Resolution plan approval for principal borrower does not discharge corporate guarantor's liability under Section 7

The NCLAT Principal Bench dismissed an appeal challenging a Section 7 application admission against a corporate guarantor. The appellant argued that approval of a resolution plan for the principal borrower discharged the guarantee liability. The NCLAT relied on SC precedents in Lalit Kumar Jain and Maitreya Doshi cases, holding that resolution plan approval does not discharge guarantors. Despite the principal borrower's debt exceeding Rs.218 crores and minimal upfront cash payment of Rs.2.06 crores in the resolution plan, the guarantee remained enforceable. The NCLAT found no infirmity in the Adjudicating Authority's admission order and dismissed the appeal.

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Issues Involved:
1. Validity of Section 7 application against the Corporate Guarantor post-approval of the Resolution Plan.
2. Applicability of Section 134 of the Indian Contract Act in discharging the Corporate Guarantor.
3. Impact of Clause 33 of the Corporate Guarantee on the enforceability of the guarantee.

Issue-wise Detailed Analysis:

1. Validity of Section 7 application against the Corporate Guarantor post-approval of the Resolution Plan:

The appellant, a suspended director of the Corporate Debtor, challenged the order admitting Section 7 application filed by ICICI Bank. The core argument was that the approval of the Resolution Plan of the Principal Borrower discharged the debt, making the Section 7 application against the Corporate Guarantor unsustainable. However, the Tribunal held that the guarantee provided by the Corporate Debtor continued to be enforceable even after the approval of the Resolution Plan. This was based on the Tribunal's earlier judgment dated 11.03.2022, which clarified that excluded securities, including the Corporate Guarantee, were not extinguished by the Resolution Plan. The Tribunal emphasized that the Resolution Plan explicitly stated that excluded securities would continue to be enforceable. Therefore, the Section 7 application against the Corporate Guarantor was valid.

2. Applicability of Section 134 of the Indian Contract Act in discharging the Corporate Guarantor:

The appellant argued that under Section 134 of the Indian Contract Act, the Corporate Guarantor should be discharged as the Principal Borrower's debt was settled through the Resolution Plan. However, the Tribunal referred to the Supreme Court's judgment in "Lalit Kumar Jain vs. Union of India," which established that the approval of a Resolution Plan does not ipso facto discharge the guarantor's liability. The Tribunal reiterated that an involuntary act of the principal debtor leading to the loss of security does not absolve a guarantor of its liability. The Tribunal concurred with the Adjudicating Authority's view that Section 134 was not applicable in this case, as the discharge of the Principal Borrower occurred by operation of law and not by an act of the creditor.

3. Impact of Clause 33 of the Corporate Guarantee on the enforceability of the guarantee:

The appellant raised an additional ground based on Clause 33 of the Corporate Guarantee, which stipulated that the guarantee would fall off if the outstanding amount of the borrower fell below INR 218 Crores. The appellant contended that since the Resolution Plan involved an upfront cash payment and preference shares, the outstanding debt fell below the specified threshold, thereby terminating the guarantee. However, ICICI Bank countered that the total debt of the Principal Borrower was above INR 218 Crores at the time of the invocation of the guarantee and remained so. The Tribunal agreed with ICICI Bank, noting that the preference shares were another form of debt and did not reduce the debt below INR 218 Crores. Consequently, Clause 33 did not render the guarantee unenforceable.

Conclusion:

The Tribunal upheld the Adjudicating Authority's decision to admit the Section 7 application against the Corporate Guarantor. It confirmed that the Corporate Guarantee remained enforceable post-approval of the Resolution Plan, Section 134 of the Indian Contract Act did not apply to discharge the guarantor, and Clause 33 of the Corporate Guarantee did not terminate the guarantee. The appeal was dismissed, affirming the validity of the Section 7 application.

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