2026 (1) TMI 284 - SC - IBC

Third-party surety liability after IBC resolution plan approval upheld; creditors' rights preserved despite NIL subrogation terms

Approval of a resolution plan under the IBC does not, by itself, discharge a third-party security provider/surety from contractual liability, unless the ... Approval of the Resolution Plan of ESL resulted in extinguishment of entire debt, so as to bar any claim against the ECL as a security provider/promoter - HELD THAT:- The Resolution Plan unequivocally provides that rights against any third party, including a security provider/existing promotor in relation to any portion of unsustainable debt, secured or guaranteed by such third parties, will not be extinguished. It further provides that, if any third-party security provider (including the Existing Promoter) who has guaranteed or secured any portion of debt availed by ESL prior to insolvency commencement date, including the Existing Promoter who have created pledge of shares of ECL or ESL, makes any claims against ESL or Vedanta or SPV on account of any invocation/enforcement of such guarantee or security provided, such claim should be settled at NIL value. It is well settled that approval of the Resolution Plan does not ipso facto discharge a security provider of her or his liabilities under the contract of security. Clause 3.2 (x) of the Resolution Plan explicitly reserves the rights of financial creditors against such third parties, including security providers/existing promoters, in relation to the unsustainable debt. The issue involved in the appeal is answered in the negative. The approval of the Resolution Plan of ESL does not result in extinguishment of entire debt, so as to bar any claim against the ECL as a security provider/third-party surety - Appeal dismissed. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether approval and implementation of the Resolution Plan resulted in extinguishment of the entire debt, so as to bar any claim against a third-party security provider/promoter in respect of the 'Unsustainable Debt'. 2. ISSUE-WISE DETAILED ANALYSIS Issue (i): Effect of the Resolution Plan on survival of rights against third-party security providers/promoters in relation to 'Unsustainable Debt' Legal framework: The Court examined the mandatory contents and operative terms of the approved Resolution Plan, particularly the Plan's treatment of 'Sustainable Debt' and 'Unsustainable Debt' and the specific reservation of rights in Clause 3.2(ix). The Court also applied the settled position that approval of a Resolution Plan does not ipso facto discharge a security provider's contractual liabilities. Interpretation and reasoning: The Court found, from the Plan's admitted figures and steps integral to its implementation, that financial creditors received an upfront cash distribution only towards 'Sustainable Debt', while 'Unsustainable Debt' was addressed by conversion into equity followed by a planned reduction in face value and consolidation. This mechanism substantially reduced the ultimate value of equity held by financial creditors compared to the quantum of 'Unsustainable Debt', demonstrating that the Plan did not provide full value of that component. On the Plan's express terms, Clause 3.2(ix) permanently extinguished creditors' rights/remedies against the company, except rights against third parties (including the existing promoter/security provider) in relation to any portion of 'Unsustainable Debt' secured or guaranteed by such third parties. The Court also noted the Plan's stipulation that if a third-party guarantor or security provider makes any claim against the company or the resolution applicant/SPV due to invocation/enforcement, such claim would be settled at NIL value, reinforcing that the Plan contemplated continuing enforcement against third-party security. Conclusions: The Court conclusively held that approval of the Resolution Plan did not extinguish the entire debt so as to bar claims against a third-party security provider/promoter in relation to 'Unsustainable Debt'. The issue was answered in the negative, and the finding that creditor rights could survive against third parties (as preserved by the Plan) was upheld, leading to dismissal of the appeal.