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Mainstream, VOL LIX No 25, New Delhi, June 5, 2021

Personal Guarantors Per-Se Not Discharged | Chittarvu Raghu

Friday 4 June 2021

by Chittarvu Raghu *

The central government had issued a notification dated 15.11.2019 under Sec.1(3) of the Insolvency and Bankruptcy Code, 2016 appointing the 1st Day of December, 2019 as the date on which some of the provisions relating to personal guarantors to corporate debtors shall come into force. Consequently, Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Regulations, 2019, dated 20.11.2019 were framed by virtue of powers conferred under Sec.196(1), Sec.240(2) r/w Clause (e) of Sec.2 and Sec.60 of the Insolvency and Bankruptcy Code, 2016. Several writ petitions were filed before various High Courts and the Hon’ble Supreme Court challenging the notification dated 15.11.2019 and the regulations dated 20.11.2019. The Apex Court had transferred all the cases filed before various High Courts to the Apex Court, and clubbed with the petitions filed before it. Since there was a common grievance in all the cases, the Apex Court had passed a common judgment dated 21.5.2021 in the case titled as Lalit Kumar Jain Vs. Union of India and others.

The notification dated 15.11.2019 was mainly challenged on the ground that the said notification is ultra vires the proviso to Sec.1(3) of the Code. It was also contended that the impugned notification by applying the code to the personal guarantors only, takes away the protection afforded by law in the light of Sec.128, 133 and 140 of the Contract Act and that once a resolution plan is accepted, the Corporate Debtor is discharged of liability and as a consequence, the guarantor whose liability is co-extensive with the principal debtor is also discharged of all liabilities.

The Apex Court had examined all the provisions of the Insolvency and Bankruptcy Code, 2016 and came to a conclusion that the impugned notification is not an instance of legislative exercise or amounting to impermissible and selective application of provisions of the code and therefore notification was issued within the power granted by the parliament and invalid exercise of it. The exercise of power in issuing the notification under Sec.1(3) is, therefore, not ultra vires; the notification is valid.

Apart from challenging the notification on the ground of ultra vires of the power, the other main thrust of the argument of the petitioners is that in the light of the change of terms and conditions of the contract inter-se between the creditor and the corporate debtor while implementing the resolution plan, the guarantor per-se stood discharged. However the petitioners did not raise any issue with regard to extent of liability of a personal guarantor vis-vis when a resolution plan is approved and debt component is reduced. The Apex Court has not recorded any such argument advanced by the petitioners in the judgment. However the Solicitor General had argued before the court which is recorded at Para No.43 that the liability of the guarantor is co-extensive, joint and several with that of the principal borrower unless the contrary is provided by the contract. He further argued that ‘the word co-extensive’ is an objective for the word ‘extent’ and it can relate only to the quantum of principle debt and ultimately it was submitted that the continuation of financial creditor’s claim against a guarantor would not lead to double recovery of a claim as the financial creditor would be able to recover only the balance debt which remains outstanding and unrecovered from the principal borrower as per the principle ‘double dip’. The Solicitor General also asserted that the simultaneous remedy against the co-obligors does not permit the creditor to recover more than the total debt owed to it. This argument was accepted by the Apex court at Para No. 110 by referring to Kaupthing Singer and Friedlander Ltd., - Judgment of the UK Supreme Court. The Apex Court held that the sanction of resolution plan and finality imparted to it by Sec.31 of the Code does not per-se operate as a discharge of the guarantors liability. As to the nature and extent of the liability, much would depend on the terms of the guarantee itself.

The Apex Court has held that the rationale for allowing Directors to participate in the meetings of the committee of creditors is that the Director’s liability as personal guarantors persists against the creditors and an approved resolution plan can only lead to a revision of amount or exposure for the entire amount. The Apex Court did not explicitly go into the issue relating to the extent of personal guarantors liability vis-vis the reduction in debt amount after approval of resolution plan.

The Hon’ble Supreme Court in Central Bank of India Vs. C.L.Vimala and others had examined the Scope of Sec.128 of the Contract Act. In the said case the Apex Court had held that Sec.128 of the Contract Act is subject to the conditions contained otherwise in the contract by relying upon its earlier judgment in United Bank of India Vs. Bengal Behar Constructing Company Limited wherein it was held that in the light of the conditions contained in the contract, a compromise decree between the creditor and the debtor is binding on the surety.

Therefore still there is a scope for the personal guarantors more particularly who were not erstwhile Directors to contend that their extent of liability shall stand reduced in the light of approved resolution plan. The question that arises is whether the personal guarantors if raise such an issue, committee of creditors constituted under the code has a power to adjudicate the same. The Apex Court has held that all creditors and other classes of claimants including financial and operational creditors, those entitled to statutory dues, workers etc., to participate in the resolution process, are heard and those in relation to whom CoC accepts or reject pleas are entitled to vent their grievances before the NCLT and after considering their submissions and objections the resolution plan is accepted and approved. It is not explicit in the judgment as to whether the personal guarantors are also included in ‘other classes of claimants’. In the judgment — the committee of creditors of Essar Steel (I) Ltd., the Apex Court has held that the legislature has not endowed the adjudicating authority (NCLT) with the jurisdiction or authority to analyse or evaluate the commercial decision of the committee of creditors much less enquire into the justness of the rejection of the resolution plan by the dissenting financial creditors. The Apex Court also affirmed that the adjudicating authorities’ jurisdiction is circumscribed by Sec.30(2) of the code.

It is clear from the judgment of the Apex Court that the liability of the personal guarantor is per-se not discharged in the light of the resolution plan. The personal guarantors more particularly who were not the erstwhile Directors may raise an issue with regard to the extent of liability vis-vis the resolution plan. But it is not explicit as to whether the committee of creditors or adjudicating authority are conferred with such a power to adjudicate the said issue.

(Author: Chittarvu Raghu, is advocate at High Court’s of Andhra Pradesh & Telangana States; Email: Craghuadvocate[at]gmail.com)

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