The Supreme Court has ruled that lenders can start insolvency proceedings at the same time against both the main borrower and the corporate guarantor for the same loan under the IBC. The Court said there is no legal bar in the Code and each case must be examined independently on merits.
The Supreme Court of India on Thursday delivered a significant judgment under the Insolvency and Bankruptcy Code (IBC), holding that lenders are legally permitted to initiate insolvency proceedings simultaneously against both the principal borrower and the corporate guarantor for the same debt.
The ruling clarifies that there is no statutory prohibition in the IBC against parallel Corporate Insolvency Resolution Process (CIRP) proceedings, reinforcing creditor rights under the Code.
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A Bench comprising Justice Dipankar Datta and Justice Augustine George Masih passed the 47-page verdict, stating that financial creditors can file parallel CIRP applications if the legal requirements under the IBC are satisfied. The Court emphasized that the IBC is a carefully structured legislative framework enacted by Parliament and that courts must interpret it as written, without adding new restrictions.
Justice Datta began the judgment with a strong reminder about judicial discipline and statutory interpretation. He wrote,
“The Judge is not to innovate at pleasure. He is not a knight errant roaming at will in pursuit of his own ideal of beauty or of goodness,”
underlining that courts must apply the law strictly as enacted. The Bench stressed that judges cannot rewrite or modify the framework of the IBC through interpretation, especially in matters involving commercial and financial policy.
The Court rejected the argument that insolvency proceedings should be blocked against a guarantor merely because the IBC is not a recovery mechanism. Addressing this contention, Justice Datta observed,
“Thus, whilst approving that the IBC is not a recovery proceeding, we negate the contention that CIRP can be prohibited against a guarantor or co-borrower only on that ground. It seems prudent that the rationale of a creditor obtaining a guarantee for its debt must be realized to its fullest. A financial creditor, vested with rights under the Code, must be able to exercise it. Equally so, the adjudicating authority has the obligation to examine the application independently, on its own merits,”
Justice Datta said.
The Court explained that if creditors are forced to wait for one insolvency process to conclude before initiating another against a guarantor, it would defeat the very purpose of a guarantee. A guarantee, by its nature, gives additional security to the lender. If the creditor cannot proceed simultaneously, the guarantee would lose its practical value.
The Bench linked this reasoning to the principles under the Indian Contract Act, particularly the concept that a surety’s liability is co-extensive with that of the principal debtor. This means the guarantor is equally responsible for repayment of the debt, unless the contract states otherwise.
The judgment also dealt with the issue of any time gap between insolvency proceedings against the borrower and the guarantor. The Court clarified that the IBC does not create any temporary protection or “pause” period for guarantors.
Referring to this aspect, the Bench observed,
“The interpretation… would mean that the guarantor would be exempt, in the interregnum, from paying the debt, which the IBC does not provide for,”
the verdict said. According to the Court, accepting such an interpretation would effectively insert a new rule into the statute, which is not permitted.
The ruling came in a batch of appeals involving major financial institutions, including ICICI Bank and State Bank of India (SBI), along with infrastructure and real estate companies. In some of these cases, insolvency proceedings against corporate guarantors had been stalled or blocked.
The Supreme Court allowed the appeals filed by the lenders and set aside decisions that had prevented parallel CIRP proceedings. It also dismissed appeals filed by certain corporate directors challenging such actions.
Importantly, the Court clarified that while parallel proceedings are legally permissible, each insolvency application must still be independently examined by the adjudicating authority on its own merits.
The National Company Law Tribunal (NCLT), as the adjudicating authority under the IBC, is required to assess whether the conditions for admission of the application are fulfilled in each case.
With this decision, the Supreme Court has settled the legal position that there is no statutory bar under the IBC preventing simultaneous insolvency proceedings against a principal borrower and a corporate guarantor for the same debt.
The judgment strengthens creditor rights and reinforces the contractual and statutory framework governing guarantees in insolvency law. It also reiterates that courts must respect the legislative design of the IBC and avoid adding conditions that are not found in the statute itself.
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