Specifics related to the contract of guarantee is governed under the
principles of Indian Contract Act, 1872 and is mentioned in chapter VIII of the
Contract Act. For a layman to understand a contract of guarantee is a contract
to discharge the liability of a third person in case he defaults. It is a
tri-party contract between the principal debtor, creditor and the surety.
The Contract Act has very well specified the rights and liabilities of a
guarantor in regards to a contract of guarantee. Here the main point of
understanding is that the contract of guarantee is to safeguard the position of
the creditor in case the principal debtor defaults. As per the Contract Act, the
guarantor enjoys the right of subrogation wherein the guarantor gets to claim
indemnity from the principal debtor in case the guarantor when the principal
In recent times this has posed as an issue when guarantee is being discussed in
the cases coming under the Insolvency and Bankruptcy Code, 2016. Under the
Insolvency and Bankruptcy Code,2016 the surety is denied the right to
subrogation. In this article, we will see how the Insolvency and Bankruptcy Code
stands as a contrast to the Indian Contract Act,1872 in terms of guarantee
Liability of Guarantors after approval of CIRP under the IBC, 2016
The question here is about the rights of the creditor against that of the
guarantor after the conclusion of Corporate Insolvency Resolution Process (CIRP)
of the concerned. The issue here has to be understood while throwing light on
the objective of the Insolvency and Bankruptcy code, 2016. The object of the IBC
is to maximize the value of the assets of the corporate debtor.
The resolution approved during CIRP is not for recovery. Once the resolution
plan is approved by the adjudicating authority the obligations of the corporate
borrower cease. However, the creditors retain the right to proceed against the
guarantors of the corporate debtor concerned. Under IBC there is no bar on the
creditor with regard to his right to claim its remaining debt from the
guarantor. Here the due debt or the remaining debt is the part that has not been
recovered from the debtor through CIRP.
As we know that the Indian Contract Act,1872 has made it clear that the
liability of the guarantor is coextensive with that of the borrower the
liability of the guarantor is dependent in itself as the contract of guarantee
is an independent contract under section of the Contract Act.
Section 133, 134 and 140 of the Indian Contract Act gives certain rights to the
guarantors. However, after the approval of the CIRP the guarantor cannot be
discharged of his liability towards the creditor on the discharge of the
principal debtor’s liability (S 134). This happens because the debtor is
discharged by the operation of law hence the main ingredient of section 134 is
Placing strong reliance on section 31 of the IBC the guarantor cannot be
released from making the payment by virtue of section 133 of the Indian Contract
However, under section 140 of the Indian Contract Act the guarantors enjoy the
right of subrogation, under this the guarantor has a right of subrogation of the
debt amount paid on the behalf of the principal debtor but under IBC after the
CIRP is concluded the guarantor cannot enjoy this right of subrogation for the
payment made by him with respect to the debt for which the guarantee was
Lalit Mishra & Ors. vs. Sharon Bio Medicine Ltd. & Ors.
As seen in the case mentioned above the judgement held that the guarantor cannot
exercise his right to subrogation under section 140 of the Indian Contract Act
as the proceedings of the IBC are not recovery proceedings. Thus there is no
such recovery that can be made by the guarantors. It is clear that the
conclusion of CIRP does not bar the creditor from proceeding against the
guarantors. The right of a creditor against that of the guarantor is
Double dip under IBC
Guarantee contacts are governed by the provisions of the Indian Contract
Act,1872, which clearly states that the guarantor's liability is coextensive
with that of the principal debtor. In the context of guarantee the more debated
issue under the IBC is that if a lender can make simultaneous claim against the
principal debtor and the guarantor.
On seeing through the lens of the principals of the Contract Act the most
significant characteristic of guarantee contract is coextensive liability of the
principal debtor and the guarantor (Section 128). The implication of this
section being that the liability of the guarantor is immediate and cannot be
deferred until the creditor exhausts his remedies against the principal debtor.
For the judgement in the case of Bank Of Bihar v. Damodar Prasad & Anr
held that the very objective of obtaining a guarantee under the Contract Act
would be defeated if the creditor was asked to postpone his remedies against the
In the case of Bank Of Bihar v. Damodar Prasad & Anr
the judgement held
that before payment the guarantor has no right it to command the terms to the
creditor, as in asking the creditor to pursue his remedies against the debtor in
the first instance. It is the business of the guarantor to see if the principal
debtor pays and not that of the creditor. This case highlights the fact that the
solvency of the principal is not a sufficient ground for restraining execution
of the decree against the surety. It is the surety's liability to pay the debt.
