India: Liability Of Guarantors After Approval Of Resolution Plan Under The Insolvency And Bankruptcy Code, 2016

Last Updated: 8 August 2019
Article by Apoorv Sarvaria and Manas Shukla

There have been a number of cases where the issue of rights of a creditor against a guarantor (corporate as well as individual) under the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as "IBC") have been raised. The Apex Court and the Adjudicating Authorities/Appellate Authority have provided sufficient clarity on issues such as whether the Moratorium under Section 14 of IBC applies to the assets of a guarantor or whether the Corporate Insolvency Resolution Process (CIRP) can be initiated against a corporate guarantor even before the same is initiated against the Corporate Debtor. However, the question which remains and needs to be discussed is about the rights of a creditor against a guarantor after the conclusion of CIRP of the Principal Debtor/Corporate Debtor i.e. post the approval of the resolution plan. This article intends to analyse the same. Before analysing the above said position, we have to understand that the object of IBC is to maximize the value of the assets of the Corporate Debtor. The resolution approved by the Committee of Creditors during CIRP is not for recovery.

As per the scheme of IBC, once the resolution plan is accepted by the Committee of Creditors (CoC) and the same is approved by the Adjudicating Authority, the CIRP comes to an end.  Once the CIRP is concluded and the plan gets approved by the Adjudicating Authority as per Section 31 of the IBC, the debt which was owed by the Corporate Debtor is settled. No proceedings against the Corporate Debtor can be initiated in relation to the debt that has been settled. The resolution plan so approved is binding on the corporate debtor, its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan.

It is, therefore, understood that once the resolution plan is approved by Adjudicating Authority, the liabilities of the Corporate Debtor come to an end. However, the creditors retain the right to proceed against the guarantors of the Corporate Debtor. There is no specific bar under the IBC that a creditor cannot claim its remaining debt due from the guarantor (which has not been recovered from the Corporate Debtor through CIRP). It is a settled position of law that the liabilities of guarantors are co-extensive with the borrower. Therefore, if the borrower is unable to clear the debt, then the right is accrued in favour of the creditor to proceed against the guarantor. This liability is independent in itself as the contract of guarantee is an independent contract.

The guarantors, on the other hand, may take defence of Sections 133, 134 and 140 of the Indian Contract Act. As per Section 134, a guarantor is discharged of its liability towards the creditor if the creditor on its own instance discharges the Principal Debtor. The main ingredient of this section is discharge of the debtor through voluntary act of the creditor and not due to operation of law. Any scheme or plan that is approved by a court or tribunal becomes a statutory scheme and is, therefore, an act of operation of law.

Under the IBC, the position is different. The Corporate Debtor under IBC is discharged on the approval and implementation of the resolution plan. The resolution plan is approved by the Adjudicating Authority after it is satisfied that the same is approved by the prescribed majority of the members of CoC and its contents are in accordance with law. Therefore, under the IBC, the Corporate Debtor is discharged by the operation of law, i.e. approval of the resolution plan by the Adjudicating Authority on its satisfaction and not at the instance of a creditor even if one or any of the creditors may or may not be in favour of resolution plan. Once the resolution plan is approved by the Adjudicating Authority, the Corporate debtor is discharged and the said decision is binding on the creditor. Thus, the guarantor cannot be said to be discharged of its liability towards the creditor on the discharge of Principal Debtor's liability under the IBC.   

The Supreme Court in the case of SBI v. V. Ramakrishnan 2018 SCC OnLine SC 963, while addressing this issue placed strong reliance on Section 31 of the IBC which states that once the resolution plan is approved it will be binding on all the stakeholders including the guarantors. On the basis of the said provision, it held that the guarantor cannot be relieved from making payment by virtue of Section 133 of the Contract Act even if the debt is varied under the resolution plan as the resolution plan is binding on the guarantor as well.

The other defence which can be taken by a guarantor is Section 140 of the Contract Act which provides for right of subrogation. As per this section, a guarantor has a right of subrogation for the debt amount paid on behalf of the principal debtor. Under IBC, after the CIRP is concluded, a guarantor cannot enjoy such right when the payment is made by him with respect to the debt for which the guarantee is provided. This position has been settled by the NCLAT in Lalit Mishra & Ors. v. Sharon Bio Medicine Ltd. [Company appeal Insolvency no. 164 of 2018] dated: 14.11.2018], wherein it has been held that the guarantor cannot exercise its right of subrogation under the Contract Act as proceedings under the IBC are not recovery proceedings. The object of the proceedings under the IBC is to revive the company and focus on maximization of value of its assets and not to ensure that the credit is available to all stakeholders. Thus, no such recovery can be made by guarantor.

In the Report of the Insolvency Law Committee dated March 26, 2018, the Committee has also observed that the assets of a surety is separate from those of Corporate Debtor. The enforcement of guarantee may not have a significant impact on the debt of the corporate debtor and the proceedings against the Corporate Debtor may not be seriously impacted by the actions against the assets of sureties. The contractual principles of guarantee are required to be respected even during moratorium. The guarantor cannot take a defence that they will not be liable for any remaining amount once the resolution plan is approved.

Recently, the NCLT, Principal Bench, New Delhi, in the matter of Rave Scans Pvt. Ltd. [IB No. 01/2017, decision dated 9th May 2019] has dealt with the same aspect and has dismissed the application filed by one of the guarantors who had tried to challenge the proceedings initiated by the Financial Creditors against the guarantor post the acceptance of the Resolution Plan.

From the above, it is clear that the conclusion of CIRP does not bar the creditor to proceed against the guarantors. The rights of a creditor against a guarantor are independent. The position of law is expected to become more clear in the coming times.

* The Authors represented one of the Financial Creditors in the Rave Scans matter before the NCLT, Delhi.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Vaish Associates Advocates
 
In association with
Practice Guides
by Mondaq Advice Centres
Relevancy Powered by MondaqAI
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Vaish Associates Advocates
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions