Guarantor's liability not affected by Insolvency Resolution Plan under IBC, 2016.

The court held that the liability of a guarantor does not stand reduced or extinguished upon the approval of an Insolvency Resolution Plan for the corporate debtor under the IBC, 2016. The court emphasized that the statutory proceedings under the IBC, 2016, do not affect the independent contract of guarantee, and the guarantor's liability remains intact. Consequently, the court ruled against the petitioner, dismissing the writ petition and vacating the subsisting interim order.

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Issues Involved:

1. Whether the liability of a guarantor of a debt of a corporate debtor stands reduced/extinguished upon an Insolvency Resolution Plan in respect of the corporate debtor being approved under the Insolvency and Bankruptcy Code, 2016Rs.
2. To what relief or reliefs are the parties entitledRs.

Issue-wise Detailed Analysis:

1. Whether the liability of a guarantor of a debt of a corporate debtor stands reduced/extinguished upon an Insolvency Resolution Plan in respect of the corporate debtor being approved under the Insolvency and Bankruptcy Code, 2016Rs.

The petitioner argued that the personal guarantee given by him stood extinguished upon the approval of the Resolution Plan by the National Company Law Tribunal (NCLT) for the corporate debtor. The petitioner relied on Sections 135, 139, and 145 of the Contract Act, 1872, asserting that the liability of the guarantor is co-extensive with that of the principal debtor. Since the principal debtor’s liability was settled under the Resolution Plan, the petitioner claimed his liability as a guarantor was also extinguished. The petitioner further contended that the creditor's actions were inconsistent with his rights as a guarantor, thus discharging him from the contract of guarantee.

In contrast, the respondent bank argued that the approval of a Resolution Plan does not discharge the guarantor’s liability. They cited Sections 128, 133, 134, and 135 of the Contract Act, 1872, and various provisions of the Insolvency and Bankruptcy Code (IBC), 2016, including Sections 14(3), 30(4), 60(2), and 238. The bank emphasized that the contract of guarantee is independent and the Resolution Plan does not affect the guarantor’s liability. They referred to precedents such as Maharashtra State Electricity Board v. Official Liquidator, United Bank of India v. Modern Stores (India) Ltd., and Industrial Finance Corporation of India Ltd. v. Canonnore Blending and Weaving Mills Ltd., asserting that the discharge of the principal debtor by operation of law does not absolve the surety of his liability.

After considering the arguments, the court noted that the Resolution Plan approved by the NCLT did not specifically address the personal guarantee given by the petitioner. The court emphasized that the liability of the guarantor is coextensive with that of the principal debtor unless otherwise provided by the contract. The court observed that the petitioner failed to produce the contract of guarantee to establish any contrary stipulation. The court also highlighted that the statutory right exercised under Section 7 of the IBC, 2016, does not constitute a voluntary compromise or composition with the corporate debtor.

The court referred to the Supreme Court's decision in V. Ramakrishnan & Anr., which held that Section 14 of the IBC, 2016, does not apply to personal guarantors and that personal guarantors cannot escape their liability. The court concluded that the Resolution Plan and the subsequent actions under the IBC, 2016, do not discharge the guarantor’s liability under Sections 133, 134, 135, or 139 of the Contract Act, 1872. The court applied the binding precedents of Canonnore Spinning and Weaving Mills Ltd., Maharashtra State Electricity Board, and Modern Stores (India) Ltd., and held that the liability of the guarantor does not get extinguished upon the approval of the Resolution Plan.

2. To what relief or reliefs are the parties entitledRs.

Given the conclusion that the liability of the guarantor does not get extinguished upon the approval of the Resolution Plan, the court answered the first issue in the negative and against the petitioner. Consequently, no relief was granted to the petitioner. The writ petition was dismissed, and the subsisting interim order was vacated.

Conclusion:

The court dismissed the writ petition, holding that the liability of a guarantor does not stand reduced or extinguished upon the approval of an Insolvency Resolution Plan for the corporate debtor under the IBC, 2016. The court emphasized that the statutory proceedings under the IBC, 2016, do not affect the independent contract of guarantee and the guarantor's liability remains intact.

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