The Supreme Court has held that release or discharge of a principal borrower from the debt owed by it to its creditor by an involuntary process, i.e. by operation of law, or due to liquidation or insolvency proceeding, does not absolve the surety/guarantor of his or her liability, which arises out of an independent contract.

Background:

A two-judge bench of the Supreme Court in Lalit Kumar Jain v Union of India & Ors.  upheld the validity of a notification dated 15 November 2019 (2019 Notification) which allowed creditors to initiate an insolvency resolution process against personal guarantors of corporate debtors (i.e. companies undergoing insolvencies) before National Company Law Tribunal (NCLT).  Prior to the issuance of the 2019 Notification, it was not possible for creditors to initiate insolvency resolution process against individuals including personal guarantors.

The petitioners before the Supreme Court had provided personal guarantees for borrowings by companies which were owned/promoted by them.  The borrower companies were unable to honor their financial commitments.  Consequently, the lenders initiated an insolvency resolution process against the companies under the Insolvency and Bankruptcy Code 2016 (Code).  The lenders were unable to recover their full dues from the sale or dissolution of the borrower companies and subsequently they invoked insolvency resolution process against the petitioners pursuant to the 2019 Notification.  In response, the petitioners challenged the 2019 Notification before various High Courts across the country.  However, the Supreme Court passed directions to transfer all such petitions from the various High Courts to itself and decided the issues raised by the petitioners through this judgement.

Approval Of Resolution Plan Does Not Discharge Personal Guarantor Of Liabilities Under The Contract Of Guarantee

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