2025 (12) TMI 115 - AT - IBC

Personal guarantor remains liable; Section 95 IBC application within limitation due to revived debt and continuing guarantees

The NCLAT (AT) upheld the maintainability of the creditor's application under Section 95 IBC against the personal guarantor and dismissed the appeal. It ... Maintainability of application filed u/s 95 of the Insolvency and Bankruptcy Code, 2016, against the Appellant–Personal Guarantor, was within limitation - continuation of guarantee executed by the Appellant because of the later settlement and undertakings given by the Corporate Debtor’s promoters. Whether the application filed under Section 95 of the Insolvency and Bankruptcy Code, 2016, against the Appellant–Personal Guarantor, was within limitation? - HELD THAT:- The question of limitation in this case cannot be decided by treating the loan recall notice of 18.07.2017 as the only event that matters. The relationship between the creditor and the Corporate Debtor continued far beyond this date. The Corporate Debtor participated in arbitration proceedings, faced admission of CIRP in 2019, and then approached this Appellate Tribunal with an offer of settlement. At that stage, on the request of the parties, mediation was conducted under the leadership of a former Judge of the Supreme Court, and the settlement dated 02.12.2019 came into existence. This settlement was not merely a private compromise between the debtor and creditor; it was placed in the appellate proceedings; agreed to by the parties; and expressly recorded in an order of this Tribunal dated 06.12.2019. Therefore, the obligations arising from the settlement were backed by judicial authority and carried legal sanctity. The order recorded the binding nature of the settlement and consequences of the failure of the settlement. The settlement fixed a schedule of instalments and required the Corporate Debtor to honour post-dated cheques. Importantly, the parties agreed that if the Corporate Debtor defaulted even in the first instalment or two consecutive instalments thereafter, the entire unpaid amount would become the admitted debt of the Corporate Debtor. This clause is extremely significant because it shows that the original debt did not vanish. Instead, the settlement placed the original debt in a suspended state, with a clear provision that the entire liability would spring back into effect if the debtor failed to perform the settlement terms. When the Corporate Debtor later failed to honour the cheques issued under the settlement, it is clear that this clause was triggered. In such a situation, the debt stood revived and re-acknowledged. The payments of September 2020 and April 2021 extend the limitation period at least till April 2024. Another important aspect is that the creditor issued a fresh demand notice to the guarantor on 25.01.2022. A demand on the guarantor is legally meaningful because the guarantor’s liability is co-extensive with that of the principal debtor unless the agreement specifically says otherwise. Once the guarantor received the demand notice in January 2022, the default clearly stood crystallised as against him. The Section 95 application filed on 03.05.2022 was therefore well within the extended limitation period. Limitation law does not permit to ignore such acknowledgements merely because the guarantor himself did not sign them, especially when his guarantee continued to operate for the entire duration - the Adjudicating Authority was correct in rejecting the limitation objection and in admitting the Section 95 application. The challenge on the ground of limitation therefore fails. Whether the guarantee executed by the Appellant continued to bind him, or whether it stood extinguished or substituted because of the later settlement and undertakings given by the Corporate Debtor’s promoters? - HELD THAT:- The settlement did not cancel the original loan or the rights of the creditor. Instead, it only set out a payment schedule and stated that if the Corporate Debtor honoured those instalments, the original dues would stand satisfied. The settlement was meant to give the debtor a concession, not to erase or supersede the creditor’s original rights. More importantly, the settlement also contained a very clear clause that if the Corporate Debtor defaulted even in the first instalment or in two consecutive instalments, the entire unpaid amount would automatically become the admitted debt. This clause, by itself, shows that the original rights of the creditor were never surrendered. A contract cannot be said to be substituted when the old obligations spring back into force the moment the new arrangement is breached. A guarantor