LAW OF GUARANTEE AND IT’S SCOPE UNDER THE IBC 
              
             Introduction 
              
             Contract of Guarantee means a contract to perform the promise made or discharge the liability 
             of the third person in case of his failure to discharge such liability. Black law’s dictionary 
             defines the term “Guarantee” as the assurance that a legal contract will be duly, enforced. A 
             contract of Guarantee is governed by the Indian Contract Act, 1872. Section 126 of the Indian 
             Contract, 1872, deals with the contract of guarantee. The section reads as follows: 
              
             “Contract of guarantee” is a contract to perform the promise, or discharge the liability, of a 
             third person in case of his default. The person who gives the guarantee is called the “surety”; 
             the person in respect of whose default the guarantee is given is called the “principal debtor”, 
             and the person to whom the guarantee is given is called the “creditor”. A guarantee may be 
             either oral or written. 
              
             There are three parties to a contract of Guarantee, namely: 
              
             i.   Surety : A Surety is a person giving the guarantee in a contract of guarantee. 
             ii.  Principal Debtor : A Principal Debtor is a person for whom the guarantee is given. 
             iii. Creditor : A Creditor is a person to whom the guarantee is given in a contract of guarantee. 
              
             For Example: A advances a loan of Rs. 10,000/- to B, and C promises A that if B does not 
             repay the loan, he will repay it. This is a contract of Guarantee. In this case A is the Creditor, 
             B is the Principal Debtor and C is the Surety. 
              
             It is pertinent to note that a contract of guarantee is a secondary contract that flows or emerges 
             from the primary contract entered in to between the Principal Debtor and Creditor.  
              
             Section 128 of the Indian Contract Act, 1872, deals with the liability of the Surety / 
             Guarantor. The section reads as follows: 
              
             Surety’s liability - The liability of the surety is co-extensive with that of the principal debtor, 
             unless it is otherwise provided by the contract."  
              
             “Illustration: A guarantees to B the payment of a bill of exchange by C, the acceptor. The bill 
             is dishonoured by C. A is liable, not only for the amount of the bill, but also for any interest 
             and charges which may have become due on it." 
              
             This is one of the most significant aspects of the contract of Guarantee. Unless explicitly 
             stated otherwise, the general principle of these contracts is that the liability of the Surety is 
             joint, several and co-extensive with that of the Principal Debtor. 
              
             Law of Guarantee under the Insolvency and Bankruptcy Code, 2016 (“IBC”) 
             Issue | 13th April 2020 
                                                                      1 | P a g e  
           
           
          I.         Initiating Corporate Insolvency Proceedings against the Guarantor 
               
              The Financial / Operational Creditor need not exhaust all available legal remedies 
              against  the  Corporate  Debtor  before  initiating  corporate  insolvency  against  the 
              Corporate  Guarantor.  The  Financial  /  Operational  Creditors  have  the  option  of 
              initiating insolvency proceedings against the Corporate Guarantor only, without even 
              pursuing any legal proceeding against the Corporate Debtor.  
               
              The Apex Court in Ram Kishun vs. State of U.P. observed as follows: 
               
              “There can be no dispute to the settled legal proposition of law that in view of the 
              provisions of Section 128 of the Indian Contract Act, 1872 (hereinafter called the 
              'Contract Act'), the liability of the guarantor/surety is co-extensive with that of the 
              debtor. Therefore, the creditor has a right to obtain a decree against the surety and 
              the principal debtor. The surety has no right to restrain execution of the decree against 
              him until the creditor has exhausted his remedy against the principal debtor for the 
              reason that it is the business of the surety/guarantor to see whether the principal 
              debtor has paid or not. The surety does not have a right to dictate terms to the creditor 
              as how he should make the recovery and pursue his remedies against the principal 
              debtor at his instance.” 
               
              Hence asking the Financial / Operational Creditor to postpone in availing its remedies 
              against the Corporate Guarantor would defeat the purpose of obtaining a guarantee as 
              this would result in curtailing the rights of the Creditor. This view was also taken by 
              the  Supreme Court by dismissing the Civil Appeal and upholding the landmark 
              judgement passed by the National Company Law Appellate Tribunal (“NCLAT”) in 
              the matter of Ferro Alloys Corporation Limited v Rural Electrification Corporation 
              Limited (Comp. App (AT) (Ins) No. 92 of 2017) in favour of the financial creditor 
              (being Rural Electrification Corporation Limited). In the said decision, the Supreme 
              Court affirmed the NCLAT judgment which held that insolvency proceedings against 
              the  corporate  guarantor  may  be  undertaken  without  initiating  prior  proceedings 
              against the principal debtor under the Insolvency and Bankruptcy Code, 2016. 
               
          II.        Applicability of Moratorium u/s 14 of the IBC to Guarantors 
            
              Section 14 of the IBC reads as follows: 
               
              “(1)  Subject  to  provisions  of  sub-sections  (2)  and  (3),  on  the  insolvency 
              commencement date, the Adjudicating Authority shall by order declare moratorium 
              for prohibiting all of the following, namely:—  
                  (a) the institution of suits or continuation of pending suits or proceedings 
                  against the corporate debtor including execution of any judgment, decree or 
                  order in any court of law, tribunal, arbitration panel or other authority;  
          Issue | 13th April 2020 
                                                        2 | P a g e  
           
                  (b) transferring, encumbering, alienating or disposing of by the corporate 
                  debtor any of its assets or any legal right or beneficial interest therein;  
                  (c) any action to foreclose, recover or enforce any security interest created by 
                  the corporate debtor in respect of its property including any action under the 
                  Securitisation and Reconstruction of Financial Assets and Enforcement of 
                  Security Interest Act, 2002;  
                  (d) the recovery of any property by an owner or lessor where such property is 
                  occupied by or in the possession of the corporate debtor.  
               
