Personal Guarantor Liability After Resolution Plans:Analysing Section 7 IBC and the Doctrine of Excluded Rights

Introduction 

When a company defaults on its loans, a common question arises: what happens to the individuals who guaranteed those loans? In the complex world of corporate finance, a personal guarantee is a promise made by a person, often a director or promoter of the company, to be personally liable for the company’s debt if it fails to pay. Imagine a situation where a small business owner takes out a loan for their company, and to secure it, they personally promise to pay the bank back if the business goes under. This promise, this personal guarantee, is a critical safety net for the lender. But what happens to this promise when the company enters the IBC¹ process, and a resolution plan is approved? Does the approval of the plan, which restructures the company’s debt, also wipe away the personal liability of the guarantor?

This very question lies at the heart of a significant judgement in  M/s IFCI Limited VERSUS M/s ACCIL Hospitality Private Limited² by the National Company Law Tribunal (NCLT), New Delhi Bench, presided over by Shri Manni Sankariah Shanmuga Sundaram (Hon’ble Member Judicial) and Shri Atul Chaturvedi (Hon’ble Member Technical). This decision, a pivotal one for creditors, clarifies that even after a resolution plan is approved for a corporate debtor, financial creditors can still proceed against personal guarantors as long as their rights under the guarantee are explicitly preserved. This nuanced stance challenges the notion that a clean slate for the company automatically means a clean slate for its guarantors. It’s a powerful reminder that promises made aren’t easily forgotten, even in the labyrinthine corridors of insolvency law.

This article will delve into the profound implications of this ruling. We’ll explore the subtle but crucial shift in legal interpretation, which now permits an application under Section 7 of the IBC to be filed against a corporate guarantor. We’ll also examine the critical lesson for creditors: that slumbering on one’s rights can lead to their forfeiture, even when all the cards seem to be in their favor. Furthermore, we will address key questions that the NCLT had to consider: whether the applicant qualifies as a financial creditor, if a financial debt exists as defined by Section 5(8) of the Code, and whether the approval of a resolution plan and the subsequent assignment of debt truly extinguish the liability of a corporate guarantor.

We now arrive at the crux of the matter: what happens when a resolution plan, approved and binding on all stakeholders, seems to have assigned the entire debt? The respondent, in this case, presented a compelling argument. They contended that under Section 31(1) of the IBC, the approved resolution plan for the principal borrower, which was greenlit by the Committee of Creditors with a 79.3% voting share and subsequently by the NCLT on October 19, 2020, is binding on everyone, including guarantors. They argued that the debt had been assigned in its entirety to a special purpose vehicle (SPV), Hasaud Steels Limited, a subsidiary of the resolution applicant, JSW Steel Coated Products Ltd.

To bolster their position, the respondent rested their case on a series of judgments. They cited the Australian High Court’s ruling in Hutchens v. Deauville Investments Pty Ltd³, which held that splitting a debt after assignment to create separate causes of action is impermissible. Similarly, in Prashant Shashi Ruia v. State Bank of India⁴, the Gujarat High Court had concluded that once the entire debt is assigned, the assignor cannot seek recovery under guarantees. This principle was further reinforced by the DRT in State Bank of India v. Prashant S. Ruia & Ors⁵, which held that no recovery can be pursued from guarantors when the principal debt is fully assigned and extinguished. 

The respondent also highlighted the Andhra Pradesh High Court’s decision in Kurnool Chit Funds Ltd. v. P. Narasimha⁶, which established that the extinguishment of the principal debtor’s liability also extinguishes the surety’s liability. They also pointed to the Supreme Court’s action in UV Asset Reconstruction Co. Ltd. v. Electrosteel Castings Ltd⁷., where the court issued a notice to examine whether a financial creditor could enforce an excluded security without the underlying debt, indicating the complex and unsettled nature of the issue.

But is the picture really that simple? Can an approved resolution plan, which offers a fresh start to the principal debtor, completely sever the umbilical cord of liability for its guarantors? This is where the narrative takes a fascinating turn, and a subtle but powerful shift in legal jurisprudence comes into play. The applicant, in a counter-argument, highlighted a crucial change in the legal landscape. The applicant pointed to the NCLAT’s judgment in State Bank of India v. Athena Energy Ventures Pvt. Ltd⁸. on November 24, 2020. This ruling decisively clarified that proceedings under Section 7 of the IBC can be initiated simultaneously against both the principal borrower and the corporate guarantor. The applicant’s petition, they argued, was not barred by limitation, as it should be reckoned from the date of this pivotal judgment, a date that marked a change in the law. Furthermore, they pointed to an earlier NCLT order from October 21, 2019, which had expressly protected their rights in the event of such a change. This made the reliance of the respondent on other cases like Ram Das Datta v. IDBI Bank Ltd⁹. and Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries Pvt. Ltd. and Another¹⁰ misplaced and inapplicable to the present facts.

