post receipt of the amount. This will provide a safeguard against creditors recovering extra money.
Thirdly, the IBBI can ensure that change in COC composition in case of revision of claim does not invalidate the COC’s past actions.
Lastly, the IBBI can provide for expedited disposal of litigations involving simultaneous insolvencies, so as to avoid delays across the board due to a single pendency.
Importantly, these suggestions are merely non-exhaustive starting points to a debate that is much overdue. The bottom line is that clarity on the substantive law relating to simultaneous insolvencies will only be beneficial if there are proper procedures rules in this respect. Athena Energy Ventures is one and a half years old now; it is high time that the discourse moves on to the procedural modalities of simultaneous insolvencies.