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.

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