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Personal guarantor has no right against corporate debtor: NCLAT

Personal guarantor has no right against corporate debtor: NCLAT

Varun Marwah

The NCLAT has passed a judgment ruling that a personal guarantor’s right to subrogation against a corporate debtor can be taken away in a resolution plan. The Bench comprising Justices Mukhopadhaya and Bansi Lal Bhat was hearing an appeal filed by the promoters of Sharon Bio Medicine.

The question of liability of a personal guarantor in case of companies going under insolvency was discussed in length by the Supreme Court in the case of Veesons Energy. The Supreme Court verdict read along with the IBC Ordinance 2018 clarifies that creditors have the right to proceed against guarantors independent of the insolvency proceedings, to recover their dues. Both, the ruling and amendment, however, fall short of explaining whether the surety will have a right to proceed against the corporate debtor for a guarantee that was invoked against him. Section 140 of the Indian Contract Act allows the surety to step into the shoes of the creditor to recover dues against a debtor.

The NCLT Mumbai Bench had passed an oder affirming the resolution plan for Sharon Bio Medicine in February 2018. The promoters, however, had two objections to the proposed resolution plan. Firstly, the resolution plan extinguished their shareholding in the company entirely and secondly, their right as sureties to recover claims from the company was also extinguished. Effectively, the surety’s right to subrogation was extinguished by the approved resolution plan.

As per the resolution plan- all securities/ collaterals/ margin money/ fixed deposit with lien provided by the Company shall be deemed to be released immediately on Effective Date. It is subsequently mentioned that the personal guarantee provided by the existing promoters of the Company, shall result in no liability towards the ‘Company’ or the ‘Resolution Applicants’ 

The promoters argued that reducing their personal guarantee to ‘nil‘ under the resolution plan amounted to violation of sections 133 and 140 of the Indian Contract Act. The NCLAT declined to interfere in the ruling that,

It was not the intention of the legislature to benefit the ‘Personal Guarantors’ by excluding exercise of legal remedies available in law by the creditors, to recover legitimate dues by enforcing the personal guarantees, which are independent contracts. It is a settled position of law that the liabilities of guarantors is co-extensive with the borrower. This Appellate Tribunal held that the resolution under the ‘I&B Code’ is not a recovery suit. The object of the ‘I&B Code’ is, inter alia, maximization of the value of the assets of the ‘Corporate Debtor’, then to balance all the creditors and make availability of credit and for promotion of entrepreneurship of the ‘Corporate Debtor’. While considering the ‘Resolution Plan’, the creditors focus on resolution of the borrower ‘Corporate Debtor’, in line with the spirit of the ‘I&B Code’

The NCLAT has again held that IBC proceedings should not be treated as recovery proceedings, and therefore, any right available to the surety under contract law will not be applicable in case of an approved resolution plan. This judgment, however, is strongly worded against the power of the promoters, to have any voice or claim in a company which they drove into insolvency.

It is unclear whether this ruling would apply only for promoters who act as personal guarantors or even in cases of third parties (that have not played any role in driving the corporate debtor into insolvency) who had acted as personal guarantors for the corporate debtor.  Further, the scope of this judgment is unclear: whether it authoritatively takes away the right to subrogation of sureties in all cases resolved under the IBC, or if it is an aspect which is best decided between the resolution applicant and creditors committee.

Alok Dhir appeared for the appellants, promoters of Sharon Bio.  Ankur Kashyap, briefed by Manan Mehta from Cyril Amarchand Mangaldas, appeared for the successful resolution applicant, Peter Beck and Partners. Sumant Batra appeared for the creditors committee. Bishwajit Dubey from Cyril Amarchand Mangaldas appeared for the Monitoring Agency.

(Read the judgment)