              (2) The supply of essential goods or services to the corporate debtor as may be 
              specified shall not be terminated or suspended or interrupted during moratorium 
              period.  
               
              (3) The provisions of sub-section (1) shall not apply to such transactions as may be 
              notified  by  the  Central  Government  in  consultation  with  any  financial  sector 
              regulator.  
               
              (4) The order of moratorium shall have effect from the date of such order till the 
              completion of the corporate insolvency resolution process.” 
            
               Section  14  of  the  IBC  basically  provides  for  a  moratorium  from  the  insolvency 
              commencement date on inter alia “the institution of suits or continuation of pending 
              suits  or  proceedings  against  the  Corporate  Debtor  including  execution  of  any 
              judgment, decree or order in any court of law, tribunal, arbitration panel or other 
              authority”. With respect to the applicability of the Moratorium imposed under section 
              14  of  the  IBC  to  the  Guarantor  of  a  Corporate  Debtor  undergoing  insolvency 
              proceedings, contradictory views have been taken by various tribunals and courts with 
              some holding that the moratorium imposed under section 14 of the IBC is applicable 
              to Guarantors whereas some holding that the same is not applicable. In the matter of 
              State Bank of India v. V Ramakrishnan and Veesons Energy Limited, the question 
              raised before the NCLAT was, whether the period of moratorium under section 14 of 
              Insolvency and Bankruptcy Code is applicable to Personal Guarantor? The NCLAT 
              while placing reliance on section 14, 30 and 31 of the IBC observed the following: 
                
              “In view of the aforesaid provisions, we hold that the ‘Moratorium’ will not only be 
              applicable  to  the  property  of  the  ‘Corporate  Debtor’  but  also  on  the  ‘Personal 
              Guarantor’.” 
               
              Hence, in this case it was held that the moratorium period was applicable to the 
              Guarantor of the Corporate Debtor too. The NCLAT in the matter of Schweitzer 
              Systemtek India Pvt. Ltd. v. Phoenix ARC Pvt. Ltd. & Ors. took a contrary view from 
              the observations made in the aforementioned case. The NCLAT while upholding the 
              order of the NCLT in this case, held that the moratorium imposed under section 14 of 
              the IBC was not applicable to the property of the guarantor of the corporate debtor. 
              The NCLAT relied on the interpretation of the word “its” in section 14 of the IBC 
          Issue | 13th April 2020 
                                                        3 | P a g e  
           
              while making this observation, holding that the property not owned by the corporate 
              debtor do not fall under the ambits of the moratorium.  
               
              The Insolvency Law Committee (“ILC”) which was set up to conduct a detailed 
              review of the IBC, due to the contradictory views of the adjudicating authorities with 
              respect to the applicability of the moratorium to Guarantors, gave a clarification by 
              way of an explanation in section 14 of the IBC, stating that all assets of the guarantors 
              will be outside the scope of moratorium imposed under the IBC. 
               
              Accordingly, pursuant to the recommendations of the ILC, an explanation by way of 
              an amendment was introduced in section 14 of the IBC stating that the moratorium 
              shall not be applicable to the guarantor of a corporate debtor vide the Insolvency and 
              Bankruptcy Code (Second Amendment Act), 2018. This clarificatory amendment, 
              put to rest the controversy involving the applicability of the moratorium under section 
              14 of the IBC to the guarantor of the corporate debtor. 
           
          III.      Supreme Court on Law of Guarantee 
           
              In the matter SBI vs V. Ramakrishnan, though the question  raised before the Apex 
              Court was in relation to the applicability of moratorium imposed under section 14 of 
              the IBC to guarantors of the corporate debtor, the Apex Court has also dealt with the 
              law of guarantee. This appeal was preferred by the creditor against the NCLAT order 
              where in it was held that the moratorium imposed under section 14 of the IBC would 
              also be applicable to the guarantors. The Ld. Counsel appearing for the respondents 
              while making arguments, placed reliance on an Order passed by the Allahabad High 
              Court in Sanjeev Shriya v. State Bank of India and Ors., which stated that as a 
              proceeding relatable to the corporate debtor is pending adjudication in two forums, it 
              is  not  permissible to proceed against the personal guarantor. A financial creditor 
              cannot operate in a manner that imperils the value of the property of the personal 
              debtor. The Supreme Court commented that the reasoning of Allahabad High Court 
              made in this case does not make sense. The Supreme court placed reliance on the 
              findings made by the Insolvency Law Committee wherein the following observation 
              was made: 
               
              “5.9 A contract of guarantee is between the creditor, the principal debtor and the 
              surety, where under the creditor has a remedy in relation to his debt against both the 
              principal debtor and the surety [National Project Construction Corporation Limited 
              v. Sandhu and Co., AIR 1990 P&H 300]. The surety here may be a corporate or a 
              natural person and the liability of such person goes as far the liability of the principal 
              debtor. As per section 128 of the Indian Contract Act, 1872, the liability of the surety 
              is co-extensive with that of the principal debtor and the creditor may go against either 
              the principal debtor, or the surety, or both, in no particular sequence [Chokalinga 
              Chettiar v. Dandayunthapani Chattiar, AIR 1928 Mad 1262]. Though this may be 
              limited  by  the  terms  of  the  contract  of  guarantee,  the  general  principle  of  such 
              contracts is that the liability of the principal debtor and the surety is co-extensive and 
          Issue | 13th April 2020 
                                                        4 | P a g e