2024 (7) TMI 388 - AT - Insolvency and Bankruptcy

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

Seeta Shah Versus ICICI Bank Limited

The NCLAT Principal Bench dismissed an appeal challenging a Section 7 application admission against a corporate guarantor. The appellant argued that ... Maintainability of section 7 application - effect of approval of Resolution Plan in the CIRP of the Principal Borrower on the guarantee which was given by the Corporate Debtor to ICICI Bank - HELD THAT:- In the present case are concerned with claim of discharge of a Guarantor consequent to approval of Resolution Plan under the I&B Code. It is to be noted that the judgment of the Hon’ble Supreme Court in Lalit Kumar Jain [2021 (5) TMI 743 - SUPREME COURT] has also been subsequently relied and reiterated by the Hon’ble Supreme Court. Reference made to judgment of Hon’ble Supreme Court in Maitreya Doshi vs. Anand Rathi Global Finance Ltd. & Anr. [2022 (9) TMI 1012 - SUPREME COURT] wherein in Hon’ble Supreme Court has quoted the judgment of Lalit Kumar Jain vs. Union of India [2021 (5) TMI 743 - SUPREME COURT] holding that the approval of a resolution plan in relation to a Corporate Debtor does not discharge the guarantor of the Corporate Debtor. In recent judgment of Hon’ble Supreme Court in Ajay Kumar Radheyshyam Goenka vs. Tourism Finance Corporation India Ltd [2023 (3) TMI 686 - SUPREME COURT] where question arose for consideration as to whether for approval of Resolution Plan by virtue of Section 31 process Section 138 of NI Act cannot be continued. From the facts brought on the record, it is clear that when Corporate Guarantee was invoked by the ICCI Bank on 16.10.2017 debt of more than Rs.218 Crore was due on the Principal Borrower. Initiation of proceeding against the Principal Borrower for admitted claim of Rs.294,51,35, 655/- itself proves that debt of the Principal Borrower was more than Rs.218 Crores. According to own case of the Appellant, upfront cash has been proposed of only Rs.2,06,00,000/- and rest amount of Rs.273,38,49,866/- was to be paid in preference shares - the submission of the Appellant that the guarantee dated 10.08.2016 stood terminated and unenforceable, cannot be accepted - there are no substance in this submission. The Adjudicating Authority after considering all relevant aspects of the matter has admitted the Section 7 application against the Corporate Guarantor, in which there are no infirmity - there is no merit in the appeal - appeal dismissed. 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.