NCLAT'S JUDGMENT IN SVA FAMILY TRUST & ORS. V. UJAAS ENERGY LIMITED & ORS.
The Supreme Court's judgment in Lalit Kumar Jain v. Union of India & Ors.1 made clear that the resolution of a corporate debtor under the Insolvency and Bankruptcy Code, 2016 (“IBC”) does not automatically discharge the guarantors of the corporate debtor from liability. Resolution plans often state that while approval of the plan would extinguish creditors' claims against the corporate debtor, it would not prevent creditors from pursuing their claims against the promoters and guarantors of the corporate debtor. A recent judgment of the National Company Law Appellate Tribunal, Principal Bench (“NCLAT”) considered the converse issue—can a resolution plan provide for the release of personal guarantees, when the personal guarantor has not been subject to the insolvency resolution process?
In SVA Family Welfare Trust & Ors. v. Ujaas Energy Ltd. & Ors2 (“Ujaas Energy”), the resolution plan proposed by SVA Family Welfare Trust provided for a total payment of approximately INR 74.8 crores to settle creditor dues, of which INR 23.8 crores was earmarked as consideration for the release of personal guarantees issued by the promoters of the corporate debtor. The resolution plan had been approved by 78.04% of the financial creditors; however, one of the financial creditors, the Bank of Baroda, objected to the plan, contending that the resolution plan for a corporate debtor could not take away the rights of a secured creditor to proceed against a personal guarantor. The National Company Law Tribunal (“NCLT”) also rejected the resolution plan on the grounds that the plan could not provide for the release of personal guarantees.
The NCLAT reversed the decision of the NCLT, holding that it was well within the commercial wisdom of the committee of creditors (“CoC”) to approve a plan that provided for the release of personal guarantees. The NCLAT acknowledged that there had been cases, such as the Supreme Court's decision in Lalit Kumar Jain, which made clear that the resolution of the corporate debtor did not “per se” discharge the personal guarantors from liability. However, these judgments did not imply that a resolution plan could never provide for the release of personal guarantees.
Further, the NCLAT differentiated this case from its prior judgment in Nitin Chandrakant Naik and Anr. vs. Sanidhya Industries LLP and Ors.3 where the tribunal had held that a resolution plan could not consume the assets of the personal guarantor without recourse to appropriate proceedings. The resolution plan in Ujaas Energy, the NCLAT pointed out, did not deal with the assets of the personal guarantor, but only provided for release of the personal guarantee that had been granted as security for financial assistance provided to the corporate debtor. Finally, the NCLAT emphasised that the minutes of CoC meetings clearly reflected that the release of personal guarantees had been discussed at length and was a deliberate decision taken by the CoC. Given that the CoC had clearly applied its mind in agreeing to a release of the personal guarantees in consideration for a specific payment, the NCLAT found no reason to question its exercise of commercial wisdom.
The CoC is indeed granted significant discretion in exercising its commercial wisdom, a point that has been widely accepted by courts and tribunals, particularly after the Supreme Court's judgment in Essar Steel's insolvency. It is also the case that the IBC provides for a wide range of actions that may be taken through resolution plans, with Section 31 of the IBC stating that resolution plans are binding on all stakeholders of the corporate debtor, including guarantors. However, the NCLAT's judgment in Ujaas Energy nevertheless raises a critical question of whether a resolution plan can extinguish the right of creditors to proceed against parties other than the corporate debtor.
Through the corporate insolvency resolution process (“CIRP”), individual creditors give up their rights to take separate enforcement actions and are bound by the decisions of the CoC. For example, if the CoC, by a voting share of 66% or more, approves a resolution plan that provides for an 80% haircut for the financial creditors, the dissenting financial creditors would have to accept the plan. As long as they receive at least the liquidation value of their claims, the right of dissenting creditors to proceed against the corporate debtor gets extinguished by virtue of the resolution plan.
However, the case of Ujaas Energy differs from this typical scenario because the liability under the guarantee is not a debt owed by the corporate debtor. Instead, the guarantee is a debt of a third party (often the promoters of the corporate debtor), created through a contract of guarantee between a creditor and the third party. The creditor who is the beneficiary of the guarantee may, of course, waive its rights to claim under the guarantee, but can this right be extinguished without the individual creditor's consent through a decision of the CoC? The IBC explicitly clarifies that the CIRP only relates to the corporate debtor and its assets and, as a consequence, the rights of creditors vis-à-vis the corporate debtor. Given this, it is questionable if the decisions of the CoC can take away a creditor's rights to a debt owed, not by the corporate debtor, but by the guarantor. Further, while agreeing that a resolution plan cannot deal with the guarantor's assets, the NCLAT's judgment fails to consider whether resolving a personal guarantor's debt without taking into account the personal guarantor's assets violates the creditor's rights in the broader borrowing arrangement.
The NCLAT's decision in Ujaas Energy may well be appealed and it remains to be seen how the Supreme Court might deal with this tricky issue. Interestingly, the U.S. Supreme Court is currently considering a similar issue in a different context—in the bankruptcy settlement of Purdue Pharma, the company widely considered to be responsible for the opioid crisis in the United States. The $6 billion settlement in the Purdue Pharma bankruptcy has been challenged on the basis that the settlement releases the Sackler family, the shareholders of Purdue Pharma, from all liability for their role in the opioid epidemic, even though they had not filed for bankruptcy protection themselves. In an article published in the Yale Law Journal, Lindsey D. Simon, refers to the likes of the Sackler family as bankruptcy “grifters”.4 Grifters, according to Simon, get themselves entangled in the debtor's bankruptcy, with the aim of benefiting from the proceedings, without filing for bankruptcy protection themselves. If bankruptcy settlements routinely provide grifters with protection against future lawsuits, Simon believes this could significantly compromise the due process rights of claimants (who, in Simon's discussions, are primarily mass tort victims) to proceed against the grifters.
The situation of mass tort claimants under U.S. bankruptcy law is very different from the rights of creditors to proceed against guarantors in the context of a CIRP. However, in both cases, the all encompassing nature of insolvency proceedings has meant that a resolution or bankruptcy settlement could impact a wide range of stakeholders, including those not directly involved in the process. If the insolvency proceeding ends up discharging the debt or liability of parties that are not going through the insolvency process, the legally permissibility of such a discharge and its impact on dissenting creditors will need to be carefully thought through.
1. [(2021) 9 SCC 321]
2. Company Appeal (AT) (Insolvency) No. 266 of 2023, decided on August 21, 2023.
3. 2021 SCC OnLine NCLAT 302.
4. Lindsey D. Simon, Bankruptcy Grifters, 131 Yale L.J. 1154 (2022).
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