Treatment of Guarantee under IBC
Under IBC it is made very clear that the moratorium would not extend to the
guarantor of a corporate debtor and that the creditor can proceed against the
guarantor while the CIRP of the principal borrower. The amendment in Section 60
of the IBC was in order to provide a link between the insolvency resolution of
the debtor and the guarantor. By the amendment the intention of the legislature
to allow a financial creditor to initiate simultaneous proceedings against the
debtor and the guarantor is highlighted.
Here it is made clear that the IBC has permitted the creditor can file a proof
of claim in the liquidation of both the debtor and the guarantor. However, the
creditor in no way can recover more than the amount due in respect of the loan
Dr. Vishnu Kumar Agarwal v. M/S Piramal Enterprise limited
The case mentioned above concerns a principal debtor having borrowed from a
creditor which was guaranteed by two corporate guarantors.
The issues of the case are:
- CIRP could be initiated against the guarantor when the principal debtor
was not a body corporate and
- if there could be simultaneous initiation of CIRP against the two
guarantors at the same time.
The judgement of the court in regards to the first issue was affirmative. While
deciding on the second issue the court held that there is no bar in the
insolvency and bankruptcy code 2016 for filing simultaneously two applications
under Section 7 against the principal debtor as well as the guarantor or against
both the guarantors.
However, the court held that once for the same set of claim
an application is filed under section 7 by the creditor and is admitted against
one of the principal debtor or corporate guarantor(s) a second application by
the same creditor for the same claim cannot be admitted against the other
principal debtor or guarantor(s). Accordingly, if a creditor has recovered a
portion of his claim from one debtor he would be barred from claiming the rest
from the others.
The NCLAT seems to have arrived at the above mentioned conclusion on the basis
that for a same set of debt the same financial creditor cannot file for two
simultaneous CIRP's- this condition is essentially a double dip
permissible under the Insolvency and Bankruptcy Code, 2016. Though in this case
the reason for arriving to the above said judgement has not been discussed.
The Piramal judgement
clearly weighs against the principles of Guarantee
under the Indian Contract Act,1872. The Contract Act entitles the creditor to
proceed against either the debtor or one or more of the guarantors or against
both in no specific order.
This fact has been catered to in the case of Chokalinga Chettiar v.
, AIR 1928 Mad 1262. Section 146 of the Contract
Act,1872 states the liability of the surety is co-extensive with that of the
debtor and the surety is jointly and severally liable. Co-guarantors are liable
to contribute equally and for instances where there is more than one guarantor
they have to share the liability equally unless the contract provides otherwise.
The hallmark of the contract of guarantee under the Indian Contract Act is the
lender's remedy against the debtor and the guarantor without an obligation to
exhaust the remedy against one of them before proceeding against the other. As
we say that the section 14 of the Insolvency and Bankruptcy Code, 2016 has made
it clear that the order of moratorium will not be applicable against the
So saying that the creditor cannot have two simultaneous claims against the same
that against the data and the guarantor render the aforesaid amendment
redundant. There is no provision in the IBC which bars the creditor from
initiating CIRP simultaneously against both the borrower and the guarantor.
Have the legislation intended to prevent a double dip in an insolvency it would
have made it clear and Section 14 of the insolvency and bankruptcy code would
have excluded any such proceedings. In this scene the decision of the supreme
court in regards to the appeal filed in the Piramal Case is much waited for that
will throw more light on the matter with regards to double dip under IBC.
By now we can see how the rights of the surety is at cost under the Insolvency
and Bankruptcy Code, 2016 and if it continues this way it is very probable the
guarantors will be unwilling to stand as a surety to transactions as their
rights are in doubt here. Apart from this I am of the opinion that the
insolvency and bankruptcy code 2016 needs some necessary amendments to address
to the issues that might arise from simultaneous CIRPs against the principal
debtor and the corporate guarantor.
- The Indian Contract Act, 1872
- The Insolvency and Bankruptcy Code, 2016
- Lalit Mishra & Ors. v. Sharon BioMedicine Ltd. & Ors., Company Appeal
(AT) (Insolvency) No. 164 of 2018.
- Bank of Bihar Vs. Damodar Prasad, AIR 1969 SC 297: (1969) 1 SCR 620
- Dr. Vishnu Kumar Agarwal v. M/S Piramal Enterprise limited
- Chokalinga Chettiar v. Dandayunthapani Chattiar, AIR 1928 Mad 1262.