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Guarantor cannot enjoy a right of subrogation under the Insolvency code

Cause Title : State Bank of India Vs Shri Ghanshyam Surajbali Kurmi, CP(IB) 297/95/HBD/2021, National Company Law Tribunal Bench-1, Hyderabad

Date of Judgment/Order : 07.07.2022

Corum : Dr. N. Venkata Ramakrishna Badarinath, Hon‟ble Member (Judicial), Shri Veera Brahma Rao Arekapudi, Hon‟ble Member (Technical)

Citied: Lalit Kumar Jain vs Union of India, Supreme Court

            Lalit Mishra & Ors. v. Sharon Bio Medicine Ltd, NCLAT


Background

The Financial Creditor/Applicant filed a Company petition before this Adjudicating Authority under Section 9 of the Code to initiate Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor vide CP (IB) No. 269/9/HDB/2018. The petition was admitted by this Adjudicating Authority on 06.09.2018.

With the framing of I & B (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtor) Rules, 2019 which came into effect from 01.12.2019,  permitting the Financial Creditor to institute insolvency resolution process against personal guarantors, the Financial Creditor had issued demand notice in Form B dated 16.08.2021 through RPAD on 01.09.2021 to the Personal Guarantor i.e. Shri. Ghanshyam Surajbali Kurmi demanding payment of the amount in default.

The Adjudicating Authority  granted interim-moratorium and appointed a Resolution Professional. The RP stated that the Personal Guarantor confirmed that no payment had been made to the Financial Creditor towards the default committed by the Corporate Debtor and lack of resources to pay the amount. Hence the Resolution Professional recommended the admission of the petition filed under Section 95 of the Code.

Clause F of the Resolution Plan states:
“Once the consideration as envisaged in the resolution plan is paid, all rights, security and interest including but not limited to mortgage, pledge, guarantee and hypothecation created shall stand satisfied in lieu of the said payment.”

Based on the above clause, the Personal Guarantor contended that any liability of Personal Guarantor herein was discharged upon approval of Resolution Plan and more so any rights of Financial Creditor herein against Respondent have been forfeited after according its approval to the said resolution plan and therefore the application of the Financial Creditor deserves to be dismissed in limine.


Judgment

Referring to judgments of Supreme Court in Lalit Kumar Jain vs Union of India and NCLAT in Lalit Mishra & Ors. v. Sharon Bio Medicine Ltd, the NCLT observed that :-

1) Conclusion of Corporate Insolvency Resolution Plan does not bar Financial Creditor against Guarantor, and Financial Creditor can always approach this Adjudicating Authority as envisaged under the Code.

2) Reliefs and Concessions (if any) which are part of a resolution plan is squarely applicable to Corporate Debtor only which is very much in line with clean slate theory or in line with aims and objectives of Code. Accepting the interpretation of the Clause -F as envisaged by the Personal Guarantor would create scenario which would have adverse cascading effects and would extinguish the Personal Guarantee of Personal Guarantor is not tune with objectives of the Code and would create a scenario which would have adverse cascading effects.

3) Guarantor cannot enjoy a right of subrogation when the payment is made by the guarantor with respect to the debt for which the guarantee is provided. under the Indian Contract Act, 1872 as proceedings under the Code are not recovery proceedings. The object of the proceedings under the Code is to revive the company and focus on maximization of value of its assets and not to ensure that credit is available to all stakeholders.

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