Liability of Personal Gurantor under IBC with reference to Lalit Kumar Jain VS Union of India

TRANSFERRED CASE (CIVIL) NO. 245/2020

The Liability of Personal gurantor is comparatively more riskier than any other Creditor as the gurantors personal asset shall be liable and can be attached with the Resolution Plan.

But there is a option for the gurantor to step into the shoes creditor of the company and can recover the amount given in resolution plan from the company.

GURANTOR’S RIGHT OF SUBROGATION TO STEP IN THE SHOES OF CREDITOR.

Anything done, or promised to be done, in favor of the party is a sufficient consideration for the guarantor. Further, the surety/guarantor is subrogated to all the rights of the creditor against the principal debtor . the guarantor steps into the shoes of the creditor, and is entitled to enforce all the securities that the creditor has against the borrower, on whose behalf the payment is made Sec127 of the Indian Contract Act, 1872.

There was a notification passed by the Central government as on 15/11/2019 regarding the personal gurantor to be liable for the debts of the company. Notification as below

Indian Contract Act, 1872

Since then there has been a lot of trouble between the Government and the companies. So, in the below mentioned case the IBBI has requested to sum up all the matters together and to be heared by the Hon’ble Supreme court.

Recent Judgement by the Hon’ble Supreme court as on 18/02/2021 stating the role of personal gurantor as in the case of

LALIT KUMAR JAIN VS UNION OF INDIA & ORS. TRANSFERRED CASE (CIVIL) NO. 245/2020.

The Petitioner contended that the Liability of the Personal guarantor is coextensive with the Personal Debtor under sec-128 of the contract act. The Creditors being allowed to claim from the personal guarantor in spite of getting their share from the CIRP of the corporate debtor is Untenable. It is also contended that the COC and the RP are the people who defined the term “Guarantor” as a personal Guarantor and there is no definition for Guarantor in the Parent Act. Praying that the Notification to be considered as ultra vires. Part-III doesnot create any distinction between the personal guarantor and corporate debtor. The Impugned notification applies to particular subcategory of people that is Personal guarantor who is out of scope of the conditional delegation of power. Such notification shall be deemed void. The conditional legislation power under sec1(3) of the code to bring changes for particular category be deemed ultra vires and contrary to the power granted by the Parliament. On application of moratorium under sec-101 of the code against the Personal Guarantor’s debt as a guarantor is same as the Corporate Debtor. So an initiation of such suit shall result in CIRP and all pending cases against the corporate debtor shall be stayed as on admission of application for resolution plan for the Personal Guarantor. Sec-29A promoters of the Corporate Debtors who are the Personal Guarantor in most cases are barred to file Resolution plan which is a disadvantage to the individuals other than the Personal Guarantor. On a default owned by the Corporate Debtor against the borrowings taken from the Financial Creditors, automatically excludes the Personal Guarantor from filing claims until unification of the Code. The liability of the Personal Guarantor is coextensive with the principal borrower unless contrary provided in the contract. even on the occurrence of winding up the liability of the surety does not get absolved and still exists.

These were the primary dispute of the case and  the Supreme court held that  approval of a Resolution Plan does not ipso facto discharge a Personal Guarantor (of a Corporate Debtor) of her or his liabilities under the contract of Guarantee.  As held by the Hon’ble Supreme Court, the release or discharge of a Principal Borrower from the debt owed by it to its Creditor, by an involuntary process, by operation of law, or due to liquidation or insolvency proceeding, does not absolve the Guarantor of his or her liability, which arises out of an independent contract. It is also further held that the impugned Notification is “legal and valid”.

While dismissing the Writ Petition along with all the related Transfer Petitions the Hon’ble Apex Court held that approval of a Resolution Plan relating to a Corporate Debtor does not operate so as to discharge the liabilities of Personal Guarantors.

AMRIT LAL GOVERDHAN LALAN VS STATE OF TRAVANCORE AIR 1968 SC1432

Personal guarantors are generally promoters of the corporate debtor who have profited from the debtor and may have contributed to its insolvent state through mismanagement, and the Code seeks to prevent them from rewarding themselves or benefitting from the CIRP at the expense of the creditors.

That being said, a personal guarantor is not entirely deprived of the right of subrogation. If the debt is satisfied prior to the approval of the resolution plan, then the personal guarantors can exercise their right of subrogation by having their claim included in the plan. Further, if the debt is satisfied after the approval of the plan, then the resolution applicants may exercise their discretion to provide for claims relating to subrogation. However, in the Essar Steel case, the Supreme Court held that failure to provide for such claims would not invalidate the plan, as it is binding on all stakeholders under section 31(1) of the IBC.

WHERE TO FILE FOR RECOVERY OF MONEY DUE.