This brings us to the core of the dispute: the existence of “Excluded Rights.” The respondents maintained that the resolution plan for the principal borrower, Asian Colour Coated Ispat Limited, did not reserve any right to pursue a corporate guarantor. However, the applicant countered this by stating that this contention was fundamentally mistaken and contrary to the explicit terms of the resolution plan itself. They revealed that the plan had, in fact, carved out specific “Excluded Rights.” These rights, they submitted, included the right of the financial creditors to enforce third-party securities, such as mortgages and guarantees provided by entities like the present corporate guarantor, ACCIL Hospitality Private Limited. This was a game-changing revelation. The plan had been meticulously drafted to preserve the financial creditor’s right to proceed independently against the corporate guarantor for the recovery of balance dues. The assignment of the “Remaining Debt” to the SPV, therefore, was not the assignment of the entire debt in the way the respondent had suggested. It was a partial assignment, with the “Excluded Rights”—the very right to sue the guarantor—being deliberately and judiciously retained by the financial creditor.

So, when does a debt truly cease to exist? The NCLT, leaning on the NCLAT’s judgment in Mr. Vikas Aggarwal v/s Asian Colour Coated Ispat Limited & others¹¹, found the respondent’s contention to be entirely untenable. The NCLAT had meticulously held that a resolution plan can, and often does, carve out these “Excluded Rights” which are not transferred to the resolution applicant or its SPV. The judgment firmly established that a financial creditor’s right to proceed against a personal guarantor continues as long as this right is not explicitly extinguished or assigned. The NCLAT made it abundantly clear: “resolution of debts cannot be misconstrued as full satisfaction of debts payable to the creditors.” 

The resolution plan merely resolves the corporate debtor’s obligations to a certain extent, and this does not automatically take away the financial creditor’s right to pursue guarantors. The court’s unequivocal conclusion was that the applicant’s rights were preserved, and the existence and enforceability of these rights could not be nullified by pointing to the assignment of the “Remaining Debt” when the “Excluded Rights” remained untouched. The judgment, therefore, fortified the applicant’s case, confirming that they indeed qualified as a financial creditor with an enforceable financial debt against the corporate guarantor.

The tribunal was poised with another critical question in the instant application: should the pendency of a writ petition in a High Court stop this Tribunal from exercising its jurisdiction? The corporate debtor argued that the ongoing writ petitions before the Hon’ble High Court of Punjab & Haryana should warrant a stay of proceedings. They contended that the financial creditor, despite the approved resolution plan and the alleged assignment and extinguishment of the debt, was continuing with coercive recovery actions. The corporate debtor had filed a First Writ Petition¹² to challenge an auction sale notice issued under the SARFAESI Act and sought an interim stay on all such measures. This was followed by a Second Writ Petition¹³ after the financial creditor issued a fresh notice of assignment, in which the High Court, through an interim order dated January 20, 2023, granted relief restraining further enforcement actions.

So, how does a tribunal, with its specific statutory mandate, navigate this judicial overlap? The NCLT took a pragmatic and principled stance. It held that the pendency of civil proceedings in a constitutional court, such as a High Court, does not automatically bar a statutory body like the NCLT from exercising its jurisdiction under the IBC. The NCLT relied on the Supreme Court’s judgment in Embassy Property Developments Pvt. Ltd. v. State of Karnataka¹⁴, which clearly delineated the limited grounds for ousting the authority’s jurisdiction.

 The Tribunal noted that unless there is a specific and explicit stay order or an injunction from the High Court prohibiting the continuation of the matter, the mere existence of a pending petition is not a sufficient ground to halt statutory adjudication. The NCLT found no such prohibitive order in the present case that would impose an embargo on its jurisdiction under Section 7 of the IBC.

Furthermore, the Tribunal astutely pointed out a contradiction in the corporate debtor’s own position. On one hand, the corporate debtor was seeking judicial propriety by arguing for a stay due to the High Court proceedings. On the other, they were simultaneously drawing on various judgments to assert that the debt had been extinguished, effectively asking the NCLT to decide on an issue they claimed was still “sub judice” and undecided. 

This “dual stance,” as the NCLT called it, undermined the very position the corporate debtor was trying to project. If the matter was indeed an undecided issue for the High Court to settle, the corporate debtor could not, at the same time, claim absolute discharge of its liabilities. This logical inconsistency fortified the NCLT’s view that the writ petitions, in their current state, did not present a valid reason to stay the proceedings before it. The Tribunal concluded that its statutory duty to adjudicate the Section 7 petition remained unhindered.

