- Allahabad High Court: No ipso facto absolvement of guarantor's liability upon approval of resolution plan.
- NCLAT: The obligation of the adjudicating authority to direct for liquidation shall rise only when decision of the Committee of Creditors is in accordance with the Insolvency and Bankruptcy Code, 2016.
- The Rise of ESG Investing in India: What it Means for Corporations.
I. Allahabad High Court: No ipso facto absolvement of guarantor's liability upon approval of resolution plan.
The High Court of Allahabad ("High Court") by order dated January 12, 2023, in the matter of Narendra Singh Panwar v. Pashchimanchal Vidyut Vitran Nigam Limited and Others [Writ – C No. 26355 of 2022], held that approval of a resolution plan does not ipso facto discharge a personal guarantor of a corporate debtor of his liabilities under contract of guarantee.
The National Company Law Tribunal, Allahabad ("NCLT") initiated Corporate Insolvency Resolution Process of Trimurti Concast Private Limited ("Corporate Debtor"), following an application by Ram Alloys Casting Private Limited under Section 7 (Initiation of corporate insolvency resolution process by financial creditor) of the Insolvency and Bankruptcy Code, 2016 ("IBC"). Thereafter, by an order dated March 22, 2022 ("Order"), NCLT approved the resolution plan ("Plan") in respect of the Corporate Debtor. During the consideration of approval of Plan, an application was filed by Pashchimanchal Vidyut Vitran Nigam Limited ("Respondent"), basis which NCLT directed that its claim pertaining to electricity dues be considered in the resolution plan, along with other operational creditors.
Thereafter, the electricity connection of the Corporate Debtor, which was temporarily disconnected since September 9, 2019, was permanently disconnected on August 30, 2022. Further, a demand notice dated June 30, 2022 (" Impugned Notice") under Section 3 (Notice of demand for dues not paid) read with Section 5 (Recovery of dues) of the U.P. Government Electrical Undertakings (Dues Recovery) Act, 1958 ("Act") was issued against two of the directors of Corporate Debtor, Mr. Narendra Singh Panwar ("Petitioner") and Mr. Ashok Sharma. On August 2, 2022, a copy of the Impugned Notice was also forwarded to the District Magistrate, Muzaffarnagar for making recovery of dues as arrears of land revenue.
Aggrieved by the above-mentioned, the Petitioner challenged the Impugned Notice before the High Court by way of the captioned writ petition.
Whether a director of a company who is claimed to be the personal guarantor for payment of electricity dues of the company would be liable to fulfil the demand of dues of electricity from his personal assets, in view of the insolvency proceedings concluded in relation to the defaulter company under the IBC.
Contentions raised by the Petitioner:
Petitioner contended that a provision has already been made in the Plan for recognition and treatment of the electricity dues of the Corporate Debtor as operational dues. These outstanding dues could not have been recovered from the directors of the Corporate Debtor, since they are not personally liable. Pursuant to the NCLT approving the Plan in respect of the Corporate Debtor, treating the electricity dues as operational dues, all claims against the Corporate Debtor stood extinguished.
Further, the Petitioner demonstrated the waivers, reliefs and exemptions granted by the NCLT in the Order to contend that pursuant to approval of a resolution plan, a creditor is prohibited from initiating proceeding for recovery of its claims which are not part of the resolution plan and all such claims stand permanently extinguished. It was thus, contended that the Plan is binding on the Corporate Debtor as well as all other stakeholders.
Placing reliance upon the judgment of the Supreme Court ("SC") in the matter of Indian Overseas Bank v. RCM Infrastructure Limited [AIR Online 2022 SC 736], the Petitioner further contended that IBC is a complete code in itself and by virtue of Section 238 (Provisions of this Code to override other laws) of IBC, it will override other laws for the time being in force, in the event of inconsistency.
Further, it was contended that the expression "consumer" as defined under Section 2(15) of the Electricity Act, 2003 does not cover the director, where the body corporate is a consumer and recovery, as such, cannot be made against the directors.
Contentions raised by the Respondent:
The Respondent submitted that the provisions of the Electricity Supply Code, 2005 empower the electricity department to initiate recovery proceeding against the directors of a company and any payment due to the licencee company can be recovered as arrears of land revenue as per the provisions of the Act in accordance with the provisions of the Electricity Supply Code, 2005.