is not discharged merely because the principal debtor enters into a settlement or compromise with the creditor. The law is clear that the guarantor is discharged only if the creditor grants the debtor some benefit or makes some change in the contract that prejudices the guarantor. Further in this case, the settlement did not put any new burden on the guarantor. If anything, it reduced the liability by allowing the debtor to pay a smaller amount than originally owed. A concession given to the debtor cannot be described as a variation that harms the guarantor. Therefore, the guarantor cannot claim discharge under Section 133. Looking at the case the Appellant has referred to Mathew Varghese v. M. Amritha Kumar [2015 (1) TMI 461 - SUPREME COURT], to argue that a notice addressed in the wrong capacity affects the rights of the person receiving it. That judgment by Hon’ble Supreme Court, dealt with the strict procedural requirements under the SARFAESI Act for enforcing security over immovable property, where it was held that the statutory notice must comply with Section 13(2) before a secured asset can be sold. The present case is entirely different: it concerns a contractual guarantee under the IBC, where liability flows from an unconditional and continuing guarantee, and where the statute prescribes service of notice in a particular form before filing a Section 95 petition. The appellant had duly received the notice under section 95 and replied to the same. Therefore, the principle in Mathew Varghese does not assist the Appellant. There are no infirmity in the impugned order - appeal dismissed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Limitation for application under Section 95 of the Insolvency and Bankruptcy Code, 2016 - Whether the application filed under Section 95 against the personal guarantor was within the prescribed period of limitation. 1.2 Continuing liability of personal guarantor - Whether the guarantee executed by the appellant continued to bind him, or stood extinguished/novated/substituted by the subsequent mediation settlement and undertakings given by the promoters. 1.3 Effect of alleged novation/settlement on guarantee - Whether the mediation settlement recorded by the Tribunal and the personal undertakings of the promoters constituted a novation under Section 62 or a discharge under Section 133 of the Contract Act so as to release the guarantor. 1.4 Scope of objection based on misaddressed/earlier notices - Whether reliance on service defects in prior notices, including the notice relied upon in Mathew Varghese, affected the validity of the Section 95 proceedings where proper notice under Section 95 was admittedly served. 2. ISSUE-WISE DETAILED ANALYSIS 2.1 Limitation for application under Section 95 of the Insolvency and Bankruptcy Code, 2016 2.1.1 Interpretation and reasoning 2.1.1.1 The Tribunal rejected the contention that limitation was to be computed only from the loan recall notice dated 18.07.2017, holding that the creditor-debtor relationship continued thereafter through arbitration, admission of CIRP, mediation and settlement in December 2019, and subsequent part-payments. 2.1.1.2 The mediation settlement dated 02.12.2019 was recorded and incorporated in an order of the Tribunal dated 06.12.2019. That order treated the settlement terms as directions of the Tribunal and provided that, in the event of default of the agreed instalments or dishonour of post-dated cheques, the unpaid amount would be treated as 'admitted debt' and CIRP could be revived. The Tribunal held that the original debt was not extinguished but placed in a 'suspended state', to revive on breach of the settlement. 2.1.1.3 The Tribunal noted that part-payments were made by the corporate debtor on 11.09.2020 and 29.04.2021 in the relevant loan accounts. These payments, being admitted and undisputed, were held to constitute part-payments within the meaning of Section 19 of the Limitation Act and to extend the period of limitation. 2.1.1.4 The Tribunal held that, in law, acknowledgment or part-payment by the principal debtor extends limitation against the guarantor also, so long as the guarantee continues and is not released; no agreement to treat the guarantor differently or any revocation/release of guarantee by the creditor was shown. 2.1.1.5 The revival of CIRP by the Adjudicating Authority on 23.11.2021, on the footing that the settlement terms recorded under the Tribunal's orders dated 06.12.2019 and 15.03.2021 had been breached, was treated as an objective judicial affirmation that the underlying debt subsisted and was not time-barred. 