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Indemnity and Guarantee

 

Team LawDocs

A contract of guarantee or indemnity is a contract by way of which a ‘surety’ . Ensures to safeguard the interest of creditor. Towards the debt owed by the principal debtor towards the loan amount upon occurrence of a default. The surety plays a secondary role in a commercial transaction. By furnishing means to indemnify the creditor to the extent of amount disputed.

A contract of guarantee is a contract is govern by the provisions lay down under the Section 128 of the Indian Contract Act. The underlying objective of a contract of guarantee is to safeguard the interest of the principal creditor. Under the act the liability of guarantor is coextensive with the liability principal debtor, unless provided otherwise by the contract. However, the question of co-extensive liability of the principal debtor and guarantor has been under the radar of adjudicating authorities and appellate authorities formed under the Insolvency and Bankruptcy Code, 2016.

The question of the applicability of moratorium u/s 14 to the assets of the guarantor has a lot of debate around it. The Hon’ble NCLAT held in the matter of SBI vs. V. Ramakrishna and Anr.[1] that the moratorium under Section 14 of the code shall also be applicable to the assets of the guarantor, thereby implying that the scope of recovery from a guarantor also stands still during the period when the resolution process continues and the same created a lot of confusion amongst the creditors.

Insolvency Law Committee

To put an end to the same, the Insolvency Law Committee recommended in its report to keep the assets of the guarantor outside the scope of moratorium. The same was later on amend in the code and sub-section (3) was insert making guarantor an exception. The objective behind the same was to withhold the principles of debt recovery provided under the code and further disable the guarantor to escape from an independent and coextensive liability  to pay off the outstanding debt.

However, in the recent judgment of Dr. Vishnu Kumar Agarwal vs. M/s Piramel Enterprises Limited[2] the above mentioned objectives of the legislative were questioned and put to test. The Hon’ble Supreme Court answered in affirmative that a corporate insolvency. Resolution process can be initiated against a corporate guarantor if the principal borrower is not a corporate debtor or person. Another very important and elemental question of law that was answered was if the CIRP can be initiated against two corporate guarantors simultaneously for the same set debt and default and the Apex Court answered the same in negative and further stated that the second application based on the same set of claim and default is not maintainable.

The aforesaid ratio of the Court goes against the settled position of law with respect to law of guarantee. As it gives an escape route to the guarantor, which may be jointly and severally liable for the debt.

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