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Personal Guarantee Can Be Extinguished Through Resolution Plan

Cause Title : SVA Family Welfare Trust & Anr. Vs. Ujaas Energy Ltd. & Ors., Company Appeal (AT) (Insolvency) No. 266 of 2023, NCLAT-Delhi

Date of Judgment/Order : 21/8/2023

Corum : Justice Ashok Bhushan, Chairperson & Barun Mitra, Member (Technical)

Citied: 
  1. Vijay Kumar Jain vs. Standard Chartered Bank and Ors.- (2019) 20 SCC 455
  2. Lalit Kumar Jain v. Union of India- (2021) 9 SCC 321
  3. State Bank of India vs. V. Ramakrishnan and Anr- (2018) 17 SCC 394
  4. Nitin Chandrakant Naik and Anr. vs. Sanidhya Industries LLP and Ors.- 2021 SCC OnLine NCLAT 302
  5. Karad Urban Cooperative Bank Limited vs. Swwapnil Bhingardevay and Ors.- (2020) 9 SCC 729
  6. K. Sashidhar v. Indian Overseas Bank- (2019) 12 SCC 150
  7. Essar Steel (India) Ltd. Committee of Creditors v. Satish Kumar Gupta- (2020) 8 SCC 531
  8. M.K. Rajagopalan vs. Dr. Periasamy Palani Gounder and Anr.- 2023 SCC OnLine SC 574
  9. Edelweiss Asset Reconstruction Company Ltd. vs. Mr. Anuj Jain, Resolution Professional of Ballarpur, Company Appeal (AT) (Ins.) No.517 & 518 of 2023

Background

Corporate Insolvency Resolution Process (CIRP) was initiated against Corporate Debtor- ‘M/s. Ujaas Energy Limited’ and after due process the Resolution Plan of the Appellant was approved by the CoC by 78.04% vote shares. Bank of Baroda, one of the members of the CoC holding 5.83% voting share, had filed an Affidavit objecting to the Resolution Plan on the basis that it provided for extinguishment of rights under personal guarantees. Adjudicating Authority took the view that CoC cannot extinguish right of the particular secured creditor to proceed against the personal guarantor of the Corporate Debtor, hence, the plan contravenes the provision of Section 30(2)(e) of the Insolvency & Bankruptcy Code. It was also noticed that the Bank of Baroda has already filed Section 95 against the personal guarantor before the Adjudicating Authority. The reason provided by the AA was that the CoC can take any commercial decision relating to insolvency of the corporate debtor only, the CoC cannot extinguish right of the particular secured creditor to proceed against the personal guarantor of the corporate debtor under the garb of its commercial wisdom.
Aggrieved by the said order, this Appeal was filed.

Judgment

The NCLAT observed that out of the amount proposed in the Resolution Plan, Rs.45,00,00,000/- is towards the value of the Corporate Debtor and Rs.23,81,75,744/- is towards the release of personal guarantees.

The only question which arises for consideration in this Appeal is as to whether in a Resolution Plan can there be a clause which proposes to extinguish security interest of a Financial Creditor by way of personal guarantee of the Directors of the Corporate Debtor which was given for obtaining financial assistance from the Financial Creditor.

Referring to the above judgments, the NCLAT observed that the Supreme Court and other courts/tribunals in similar situation had taken the following view :-
  • Sanction of a resolution plan does not per se operate as a discharge of the guarantor’s liability. It was held that approval of a resolution plan does not ipso facto discharge a personal guarantor. The NCLAT held that the use of above expressions ‘per se’ and ‘ipso facto’ conversely indicates that there may be situations and circumstances, for example, relevant clauses in the Resolution Plan by which personal guarantors may be discharged.
  • There can be no dispute that Moratorium under Section 14 is not applicable on the personal guarantors. Non-applicability of the Moratorium on personal guarantor is with different object and purpose.
  • In the Resolution Plan, property of the personal guarantor cannot be consumed without recourse to appropriate proceedings.
  • Section 31(1) of the Code, makes it clear that the guarantor cannot escape payment as the Resolution Plan, which has been approved, may well include provisions as to payments to be made by such guarantor.
The NCLAT decided that present is a case where Financial Creditors have decided to relinquish personal guarantees given to secure the financial assistance granted to the Corporate Debtor by the Financial Creditors on payment of a particular value in the Resolution Plan. CoC consciously considered the clauses in the plan for relinquishing the personal guarantees of the Financial Creditors in several meetings. There was a specific clause in the Resolution Plan pertaining to release of the personal guarantee which clause was deliberated. Even the objection raised by the Union Bank of India that personal guarantee cannot be released was noticed. Only after much deliberation, the Plan was approved. The NCLAT was thus, of the view that there is no error in the consideration of the CoC of the Resolution Plan and the commercial wisdom of the CoC by approving the Resolution Plan has to be given due weightage.

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