In drt then Section 17 of the Recovery of Debts Due to Banks and Financial Institutions Act, (RDDBFI Act) empowers the Debt Recovery Tribunal (DRT) to entertain applications from banks or financial institution for “recovery of debts”.

Section 60(2) of the Insolvency and Bankruptcy Code  gives the power to Creditor to initiate a corporate insolvency process against the guarantor. Given this scenario, if one company decides to act as a guarantor for the other company than both the companies would wound up in CIRP or the liquidation process.

RECOVERY OF DEFAULTED MONEY OF RESOLUTION PLAN FROM PERSONAL GURANTOR.

In  a popular case of LALIT MISHRA AND OTHERS VS SHARON BIO MEDICINE LIMITED, wherein it was observed that a guarantor cannot enjoy subrogation rights under the IBC as the proceedings there under are not recovery proceedings. The aim of the IBC is to revive the company and not to make certain that credit is available to all stakeholders. Moreover, it should also be considered that allowing the exercise of subrogation right will mean that the debt remains as it is and this will act as an obstruction in the revival of the corporate debtor. Though ratio laid down under Shri Kundanmal Dabriwala (Supra) was not discussed by the NCLAT.

Be that as it may, in view of Judgment of High Court and NCLAT order in Lalit Mishra (Supra), creditors can recover hair cut in the resolution plan from the guarantors and guarantor’s right of subrogation does not survive post approval of the resolution plan

Where the relief is sought

Even in supreme court the appeal was rejected and upheld the High court  order.

GOURI SHANKAR JAIN VS PUNJAB NATIONAL BANK &ANR 13/11/2019

……. According to him, Section 14(3) of the Code of 2016 provides that,

there will be no moratorium in respect of proceedings against  guarantor during the Corporate Insolvency Resolution process of a corporate debtor while a moratorium against a corporate debtor is in operation.

He has submitted that, Section 14 (3) of the Code of 2016 embodies the intention of the legislature that, proceedings against the guarantor for realisation of the entire guaranteed claim irrespective of the outcome of the Corporate Insolvency Resolution process against

the corporate debtor is permissible. He has also relied upon Section 60 (2) of the Code of 2016 to submit that, proceedings against guarantors may be instituted even when an Insolvency Resolution process or liquidation process against the corporate debtor is pending before the National Company Law Tribunal. He has submitted that, the provisions of the Code of 2016 or the Resolution Plan sanctioned

under the Code of 2016 does not extinguish the liability of the guarantor. According to him, such liability cannot be said to be affected by the sanction of a Resolution Plan. He has relied upon Section 238 of the Code of 2016 in support of such contentions. He has distinguished the authorities cited on behalf of the petitioner

“The Supreme Court in Canonnore Spinning and Weaving Mills Ltd (supra) has considered discharge of liability of a guarantee under the provisions of section 141 of the Act of 1872. It has held that, a definite volition on the part of the creditor is required to take place for the guarantor to stand discharged in terms of section 141 of the Act of 1872. It has held that, the liability of the guarantor cannot but be stated to be a strict liability and even if the principal debtor is discharged from his liability unless such discharge is through the act of the creditor without consent of the surety/guarantor, the creditor’s right of action against the surety is preserved.The financial creditor is exercising a statutory right to recover its debts”

…Theoretically, as the liability of the surety is coextensive as that of the principal debtor, the creditor can proceed solely against the surety and recover the liability of the debtor from the surety. In such a situation, the subsequent reduction of liability of the debtor to the surety, by virtue of a bankruptcy or insolvency proceeding or otherwise, will not require the creditor to refund the amount recovered from the surety on account of the debtor to the surety. Pre bankruptcy and insolvency, the creditor has the right to recover the entire claim against the debtor from the surety. Post the bankruptcy and insolvency proceeding of the debtor, the pre bankruptcy and insolvency right of the creditor does not undergo any metamorphosis on the principle that, such proceedings emanate out of a statutory right and are involuntary in nature.”

CONCLUSION

Thus from the above case laws and notification it has been clearly stated about the Liability of Personal Gurantors and various methods for Retrieval of their debts. But the latest notification as on 15/11/2019 shall make the Gurantors to go under Resolution Process or the corporate debtor into resolution process at an early stage.

The Object of the IBC is for Revival of the Companies from the Debt after these latest notices it has been more a recovery forum for the creditors. The overall act shall be restructured in order to make the act more viable as the IBC has an overriding effect it shall be made with caution.

Thus this is about Liability of Personal Gurantors with reference to LALIT KUMAR JAIN VS UNION OF INDIA & ORS. TRANSFERRED CASE (CIVIL) NO. 245/2020

*****

An Article by

G.Hariharran  B.Com LL.B.(Hons) Vth year

Tamil Nadu Dr. Ambedkar Law Univeristy (School of Excellence in Law )

[email protected]   / [email protected]

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Location: Chennai, Tamil Nadu, India
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