Personal guarantee and fraud in consent decrees bar insolvency proceedings where no valid guarantee was established.

A consent decree that merely records a general assurance to pay dues and keep properties unencumbered is not, by itself, a valid contract of guarantee under section 126 of the Indian Contract Act unless it shows a clear secondary liability as surety; the decree here was treated as a settlement and joint payment obligation. Insolvency against a personal guarantor requires invocation of a valid guarantee in accordance with its terms, and no such invocation was proved. An application under section 95 of the Insolvency and Bankruptcy Code was also held not maintainable where the consent decree had been obtained during CIRP and moratorium, without disclosure, and was found to be vitiated by fraud and collusion.

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Issues: (i) Whether the consent decree dated 05.03.2020 constituted a valid contract of guarantee under section 126 of the Indian Contract Act, 1872; (ii) whether invocation of the personal guarantee was a precondition for initiating insolvency proceedings against the personal guarantor; (iii) whether the insolvency application under section 95 of the Insolvency and Bankruptcy Code, 2016 was maintainable in view of fraud alleged in obtaining the consent decree.

Issue (i): Whether the consent decree dated 05.03.2020 constituted a valid contract of guarantee under section 126 of the Indian Contract Act, 1872.

Analysis: Section 126 permits an oral or written guarantee, but the arrangement must still clearly show that the surety undertook secondary liability to discharge the principal debtor's obligation on default. The consent decree recorded a general assurance to pay the dues and to keep the properties unencumbered. It did not contain an express and independent undertaking that Respondent No. 1 was acting as a personal guarantor, nor did it specify that liability would arise only upon default of the corporate debtor. The decree therefore reflected a settlement and joint payment obligation rather than a legally distinct contract of guarantee.

Conclusion: The consent decree was not a valid contract of guarantee and this issue is decided against the appellants.

Issue (ii): Whether invocation of the personal guarantee was a precondition for initiating insolvency proceedings against the personal guarantor.

Analysis: Under the personal guarantor framework, a guarantee must be invoked in accordance with its terms before insolvency action can proceed on that basis. The record did not show any invocation of a separate enforceable guarantee, and the appellants attempted to treat the date of the consent decree itself as the date of default. As the alleged guarantee was not separately established and no invocation was proved, the statutory precondition was not satisfied.

Conclusion: Invocation of a valid personal guarantee was necessary and, on the facts, was absent; this issue is decided against the appellants.

Issue (iii): Whether the insolvency application under section 95 of the Insolvency and Bankruptcy Code, 2016 was maintainable in view of fraud alleged in obtaining the consent decree.

Analysis: The corporate debtor was under CIRP and moratorium when the civil suit was filed and when the consent decree was obtained. The decree was executed without disclosure of the subsisting moratorium, despite the directors not being authorised to bind the corporate debtor during that period. The surrounding circumstances, including the related-party nature of the transaction and the attempt to rely on the decree in insolvency proceedings, supported the finding that the decree was procured by collusion and fraud. A decree vitiated by fraud cannot form the foundation for maintainability under the Code.

Conclusion: The section 95 application was not maintainable because the consent decree was vitiated by fraud and was ab initio void and unenforceable in these proceedings; this issue is decided against the appellants.

Final Conclusion: The impugned orders disallowing the personal insolvency applications and imposing consequences on the resolution professional were upheld, and all connected appeals failed.

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