Continuing guarantee and novation principles keep guarantor liable; settlement did not extinguish debt or bar insolvency limitation.

A one-time settlement does not discharge a guarantor where the guarantee deed permits variation of the borrower's arrangement and the guarantor joins the settlement; such settlement is treated as restructuring, not novation, so the original debt remains enforceable. A guarantee expressed as joint and several, continuing until full repayment, creates coextensive liability under section 128 of the Indian Contract Act, allowing the creditor to proceed against the surety without a fresh invocation after settlement events. Prior invocation, recovery proceedings, a recovery certificate, and later settlement conduct may also extend limitation, so a section 7 insolvency application is not time-barred.

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Issues: (i) whether the one-time settlement amounted to novation of the original debt and discharged the guarantor, (ii) whether the guarantee remained a continuing guarantee with coextensive liability, and (iii) whether the application under section 7 of the Insolvency and Bankruptcy Code, 2016 was barred by limitation.

Issue (i): whether the one-time settlement amounted to novation of the original debt and discharged the guarantor

Analysis: The settlement was treated as a mode of restructuring or settling the outstanding liability, not as a substitution of the original contract by a wholly new contract. The guarantee deed itself permitted variance and modification of the borrower's arrangement, and the guarantor had also signed the settlement arrangement. In these circumstances, the settlement did not wipe out the earlier debt so as to release the surety.

Conclusion: The one-time settlement did not amount to novation, and the guarantor was not discharged.

Issue (ii): whether the guarantee remained a continuing guarantee with coextensive liability

Analysis: The guarantee deed expressly made the liability joint and several, treated admissions by the borrower as binding on the guarantor, and provided that the guarantee would continue until all dues were paid in full. On the contractual terms, the surety's liability was coextensive with that of the principal borrower under section 128 of the Indian Contract Act, 1872. The creditor was therefore entitled to proceed against the guarantor without a fresh invocation of guarantee after the settlement events.

Conclusion: The guarantee was a continuing guarantee and the guarantor's liability remained coextensive with the borrower's liability.

Issue (iii): whether the application under section 7 of the Insolvency and Bankruptcy Code, 2016 was barred by limitation

Analysis: The record showed prior invocation of the guarantee, recovery proceedings, a recovery certificate, the subsequent settlement, part payment, and later enforcement steps. A recovery certificate and subsequent acknowledgments or settlement conduct were treated as giving rise to a fresh cause of action and extending limitation. In that setting, the section 7 application could not be said to be time-barred.

Conclusion: The application under section 7 was not barred by limitation.

Final Conclusion: The guarantor remained liable on a continuing and coextensive basis, the settlement did not extinguish the original obligation, and the insolvency admission was sustained.

Ratio Decidendi: Where a guarantee deed creates a continuing and coextensive liability and permits variation or settlement of the borrower's terms, a subsequent settlement does not discharge the surety unless the contract is clearly novated; recovery proceedings, recovery certificates, and settlement conduct may also sustain limitation for insolvency proceedings.

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