The Supreme Court ruled that the approval of a resolution plan does not ipso facto release a personal guarantor of a debtor company. by operation of law, or by reason of liquidation or insolvency proceedings, does not release the guarantor from his liability, …
The Supreme Court ruled that the approval of a resolution plan does not ipso facto release a personal guarantor of a debtor company.
The release or release of a principal borrower from the debt he owes to his creditor, by an involuntary act, that is to say by operation of law, or by reason of liquidation or insolvency proceedings , does not release the guarantor from its liability, which results from an independent contract, the bench including Judges L. Nageswara Rao and S. Ravindra Bhat observed in the judgment in which he confirmed the provisions of the Insolvency and Bankruptcy Code, 2016 which applies to personal guarantors of social debtors.
One of the arguments raised by the petitioners who challenged the notification was that once a resolution plan is accepted, the debtor company is relieved of its responsibility. Therefore, according to them, the guarantor whose liability is coextensive with the main debtor, that is to say the debtor company, is also released from all liability.
Rejecting this assertion, the judiciary, referring to recent judgments in State Bank of India v. V. Ramakrishnan, Creditors Committee of Essar Steel (I) Ltd. vs. Satish Kumar Gupta, observed that the sanction of a resolution plan and of the purpose conferred on it by Article 31 does not in itself act as a discharge from the guarantor’s liability. She stated that an involuntary act by the principal debtor resulting in the loss of the collateral would not release a guarantor from liability. In rejecting the petitions, the court observed as follows:
111. In view of the above discussion, it is considered that the approval of a resolution plan does not ipso facto release a personal guarantor (of a debtor company) from his obligations under the guarantee contract. As has been ruled by that court, the release or release of a principal borrower from the debt he owes to his creditor, by an involuntary act, that is to say ipso jure, or in due to liquidation or insolvency proceedings, does not relieve the surety / guarantor of his liability, which arises from an independent contract.
112. For the foregoing reasons, the impugned notification is considered to be legal and valid. It is also considered that the approval of a resolution plan relating to a debtor company does not have the effect of discharging the obligations of the personal guarantors (towards the debtor companies).
The question posed by the petitioners was that due to the purpose of the resolution plan, the obligations of the guarantors would be extinguished. They relied on Articles 128, 133 and 140 of the Law on Contracts to insist that creditors cannot therefore sue the guarantors separately after approval of the resolution plan.
In this regard, the Supreme Court observed:
“The reason directors can attend CoC meetings is that directors’ liability as personal guarantors persists against creditors and an approved resolution plan can only lead to a review of the amount or exposure for the full amount. Any recourse under section 133 of the Contracts Act to discharge the surety’s liability due to a deviation in the terms of the contract, without his consent, is denied by this court, in V. Ramakrishnan where it was observed that the wording of Article 31 clearly indicates that the approved plan binds the guarantor, in order to avoid any attempt to evade liability under the provisions of the Law on Contracts “.
The Court also noted that in the Essar Steel case, the Supreme Court had refused to interfere in proceedings initiated to enforce personal guarantees by financial creditors.
Taking note of these precedents, the SC observed:
“It is therefore clear that the sanction of a resolution plan and of the purpose assigned to it by Article 31 does not in itself function as a discharge from the liability of the guarantor. As to the nature and extent of liability, much would depend on the terms of the security itself. However, this court has repeatedly stated that an involuntary act by the principal debtor resulting in the loss of the security would not release a guarantor from liability. “
Case: Lalit Kumar Jain v Insolvency and Bankruptcy Board of India
Reference: LL 2021 SC 257
Coram: Judges L. Nageswara Rao and S. Ravindra Bhat
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