It was further contended that out of the total outstanding due against the Corporate Debtor to the tune of INR 9,00,00,000 (Rupees Nine Crores only), the Plan merely provides for payment of an amount to the tune of INR 6,00,000 (Rupees Six Lakhs only).
Observations of the High Court
The High Court observed that IBC is a complete code in itself and in the event of any inconsistency, shall prevail over any other law for the time being in force, by virtue of its non-obstante clause, that is, Section 238 of IBC.
The High Court further observed that the waivers, reliefs and exemptions granted by the NCLT while approving the Plan are with respect to the claims against the Corporate Debtor and the assets of the Corporate Debtor. However, the issue in the present case pertains to the personal liability of the directors of the Corporate Debtor.
It was further observed that one of the directors of the Corporate Debtor, Mr. Ashok Sharma, filed his affidavit along with the application form for supply of electricity, to undertake that whatever be the dues of the Company, he would always be ready and bound to deposit the same in accordance with the orders of the Executive Engineer, U.P. Power Corporation Limited. Further, the agreement for supply of electrical energy dated April 8, 2013 had been signed by Mr. Ashok Sharma in the capacity of director of the Corporate Debtor as the 'consumer'.
Further, the High Court relied upon the judgment of the SC in the matter of State Bank of India v. Ramakrishna and Another [(2018) 17 SCC 394], wherein the question before the SC was whether upon admission of the insolvency petition, the moratorium under Section 14 of IBC would apply to a personal guarantor of corporate debtor. It was observed in the above-mentioned judgment that the absence of mention of 'personal guarantor' in the provisions of Section 14 of IBC makes it clear that Section 14 has no application to personal guarantors of corporate debtor.
Further, the High Court relied upon the judgment of the SC in the matter of Laxmi Pat Surana v. Union of India and Another [(2021) 8 SCC 481], whereby the SC had held that the obligation of guarantor is coextensive and coterminous with that of the principal borrower, as stipulated under Section 128 (Surety's liability) of the Indian Contract Act, 1872.
Thereafter, the High Court arrived at the conclusion that the sanction of a resolution plan and finality imparted to it by Section 31 (Approval of resolution plan) of IBC does not discharge the guarantor's liability. Approval of a resolution plan does not ipso facto absolve the surety/ guarantor of his liability, which arises out of an independent contract of guarantee. Further, the nature and extent of the guarantor's liability arising out of such guarantee shall depend upon the terms of the guarantee/ contract.
Decision of the High Court
In view of the aforesaid observations and the precedents, the High Court held that the contention of the Petitioner to challenge the recovery of electricity dues on the ground that approval of Plan of Corporate Debtor would ipso facto absolve the directors of the Corporate Debtor, who have stood as guarantor, from all liabilities in respect thereof whatsoever, cannot be accepted. Accordingly, the High Court dismissed the writ petition.
The High Court has rightly held that the challenge to Impugned Notice for recovery of electricity dues, issued jointly in the name of the directors of the Corporate Debtor, cannot be sustained on the ground that in view of approval of the Plan of the Corporate Debtor, all liabilities of directors who may be the guarantor, stood automatically discharged/ extinguished.
It is well-settled law that upon the approval of resolution plan pertaining to the corporate debtor, all liabilities, claims, dues and all waivers, reliefs, exemptions for past period, stands discharged/ extinguished, only in respect of the corporate debtor itself, but it does not discharge the directors of the Company, who may have stood as personal guarantors, from the liability of making the payments to the creditors/ requisite authorities as per the terms of the contract/ deed of guarantee executed by them.
Therefore, the present judgment of the High Court ensures that no director of a company or personal guarantor shall attempt to wriggle out of his responsibilities/ liabilities, on the ground that the resolution plan has already been approved and all liabilities have thus stood extinguished qua the directors/ guarantor.
© 2020, Vaish Associates Advocates,
All rights reserved
Advocates, 1st & 11th Floors, Mohan Dev Building 13, Tolstoy Marg New Delhi-110001 (India).
The content of this article is intended to provide a general guide to the subject matter. Specialist professional advice should be sought about your specific circumstances. The views expressed in this article are solely of the authors of this article.