APPROVAL OF RESOLUTION PLAN DOES NOT DISCHARGE THE LIABILITIES OF PERSONAL GUARANTOR

Section 7 of the Insolvency and Bankruptcy Code, 2016 (‘Code’ for short) provides for initiation of corporate insolvency resolution process against a corporate debtor. The bank/financial creditor may obtain personal guarantee from some persons against the loan granted to the corporate debtor. The financial creditor may initiate action to recover the loan amount from the corporate debtor as well as the personal guarantor. The Financial creditor can simultaneously initiate corporate insolvency resolution process against the corporate debtor and also initiate insolvency resolution process against the personal guarantor under section 95 of the Code. The Adjudicating Authority for personal guarantors will be the National Company Law Tribunal (‘NCLT’ for short), if a parallel resolution process or liquidation process is pending in respect of a corporate debtor for whom the guarantee is given. The process of insolvency in Part III is to be applied to individuals, whereas the process in relation to corporate debtors, set out in Part II is to be applied to such corporate persons, does not lead to incongruity.

In a corporate insolvency resolution process, once a resolution plan is approved by the Adjudicating Authority the same is binding on the government, corporate debtor, creditors etc. In UV Asset Reconstruction Company Limited Versus Electrosteel Castings Limited - 2024 (3) TMI 804 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, PRINCIPAL BENCH, NEW DELHI, the NCLATconsidered where one of the questions arose as to whether by approval of Resolution Plan, entire debt of the Corporate Debtor stood extinguished and as a result there will be no default. It was held by NCLAT that even after approval of Resolution Plan, recourse against third party can be resorted to and the approval of Resolution Plan, does not extinguish the right of Financial Creditor to proceed against third party. Thus, the personal guarantor is liable for the outstanding dues of the corporate debtor even if the resolution plan has been approved by the Adjudicating Authority.

In Lalit Kumar jain Versus Union of India and Ors. - 2021 (5) TMI 743 - Supreme Court,the Supreme Court held thatthe approval of a resolution plan does not ipso facto discharge a personal guarantor of a corporate debtor of her or his liabilities under the contract of guarantee. As held by the Supreme court, the release or discharge of a principal borrower from the debt owed by it to its creditor, by an involuntary process, i.e. by operation of law, or due to liquidation or insolvency proceeding, does not absolve the surety/guarantor of his or her liability, which arises out of an independent contract - the impugned notification is legal and valid. It is also held that approval of a resolution plan relating to a corporate debtor does not operate so as to discharge the liabilities of personal guarantors (to corporate debtors).

In Vikram Babulal Sanghvi Versus State Bank of India And Naresh Babulal Sanghvi Versus State Bank of India - 2024 (5) TMI 469 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, PRINCIPAL BENCH, NEW DELHI a working Capital Term Loan Consortium Agreement was executed between the Consortium bank consisting of the Respondent with Bank of Baroda and the Corporate Debtor, Sanghvi Forging & Engineering Limited. An Agreement was also entered into between the Personal Guarantor with Consortium Bank. The personal guarantees were extended by the appellants in the present appeals.

Since the corporate debtor failed to repay the loan amount the financial creditor initiated corporate insolvency resolution process under section 7 of the Code, before the Adjudicating Authority. The Adjudicating Authority admitted the application on 30.08.2019.

Besides, the financial creditor invoked the personal guarantees of the appellants. Statutory notice was issued to the personal guarantors by the financial creditors. The Financial creditors filed applications under section 95 of the Code for initiating insolvency resolution process. The said application was admitted by the Adjudicating Authority and Resolution Professional was appointed. In the meantime, the Adjudicating Authority approved the resolution plan in the corporate insolvency resolution process. The Resolution Professional, in the application for insolvency resolution process, prepared the report and submitted the same before the Adjudicating Authority recommending to accept the application. The Adjudicating Authority admitted the applications on 27.02.2024.

The personal guarantors filed appeals against the order of the Adjudicating Authority admitting the application for initiation of insolvency resolution process by the Adjudicating Authority. The appellants contended that Adjudicating Authority committed error in admitting Section 95 Applications, whereas after approval of the Resolution Plan, the entire debt of the Corporate Debtor stood assigned to a Special Purpose Vehicle, BF Industrial Solutions Limited and in view of the assignment of entire debt of the Corporate Debtor, personal guarantees of the Appellant(s) could not be enforced.

The NCLAT considered the submissions of the appellants. The NCLAT perused the petitions filed by the financial creditors under Section 95 of the Code. In Part-III of the Application, particulars of debt have been given. In Column-1 of Part-III, it is clearly contemplated that in the event of successful implementation of the Resolution Plan approved by the Adjudicating Authority, the claim of Financial Creditor will be reduced by the amount received from the Resolution Applicant.

The NCLAT also perused the resolution plan approved by the Adjudicating Authority. The NCLAT observed that guarantees have been excluded from assignment and that guarantees shall continue to remain with the Financial Creditor, which can be invoked and enforced. The Adjudicating Authority rejected the contention of the appellants that application under Section 95 of the Code could not be initiated against the appellants since the entire debt has been assigned to SPV. The Adjudicating Authority held that the Resolution Plan of corporate debtor was approved and the entire debt of the Corporate Debtor has been taken over by Successful Resolution Applicant but the guarantee given by the promoters has not been assigned to Successful Resolution Applicant. The personal guarantor thereby has not been freed of his guarantee for the debt payable. It is noted under section 128 of Indian Contract Act, 1872 that when a default is committed the Principal Borrower and Surety are jointly and severally liable to Creditor and Creditor has the right to recover its dues from either of them or from both of them simultaneously. The Adjudicating Authority also held that Application was filed within limitation.

The appellants relied on the judgment of Australian High Court in Hutchens v. Deauville Investments Pty Ltd. – 68 Australian Law Report 367.  The judgment of the High Court of Australia arose out of action on account of default by mortgagor. The NCLAT held that the judgment of Australian High Court cannot be helpful to the Appellant(s) in the context of Resolution Plan approved by the Adjudicating Authority under the Code and Regulations. Law with regard to Resolution Plan and discharge of Personal Guarantors has been settled by the Supreme Court in Lalit Kumar Jain (supra) and when the Resolution Plan itself contained a clause retaining the right of invoking the personal guarantees, the judgment of the High Court of Australia, in no manner help the Appellant(s) in the present case. Therefore, the NCLAT did not find any error on the impugned order of the Adjudicating Authority and dismissed the appeals filed by the appellants, the personal guarantors.