Resolution Plan clause barring creditor action against personal guarantors held invalid under Section 134 Indian Contract Act

NCLT Hyderabad held that Clause-F of an approved Resolution Plan, which barred financial creditors from initiating insolvency proceedings against personal guarantors, does not prevent such action. The tribunal ruled that personal guarantors' liability remains co-extensive with the principal borrower under Section 134 of the Indian Contract Act, 1872. Discharge occurs only through creditor's voluntary act, not operation of law. Corporate insolvency resolution plan conclusion doesn't bar proceedings against guarantors. The financial creditor was entitled to initiate insolvency resolution process against the personal guarantor. Petition was admitted, declaring the guarantor insolvent and appointing a Resolution Professional.

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The core issue considered in this judgment is whether Clause-F of the approved Resolution Plan bars the Financial Creditor from initiating the Insolvency Resolution Process against the Personal Guarantor. The Tribunal examined the legal framework under the Insolvency and Bankruptcy Code, 2016, and relevant precedents to determine the extent of liability of a personal guarantor after the approval of a corporate debtor's resolution plan.

The Tribunal analyzed the relevant legal framework, including Section 95(1) of the Insolvency and Bankruptcy Code, 2016, and the Indian Contract Act, 1872, particularly Section 134. The Tribunal also considered precedents such as the Supreme Court's decision in Lalit Kumar Jain v. Union of India, which held that the approval of a resolution plan does not discharge a personal guarantor's liabilities under a contract of guarantee.

The Tribunal noted that the liability of personal guarantors is co-extensive with that of the principal borrower. It emphasized that a guarantor is discharged of liability only if the creditor voluntarily discharges the principal debtor, not through the operation of law. The Tribunal found that the approval of a resolution plan under the Code is an act of law, not a voluntary act by the creditor, and therefore does not discharge the guarantor's liability.

The Tribunal addressed the argument that Clause-F of the Resolution Plan discharged the personal guarantor's liabilities. The Financial Creditor contended that Clause-F pertains to the corporate debtor and does not extend to personal guarantors. The Tribunal agreed, stating that interpreting Clause-F to discharge personal guarantors would undermine the Code's objectives and have adverse effects.

The Tribunal also considered the argument that the Financial Creditor, as part of the Committee of Creditors, was aware of the resolution plan's approval. However, the Tribunal held that the Financial Creditor retains the right to proceed against personal guarantors, as the resolution plan's approval does not bar such actions.

Significant holdings include the reaffirmation that the liabilities of personal guarantors are not discharged by the approval of a corporate debtor's resolution plan. The Tribunal emphasized that the Code allows for separate insolvency proceedings against personal guarantors, reinforcing the co-extensive nature of their liabilities with the principal debtor.

The Tribunal concluded that the Financial Creditor is entitled to initiate the Insolvency Resolution Process against the Personal Guarantor. It declared the Personal Guarantor insolvent and initiated the process, including a moratorium on legal actions against the debtor and the appointment of a Resolution Professional to manage the process.

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