Let us say there are 100 outstanding shares of company X held by investor A. Investor B comes in, borrows these 100 shares and short sells them to investor C.
Which means, outstanding shares=100, short interest =100.
Investor B borrows these 100 shares again from C and short sells them to investor D.
So now, short interest is 200 and outstanding shares is 100.
In this case, how can B fulfill his obligation to return the 100 shares to A and 100 shares to C? He can only buy 100 shares but he is short 200 shares