When a case appears to be settled, and the applicant’s arguments are holding water, it’s often the procedural details that can upend everything. This is precisely what happened here. Even though the NCLT had affirmed the financial creditor’s right to pursue a corporate guarantor and the existence of a financial debt, a new, critical question emerged: was the petition filed within the statutory period of limitation?

The NCLT observed that the guarantee was invoked on January 11, 2017. As per Article 137 of the Limitation Act, 1963, the limitation period for initiating proceedings under Section 7 of the IBC would ordinarily expire on January 10, 2020. The applicant, aware of this, tried to argue that the limitation period should be counted from the date of the change in law, November 24, 2020, with the Athena Energy judgment. However, this argument was swiftly dismissed. The court pointed out a simple, undeniable fact: the statutory period of limitation had already lapsed before this legal change. The present petition, filed on September 9, 2021, was well beyond the prescribed statutory period, rendering it ex facie barred by limitation.

The NCLT, while acknowledging the financial creditor had successfully demonstrated the existence of a financial debt and a default, ultimately declared the petition non-maintainable. This was a classic case of a seemingly strong legal argument being undone by a procedural oversight. The court’s hands were tied, as it does not have the power to condone delays in filing petitions under Section 7 of the IBC. Thus, despite winning the substantive legal battle, the financial creditor lost the war on a technicality. The petition was dismissed, leaving the applicant with the liberty to pursue other legal remedies, but having lost the opportunity to initiate the CIRP against the corporate guarantor in this specific proceeding.

Conclusion 

At the end of this  intricate legal journey, a journey that began with a straightforward question: can a financial creditor pursue a personal guarantor after a resolution plan for the principal debtor is approved? This landmark NCLT decision, while ultimately dismissing the petition on a procedural technicality, has left an indelible mark on insolvency jurisprudence. It has firmly established that the approval of a resolution plan is not a magic wand that wipes away all liabilities. A guarantor’s obligations, born from an independent and co-extensive contract of guarantee, remain intact as long as the creditor’s rights are meticulously preserved. The concept of “Excluded Rights” now stands as a powerful legal tool, allowing creditors to navigate the complex world of insolvency without sacrificing their recourse against those who promised to stand behind the corporate debtor. This ruling underscores a crucial lesson: in the legal landscape of insolvency, a sleeping creditor may lose even if they hold all the cards.

The implications of this judgment are profound and far-reaching. It serves as a stark reminder to both creditors and guarantors that the terms of a resolution plan must be scrutinized with the utmost care. For creditors, it is a call to action—to ensure that their right to proceed against guarantors is explicitly carved out and preserved. For guarantors, it is a warning—that a company’s resolution does not guarantee their personal freedom from debt. 

This decision reinforces the sanctity of the contract of guarantee and is likely to shape future insolvency proceedings significantly. However, a lingering question remains: will the legal community and the courts now face a new wave of litigation centered on the precise definition and scope of “Excluded Rights”? As insolvency law continues to evolve, the distinction between a debt that is “resolved” and a debt that is “extinguished” will become an even more hotly debated topic, and the answers will undoubtedly shape the future of corporate and personal finance in India.

Citations

1. Insolvency and Bankruptcy Code,2016
2. M/s IFCI Limited VERSUS M/s ACCIL Hospitality Private Limited 
3. State Bank of India v. Prashant S. Ruia & Ors 2022 SCC Online DRT 5, 
4. Prashant Shashi Ruia v. State Bank of India 2021 SCC Online Guj 3056, 
5. State Bank of India v. Prashant S. Ruia & Ors 2022 SCC Online DRT 5, 
6. Kurnool Chit Funds Ltd. v. P. Narasimha, AIR 2008 AP 38
7. UV Asset Reconstruction Co. Ltd. v. Electrosteel Castings Ltd., C.A. No. 9701 of 2024 
8. State Bank of India v. Athena Energy Ventures Pvt. Ltd., Company Appeal (AT) (Insolvency) No. 633 of 2020 
9. Ram Das Datta v. IDBI Bank Ltd.Company Appeal (AT) (Ins) No. 1285 of 2022
10. Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries Pvt. Ltd. AIR 2020 SUPREME COURT 4668
11. Mr. Vikas Aggarwal v/s Asian Colour Coated Ispat Limited & others CWP No. 1160 of 2022 
12. (CWP No. 24980 of 2021)
13. (CWP No. 1223 of 2023) 
14. Embassy Property Developments Pvt. Ltd. v. State of Karnataka, (2020) 13 SCC 308

Expositor(s): Adv. Anuja Pandit