India: Personal Guarantor Has No Right Against Corporate Debtor

Last Updated: 3 January 2019
Article by AMLEGALS  

Insolvency and Bankrupcty Code, 2016

Personal Guarantor has no right against Corporate Debtor

IN THE NATIONAL COMPANY APPELLATE TRIBUNAL,

NEW DELHI

LALIT MISHRA & ORS V. SHARON BIO MEDICINE LTD. & ORS

[Company appeal Insolvency no. 164 of 2018] dated: 14.11.2018

FACTS

The Appeal was filed by the promoters of Sharon Bio Medicine Ltd (herein after referred to as "Corporate Debtor") against the order passed by NCLT, Mumbai Bench, with respect to the Resolution Plan submitted by the 3rd Respondent has been approved.

The Appellants have challenged the order of approval of the 'Resolution Plan' on 2 grounds:

  1. No amount has been provided to the promoters under the 'Resolution Plan'; and
  2. Personal Guarantors have been discriminated in the Resolution Plan.

SUBMISSION OF APPELLANTS

Appellants submitted that:

  1. The payment terms provided in the 'Resolution Plan' is in infringement to the applicable provision of law. The Resolution Applicant arbitrarily reduced or written off substantial liabilities of the promoters/ shareholders without any legal basis.
  2. Lenders have not been treated similarly and restructuring for its entire claims of the Corporate Debtor.
  3. Security interests which include the personal guarantees of the Appellants have been reduced to 'nil' and thereby the 'Resolution Plan' has been submitted against the provisions of Sections 133 and 140 of the 'Indian Contract Act'.

RELEVANT PROVISIONS

The relevant provisions of the Indian Contract Act are reproduced as under:

Section 133 "Any Variance, made without the surety's consent, in the terms of the contract between the principle [debtor] and the creditor, discharges the surety as to transactions subsequent to the variance" and

Section 140 "Where a guarantor debt has become due or default of the principal debtor to perform a guaranteed duty has taken place, the surety upon payment or performance of all that he is liable for, is invested with all the rights which the creditor has against the principal debtor".

SUBMISSION OF RESPONDENTS

Respondents submitted that:

  1. Section 4 of the 'Resolution Plan' deals with 'raising of funds under the proposed plan'. Under Clause 1 therein, the 'reduction of share capital' has been proposed and it is proposed that the Company undertakes a selective capital reduction of (i) the entire shareholding held by the Promoter Group and Secured Lenders.
  2. It is mentioned that the minimum public shareholding requirement of 25% under Indian securities laws shall be adhered to.
  3. Respondent further submitted that as on approval of the 'Resolution Plan', the claim of the entire stakeholders stand cleared and the 'Personal Guarantor' thereafter cannot claim that they have been discriminated.
  4. All the stakeholders have already been cleared by the 'Successful Resolution Applicant'.
  5. 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.

ISSUES BEFORE NCLAT

Only issue for consideration before the NCLAT:

Whether the Personal Guarantor's right to subrogation against a corporate debtor can be taken away in a resolution plan under Insolvency and Bankruptcy Code, 2016?

OBSERVATION

NCLAT observed that:

  • The 'I&B Code' prohibits the promoters from gaining, directly or indirectly, control of the 'Corporate Debtor', or benefiting from the 'CIRP' or its outcome.
  • The 'I&B Code' seeks to protect creditors of the 'Corporate Debtor' by preventing promoters from rewarding themselves at the expense of creditors and undermining the insolvency process.
  • The promoters, being 'related parties' of the 'Corporate Debtor', have no right of representation, participation or voting in a meeting of the 'Committee of Creditors'.
  • The shareholders and promoters are not the creditors and thereby the 'Resolution Plan' cannot balance the maximization of the value of the assets of the 'Corporate Debtor' at par with the 'Financial Creditors' or 'Operational Creditors'.
  • They are also ineligible to submit the 'Resolution Plan' to again control or takeover the management of the 'Corporate Debtor'.

Therefore the NCLAT held that the personal guarantor's cannot claim to be discriminated in a resolution plan under the Insolvency and Bankruptcy Code.

CONCLUDING VIEW

The NCLAT concluded that the restructuring of the financial debt as a part of the 'Resolution Plan' approved by the NCLT does not envisage complete discharge of the liability of personal guarantors of the 'Corporate Debtor'.

The liability of the guarantors is co-extensive with the borrower and the IB Code is not a recovery suit. Therefore any right available to the surety under the Law of Contract will not be applicable in the case of an approved resolution plan.

Therefore the NCLAT held that the personal guarantor's cannot claim to be discriminated in a resolution plan under the IB Code.

It further held that

"Admittedly, the shareholders and promoters are not the creditors and thereby the 'Resolution Plan' cannot balance the maximization of the value of the assets of the 'Corporate Debtor' at par with the 'Financial Creditors' or 'Operational Creditors' or 'Secured Creditors' or 'Unsecured Creditors'. They are also ineligible to submit the 'Resolution Plan' to again control or takeover the management of the Corporate Debtor".

AMLEGALS. REMARKS

The order has dealt with a situation where the "Corporate debtor" and "Personal Guarantor" is one and the same person.

However, it will be interesting to see whether the present ruling would still be applicable where "Corporate Debtor" and "Personal guarantors" are two different persons.

With due respect to the present ruling the scope of the order is still unclear as to whether it authoritatively takes away the right in all cases resolved under the IBC, or it is a point which will best be decided between RP, the resolution applicant and Committee of Creditors?

With the above aspects in mind, it is pertinent to realize that the IB Code is evolving and many more aspects related thereto will be unleashed by various Courts of law in due course of time.

© Copyright AMLEGALS.

Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion, advice or any advertisement. This document is not intended to address the circumstances of any particular individual or corporate body. Reade should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a particular situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.

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