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Does a director’s resignation from a company automatically discharge the obligations arising under a personal guarantee? The National Company Law Appellate Tribunal (“NCLAT”), Principal Bench, New Delhi, examined this issue in Nakul Gupta v. State Bank of India and Anr.11 The appeal required the NCLAT to determine whether a continuing personal guarantee stood discharged following the guarantor’s resignation from the corporate debtor and the subsequent renewal of the consortium lending arrangements, even though the lending exposure of the enforcing creditor remained unchanged.
In deciding the issue, the NCLAT reaffirmed the settled principles governing continuing guarantees under the Indian Contract Act, 1872, holding that the liability of a personal guarantor is governed by the terms of the Deed of Guarantee read with the provisions of the Indian Contract Act, 1872. The judgment reinforces that a guarantor’s resignation from the corporate debtor does not discharge a continuing guarantee. Instead, the continuation or discharge of such a guarantee depends upon the contractual terms governing the guarantee and the statutory principles regulating its revocation and discharge.
Facts and Decision
The dispute arose from working capital facilities sanctioned by a consortium of banks led by the Bank of India to Technofab Engineering Limited (“Corporate Debtor”). Under consortium arrangements executed in October 2017, the lenders sanctioned aggregate working capital facilities of ₹907 crore in favour of the Corporate Debtor. State Bank of India (“SBI”), one of the consortium members, sanctioned facilities with an individual exposure of ₹117 crore. To secure these facilities, the appellant, Mr. Nakul Gupta, then a director of the Corporate Debtor, executed a Deed of Guarantee in favour of SBI. The Deed expressly characterised the guarantee as continuing, irrevocable and unconditional.
The appellant resigned as a director of the Corporate Debtor on 8 March 2018. Thereafter, the Corporate Debtor requested SBI and the consortium to release the appellant from the guarantee and substitute it with an alternative security arrangement. Subsequently, the parties executed a Renewal Letter dated 1 January 2019 proposing revised consortium working capital arrangements, including enhancement of the consortium’s aggregate lending limits to ₹1,075 crore. SBI’s individual sanctioned exposure, however, remained unchanged at ₹117 crore. The appellant did not execute the subsequent renewal or revival documents and continued to maintain that he stood discharged from the guarantee.
Following the Corporate Debtor’s default, the loan account was classified as a Non-Performing Asset on 27 June 2019. SBI initiated proceedings under Section 95 of the Insolvency and Bankruptcy Code, 2016 (“IBC”), seeking commencement of the insolvency resolution process against the appellant as a personal guarantor. The NCLT Delhi admitted the application, which the appellant challenged before the NCLAT.
Before the Appellate Tribunal, the appellant contended that his resignation, read together with the subsequent enhancement of the consortium’s aggregate lending facilities without his consent, discharged his liability under the guarantee. It was argued that the subsequent lending arrangements constituted a variance attracting Section 133 of the Indian Contract Act, 1872, and amounted to a novation of the underlying contractual arrangements under Section 62, thereby releasing him from his obligations as a surety.
SBI contended that the Deed of Guarantee created a continuing, irrevocable and unconditional guarantee which remained operative unless revoked in accordance with Section 130 of the Indian Contract Act. It further submitted that no notice revoking the guarantee had ever been issued to it. Although the consortium’s aggregate lending limits were subsequently proposed to be enhanced, SBI emphasised that its own sanctioned exposure remained unchanged at ₹117 crore and that the liability sought to be enforced arose exclusively from the original lending facilities secured under the Deed of Guarantee executed in October 2017.
Dismissing the appeal, the NCLAT held that the appellant’s resignation as a director did not, by itself, revoke or discharge the continuing guarantee. The Tribunal clarified that the appellant’s liability was governed by the contractual terms of the Deed of Guarantee rather than by his resignation from the Corporate Debtor. Referring to Section 130 of the Indian Contract Act, the NCLAT reiterated that a continuing guarantee may be revoked only by notice to the creditor in respect of future transactions. In the absence of any notice revoking the guarantee, the Deed continued to operate according to its terms. The Tribunal further noted that revocation under Section 130 operates prospectively and does not discharge liabilities already incurred under transactions covered by a continuing guarantee. Accordingly, the NCLAT rejected the appellant’s contention that his resignation from the Corporate Debtor could be treated as an implied revocation of the guarantee.
The NCLAT further rejected the appellant’s contention that the Renewal Letter dated 1 January 2019 resulted in a novation of the original contract under Section 62. It held that the Renewal Letter never culminated in a concluded contract capable of replacing the original contractual arrangements. In the absence of such a concluded agreement, Section 62 had no application.
The Appellate Tribunal likewise rejected the appellant’s reliance on Section 133 of the Indian Contract Act. It held that no material variance had occurred so far as SBI’s lending arrangements were concerned, particularly because SBI had not enhanced its own sanctioned exposure beyond ₹117 crore. The Tribunal further noted that the Loan Recall Notice and the subsequent enforcement and recovery measures initiated by SBI continued to be founded upon the original lending documents executed in October 2017 rather than the Renewal Letter. Consequently, the liability sought to be enforced continued to arise under the original lending and security documents, including the Deed of Guarantee.
In reaching its conclusion, the NCLAT referred to Clauses 1, 3, 6, 7, 8, 11, 12, 14 and 19 of the Deed of Guarantee, which collectively demonstrated that the guarantee was intended to remain continuing, irrevocable and unconditional notwithstanding changes in the guarantor’s status within the Corporate Debtor. The Tribunal further observed that the Deed contractually provided that the guarantor would be treated as a principal debtor for the purposes of enforcement. The NCLAT also relied upon the decisions of the Supreme Court in Sita Ram Gupta v. Punjab National Bank2 and H.R. Basavaraj v. Canara Bankr3 while reiterating the settled principles governing continuing guarantees and novation of contracts. Reference was also made to State Bank of India v. Gourishankar Poddar4 and Sri Vibu Venkatsubramanian v. State Bank of India5 while considering the circumstances in which contractual variations may or may not discharge a continuing guarantor.
Conclusion
The decision provides crucial clarity on the durability of personal guarantees during corporate exits and debt restructurings. A director’s resignation from the corporate debtor does not, by itself, terminate a continuing guarantee, nor will the renewal or restructuring of lending arrangements automatically release the guarantor. Unless the guarantee is revoked in accordance with Section 130 of the Indian Contract Act or otherwise discharged in law, the guarantor remains liable in accordance with the contractual obligations undertaken.
The decision also provides valuable practical guidance for both lenders and guarantors. For lenders, it reinforces the importance of carefully drafted continuing guarantees capable of surviving subsequent changes in the corporate debtor’s management or financing arrangements. For directors, promoters and other personal guarantors, it serves as a reminder that resignation from the corporate debtor does not, without formal revocation or contractual discharge, extinguish obligations undertaken under a continuing guarantee. In doing so, the NCLAT reinforces that a guarantor’s liability remains strictly tied to the terms of the guarantee and the Contract Act, independent of any change in their corporate status.
Citations
Expositor(s): Adv. Jahnobi Paul
