Introduction
The legal principles governing insolvency today are subject to constant revision, particularly regarding the liability of personal guarantors to corporate debtors under the IBC1. A crucial point of legal contention revolves around the scope and revocation of continuing guarantees when a guarantor resigns and a corporate debt is subsequently renewed or enhanced. The NCLAT2, Principal Bench, New Delhi, addressed this complex issue in the case of Subhash Aggarwal vs. State Bank of India & Anr3.
The issue before the NCLAT was whether the Adjudicating Authority (NCLT) was correct in allowing the application under Section 95 of the IBC filed by the SBI4 to initiate insolvency resolution against the appellant, a personal guarantor, despite his claims of resignation, forgery, and material alteration of the original guarantee deed. The Tribunal, comprising Justice Ashok Bhusan and Mr. Barun Mitra, Member (Technical), ultimately held that the original Guarantee Deed was a continuing and irrevocable guarantee, and the guarantor remained liable at least to the extent of the debt sanctioned before his resignation.
The Appellant, joined the Corporate Debtor as an Executive Director in 2008 and signed a personal guarantee for a particular sum in favour of SBI on 25.08.2009. The credit facilities were subsequently renewed and enhanced multiple times. The Appellant resigned from the Directorship on 13.02.2012. Following the resignation, the bank renewed and enhanced the credit facilities, signing Supplementary Agreements of Loan and Deeds of Guarantee, with signatures allegedly affixed on behalf of the Appellant, which he claimed were forged. The Corporate Debtor’s account was declared NPA5 on 25.07.2018, leading the bank to eventually serve a demand notice and file a Section 95 application against the Appellant.
The Irrevocable Tie: When Does a Continuing Guarantee Survive Contractual Alteration and Forgery Claims?
The Appellant argued that his liability was strictly limited to the un-invoked Guarantee Deed of 2009 for a fixed sum, which was not a continuing guarantee. He claimed he was discharged under Sections 62 and 133 of the Contract Act because subsequent facility renewals/enhancements were made without his consent, constituting a material alteration. Furthermore, he alleged that the later guarantee deeds were forged, a claim supported by an expert report, and that the bank failed in its due diligence after his resignation was uploaded on the ROC portal.
The Respondent Bank contended that the 2009 Guarantee Deed was an uncontested, continuing, and irrevocable guarantee that covered future transactions and permitted subsequent variations. They asserted that the Appellant never communicated his resignation or revocation of the guarantee to the bank, and his directorship resignation did not automatically void his surety obligations. The Bank maintained that even if later guarantees were disregarded, the Appellant remained liable for the credit limit sanctioned before his resignation, and all procedural requirements under Section 95 of the IBC were duly met.
The contentions of both parties involved citations from significant case laws. The Bombay High Court in Narayan Ramchandra Bhagwat Vs Markandya Tukaram6 cited to argue that a substantial alteration in a contract without the surety’s consent discharges the surety, even without proven prejudice. The Supreme Court in M.S. Anirudhan Vs Thomco’s Bank Ltd7. and Ram Khilona & Ors. Vs Sardar & Ors8. used to emphasize that a material alteration in a Deed of Guarantee without the party’s consent is equivalent to cancelling the deed.
The Supreme Court in Sitaram Gupta Vs Punjab National Bank9 and H.R. Basavaraj Vs Canara Bank10 cited to support the argument that when a party enters into a continuing guarantee with a bank, it remains operational for subsequent transactions unless expressly revoked.
The analysis hinges on whether the Guarantee Deed of 2009, was a continuing guarantee. The Tribunal recognized that if the later deeds were forged or materially altered the contract without consent, the Appellant would be discharged under the Contract Act principles cited. However, the Respondent Bank successfully countered by relying on the express terms of the 2009 Deed that provided for variations and made the guarantee irrevocable and continuing.
The NCLAT reconciled the conflicting claims by closely examining the terms of the Guarantee Deed of 2009. On the nature of the Guarantee the clause explicitly states, “The guarantee herein contained is a continuing one… and shall not be determined or in any way be affected by any account or accounts opened or to be opened by the Bank becoming nil…” The other clause makes it irrevocable. It further clarifies that the guarantor shall not be released or discharged notwithstanding any variation made in the terms of the Loan Agreement, including reallocation/interchange of the individual limits within the principal sum.
Ultimately, the Tribunal concluded that since the Guarantee Deed of 2009 was a continuing and irrevocable guarantee and had not been expressly revoked, the Appellant remained liable at least to the extent of the debt secured before his resignation. The Adjudicating Authority had therefore committed no error in allowing the Section 95 petition.
Conclusion
The appeal in Subhash Aggarwal (Supra) challenged the initiation of the personal guarantor’s insolvency resolution under Section 95 of the IBC. The NCLAT upheld the NCLT’s order, primarily holding that the original Guarantee Deed of 2009 was a continuing and irrevocable contract with clauses that bound the guarantor despite subsequent variations in the credit facility and his eventual resignation from the Corporate Debtor. The lack of express revocation or clear communication of the same to the bank sealed the Appellant’s continuing liability.
This judgment reinforces the robust nature of continuing and irrevocable guarantees executed in favour of banks and financial institutions, particularly in the context of personal guarantors under the IBC. It solidifies the principle that resignation from a Corporate Debtor’s board does not automatically revoke a personal guarantee; an explicit and legally compliant revocation is required. Furthermore, the decision clarifies that express contractual clauses allowing for variations in loan terms, even without the guarantor’s fresh consent for each renewal, will likely be enforced, making it more difficult for personal guarantors to escape liability based on material alteration arguments, provided the original deed’s language is broad enough.
The case raises several important questions for future litigation. To what extent can the “forgery” defence be a genuine “dispute” under Section 95/99 of the IBC, given that the Adjudicating Authority is not a court for conclusively determining forgery? Should there be a mandatory requirement for Financial Creditors to formally acknowledge or deny a guarantor’s claimed revocation of a continuing guarantee post-resignation to avoid ambiguity? Personal guarantors should ensure that upon resignation from a Corporate Debtor, they explicitly and formally communicate the revocation of their personal guarantee to the Financial Creditor, referencing the specific clause of the guarantee deed and seeking formal acknowledgment, regardless of the ‘irrevocable’ clause, to strengthen any future defence.
Citations
- Insolvency and Bankruptcy Code, 2016
- National Company Law Appellate Tribunal
- Subhash Aggarwal vs. State Bank of India & Anr. (Company Appeal (AT) (Insolvency) No. 512 of 2024)
- State Bank of India
- Non-Performing Asset
- Narayan Ramchandra Bhagwat Vs Markandya Tukaram (AIR 1959 BOM 516)
- M.S. Anirudhan Vs Thomco’s Bank Ltd., (AIR 1963 SC 746)
- Ram Khilona & Ors. Vs Sardar & Ors., (AIR 2002 SC 2548)
- Sitaram Gupta Vs Punjab National Bank (2008) 5 SCC 711
- H.R. Basavaraj Vs Canara Bank (2010) 12 SCC 458)
Expositor(s): Adv. Shreya Mishra