2.1.1.6 The Tribunal further held that a fresh demand notice (Form-B) was issued to the personal guarantor on 25.01.2022, duly received on 28.01.2022. Given that the guarantor's liability is co-extensive with that of the principal debtor, this notice crystallised default as against the guarantor, and the Section 95 application filed on 03.05.2022 was clearly within the extended limitation period, which ran at least till April 2024 due to the part-payments. 2.1.1.7 The Tribunal declined to accept the appellant's plea that only the 2017 recall notice governed limitation and held that limitation law could not ignore subsequent acknowledgments/part-payments merely because these were made by the principal debtor and not personally signed by the guarantor, while the guarantee remained operative. 2.1.2 Conclusions 2.1.2.1 The application under Section 95 filed on 03.05.2022 was held to be within limitation, in view of the mediation settlement recorded by the Tribunal, the part-payments made in 2020 and 2021, the revival of CIRP in November 2021, and the demand notice of January 2022 to the guarantor. 2.1.2.2 The objection that the Section 95 application was barred by limitation was rejected, and the Adjudicating Authority's admission order was upheld on this ground. 2.2 Continuing liability of personal guarantor and effect of mediation settlement/undertakings 2.2.1 Legal framework discussed 2.2.1.1 The Tribunal examined the nature of a 'continuing guarantee' and the effect of changes in the underlying contract with reference to Sections 62, 133 and 19 of the Indian Contract Act, 1872, and the concept of co-extensive liability of a guarantor. 2.2.1.2 The Tribunal also considered the construction of the specific clauses of the Deed of Guarantee (including Clauses 8, 10, 14, 15 and 19) as governing the scope, duration, and irrevocability of the guarantee, and the effect of any novation/variation or enhancement of loan. 2.2.2 Interpretation and reasoning - scope of guarantee and second loan 2.2.2.1 The Tribunal noted that the corporate debtor had availed two facilities: the first loan (Loan Account LNPIT00712-130002234) and the second loan (Loan Account LNPIT03516-170006753). It relied on the appellant's own submissions and the settlement agreement recitals to note that the second loan was sanctioned specifically 'to regularise the aforesaid account' and thus formed part of a continuing financial arrangement. 2.2.2.2 Clause 15 of the Guarantee Agreement provided that, in the event of enhancement of the loan by the creditor, 'with or without informing the Guarantor, this guarantee shall remain valid for such enhanced limit also'. The Tribunal interpreted this to mean that the guarantee automatically extended to cover further or regularising finance forming part of the same overall credit exposure. 2.2.2.3 Clause 8 declared the guarantee to be a 'continuing' guarantee until the creditor had no subsisting claim and all dues were fully discharged to its satisfaction. Clause 19 made the guarantee 'unconditional and irrevocable' and provided that it would remain so until the creditor expressly discharged it in writing. No such written discharge was shown. 2.2.2.4 The Tribunal also noted that payments continued to be made in both loan accounts during 2020 and 2021, reinforcing that both loans were treated as components of a single composite financial obligation covered by the continuing guarantee. 2.2.3 Interpretation and reasoning - effect of variation/settlement on guarantee 2.2.3.1 Clause 10 of the Guarantee Agreement provided that 'any novation/variation of the Agreement and for concessions acquiescence made by' the creditor to the borrower, with or without informing the guarantor, would not discharge the guarantee, and that concessions, indulgences or variations in respect of the borrower's terms or securities would not prejudice the creditor's rights against the guarantor. 2.2.3.2 Clause 14 stipulated that in the event of the borrower's default, the entire sum outstanding under the agreement would become forthwith due and payable, crystallising the guarantor's liability. 2.2.3.3 The Tribunal held that the 2019 mediation settlement did not amount to a novation under Section 62. The settlement did not expressly extinguish or substitute the original loan contract; it merely provided a structured repayment schedule and concessions, with a specific clause that, upon default of the first instalment or two consecutive instalments, the unpaid amount would be treated as 'admitted debt' and CIRP could be revived. 2.2.3.4 On this wording, the Tribunal reasoned that the original rights and obligations under the loan agreement were not abandoned but kept in abeyance, to revive automatically on breach of the settlement. A contract whose old obligations 'spring back' upon failure of the new arrangement does not qualify as a novation that extinguishes the pre-existing obligations. 