Two firms can face IBC proceedings if both are corporate debtors: SC

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The Supreme Court on Thursday said if two corporate bodies fall within the ambit of corporate debtors, there is no reason why insolvency proceedings cannot be initiated against both under the IBC.

Section 7 of the Insolvency and Bankruptcy Code (IBC) deals with the initiation of the corporate insolvency resolution process by financial creditors.

The apex court also observed that approval of a resolution in respect of one borrower cannot "certainly discharge" a co-borrower.

A bench of Justices Indira Banerjee and J K Maheshwari delivered its verdict on a plea against the August last year judgement of the National Company Law Appellate Tribunal (NCLAT) which had dismissed an appeal against an order of the adjudicating authority, the National Company Law Tribunal (NCLT), Mumbai.

The NCLT had in its February last year order admitted a petition for initiation of Corporate Insolvency Resolution Process (CIRP) against a firm for the same set of loans arising out of the same loan documents, in respect of which the financial creditor had initiated CIRP against another company.

The apex court, which dismissed an appeal against a judgement passed by the NCLAT noted in its verdict that the financial creditor had disbursed a loan of Rs six crore to one of the companies pursuant to the loan-cum-pledge agreements, executed both by the two firms.

It noted that the other company has been referred to in the agreement as borrower and pledger and prima facie, it appeared that the firm was a party to the loan-cum-pledge agreement in its dual capacity of borrower and pledgor of shares.

While referring to a previous verdict of the apex court, the bench said it was held that the approval of a resolution plan concerning a corporate debtor does not discharge the guarantor of the corporate debtor.

"On a parity of reasoning, the approval of a resolution in respect of one borrower cannot certainly discharge a co-borrower," the bench said.

"If there are two borrowers or if two corporate bodies fall within the ambit of corporate debtors, there is no reason why proceedings under section 7 of the IBC cannot be initiated against both the corporate debtors," it said.

The apex court said 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. However, once the claim of the financial creditor is discharged, there can be no question of recovery of the claim twice over," it said while dismissing the appeal.

The bench noted in its verdict that the financial creditor had filed separate petitions under section 7 of the IBC for initiation of CIRP against both the firms and the NCLT had admitted the pleas.

During the arguments before the apex court, the counsel appearing for the appellant, a suspended director of one of the firms, had said that no amount under the loan-cum-pledge agreements was disbursed by the financial creditor to the company and the loan was granted to the other firm.

The lawyer had argued that since no disbursement was made to the firm against consideration for the time value of money, there was no obligation on its part to make any repayment to the financial creditor.

The counsel appearing for the financial creditor had argued that both the companies were described as borrowers in the loan-cum-pledge agreements .