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[SC] CIRP can be initiated against a person who acted in dual capacity as a borrower and a pledgor

The Supreme Court has held, in Maitreya Doshi v Anand Rathi Global Finance Limited 2022 SCC OnLine SC 1276, that corporate insolvency resolution process (CIRP) proceedings under section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) may be initiated against two corporate debtors but the same amount cannot be realized from both.


Brief facts:

  • M/s Anand Rathi Global Finance Limited ('Anand Rathi') disbursed loan of approx. Rs. 6 crores to M/s Premier Limited ('Premier'), vide three loan agreements in which one M/s Doshi Holdings Private Limited ('Doshi Holdings') pledged the shares held by it in Premier in favor of Anand Rathi, while also being described in such agreements as a borrower along with Premier.

  • Premier could not repay its loan and cited genuine difficulty as the reason for such non-repayment.

  • As a consequence, Anand Rathi filed a petition under section 7 of the IBC against Premier, and on the same day, it also filed a section 7 petition against Doshi Holdings.

  • The Adjudicating Authority (NCLT) admitted the petitions under section 7 for both Premier as well as Doshi Holdings, and the appeal filed by Doshi Holdings under section 61 of the IBC was also rejected by the NCLAT, upholding the admission of the petition.

Held:


The Supreme Court, while rejecting the appeal of Doshi Holdings, held as follows:

  • The mere fact that Doshi Holdings was also a pledgor is wholly irrelevant and does not, in any manner, disentitle Anand Rathi from initiating insolvency proceedings under section 7 of the IBC.

  • The NCLAT was the final fact-finding authority. Such authority had held that Doshi Holdings has been referred to in the loan agreements as the borrower and pledgor. Thus, Doshi Holdings was a party to such agreements in a dual capacity - of a borrower as well as a pledgor. This is based on the basis of interpretation of the loan agreements, which is a plausible interpretation.

  • In Lalit Kumar Jain v Union of India (2021) 9 SCC 321, it has been held that the approval of a resolution plan in relation to a corporate debtor does not discharge the guarantor. On a parity of reasoning, the approval of a resolution plan in respect of one borrower cannot certainly discharge a co-borrower.

  • If there are two co-borrowers, there is no reason why CIRP proceedings cannot be initiated against both of them. However, the same amount cannot be realized from both, and if the dues are realized in part from one corporate debtor, the balance may be realized from the other. Once the claim of the financial creditor is discharged, there cannot be any question of recovery of the same amount twice over.

Our analysis:


There is no doubt regarding the fact that if there are two co-borrowers in a loan transaction, both of them would be liable to the creditor for recovery of the said loan. Whether the same is a joint and several liability, and what could be the proportion of the recovery amount could be defined in the agreement and in case such agreement is silent on this aspect, both the parties would be liable to recovery of the full amount.


However, it is also to be noted that in order to fully understand the relationships between parties in an agreement and/or transaction, (i) the conduct of the parties, and (ii) the agreement as a whole, are relevant factors. In the above noted case, Doshi Holdings was not, in essence, a co-borrower and it was also undisputed that it had not received any amount from the loan amount. It was just that the title clause to the loan agreement mentioned both Premier and Doshi Holdings as the borrowers. However, the Court refrained from giving any factual finding on the matter and rightly held that the NCLAT was the final fact-finding authority. Another possible argument could, however, be that whether or not the appellant was a co-borrower, was a mixed question of fact (by reading the agreement) and law (whether only being mentioned as a borrower in the agreement and not having received any amount as contemplated to be received by the borrower) and thus, it was a question of law.


Nonetheless, with grave consequences that follow from the CIRP, the case reminds us of the importance of the drafting and execution of agreements wherein though some party being mentioned as a co-borrower may offer some added comfort to the lender, it may result in unanticipated discomfort and consequences for such party.


Authored by the Editorial Team, Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.

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