2.2.3.5 The Tribunal further emphasised that the settlement was not a purely private contract but was incorporated into the Tribunal's orders dated 06.12.2019 and 15.03.2021. Those orders expressly provided that failure to adhere to the settlement terms would lead to revival of CIRP. This reinforced that, on breach, the original loan and guarantee continued to operate. 2.2.3.6 With reference to Section 133 of the Contract Act, the Tribunal held that a guarantor is discharged only if there is a variation in the contract between creditor and debtor that prejudicially affects the guarantor. In this case, the settlement conferred concessions and reduced liability by quantifying a smaller payable sum; it did not impose any additional burden on the guarantor. A concession to the debtor was held not to be a prejudicial variation discharging the guarantor. 2.2.3.7 The Tribunal held that the giving of personal undertakings and willingness of promoters to provide personal guarantees under the settlement did not, in itself, release the existing guarantor. A creditor may have multiple guarantors; the earlier guarantor is discharged only by clear, explicit release or waiver, which was absent. Clause 19 expressly required a discharge 'by issuing a letter' from the creditor, which was never issued. 2.2.3.8 The Tribunal concluded that, following default on the settlement and dishonour of post-dated cheques, CIRP was revived by order dated 23.11.2021. Since the principal debtor's liability thus revived and continued, the guarantor's liability - being co-extensive - also continued, there being no agreement to treat him differently. 2.2.4 Conclusions 2.2.4.1 The guarantee executed by the appellant was held to be a continuing, unconditional, and irrevocable guarantee, extending to the second loan as part of the same financial arrangement, by virtue of the express terms of the Guarantee Agreement. 2.2.4.2 The mediation settlement of 2019, as recorded in and forming part of the Tribunal's orders, did not amount to novation or extinguishment of the original loan or guarantee under Section 62, nor did it constitute a prejudicial variation discharging the guarantor under Section 133. 2.2.4.3 The subsequent undertakings by the promoters and their willingness to furnish personal guarantees did not release or substitute the appellant's existing guarantee, in the absence of an express discharge by the creditor. 2.2.4.4 The appellant remained liable as personal guarantor, and the creditor was entitled to proceed against him under Section 95 of the Code. The Adjudicating Authority's view that the guarantee continued to bind the appellant and that PIRP could be initiated was upheld. 2.3 Effect of reliance on Mathew Varghese and alleged defects in earlier notices 2.3.1 Interpretation and reasoning 2.3.1.1 The appellant relied on Mathew Varghese to contend that notices addressed in an incorrect capacity or served defectively vitiate subsequent enforcement steps. The Tribunal examined that decision and noted that it related to strict statutory notice requirements under the SARFAESI Act for sale of secured assets. 2.3.1.2 The Tribunal distinguished the present context, which concerned a contractual guarantee invoked through a proceeding under Section 95 of the Code, where the relevant statutory requirement is service of the Section 95 application/notice on the guarantor in the prescribed manner. 2.3.1.3 The Tribunal found that the appellant had duly received the notice under Section 95 and had responded and contested the proceedings. Hence, any prior misdescription or capacity error in earlier termination/arbitration notices had no bearing on the validity of the present Section 95 process. 2.3.2 Conclusions 2.3.2.1 The principle in Mathew Varghese, based on the SARFAESI statutory scheme, was held to be inapplicable to the present IBC guarantee context. 2.3.2.2 The service and receipt of the Section 95 notice having been admitted, alleged defects in earlier notices did not vitiate the proceedings under Section 95 or affect the guarantor's liability. 2.4 Overall disposition 2.4.1 In light of the findings that (i) the Section 95 application was within limitation, and (ii) the guarantee continued and was not discharged or substituted, the Tribunal found no infirmity in the Adjudicating Authority's order initiating the personal insolvency resolution process against the guarantor. 2.4.2 The appeal was dismissed, pending interlocutory applications were closed, and no order as to costs was made.