State Bank of India & Ors. Vs. Mr. Prashant S. Ruia & Anr. - In the absence of any subsisting underlying debt due from ESIL, the Secured Financial Creditors cannot in law trigger the personal guarantees that have been given by the defendants.

 DRT Ahmedabad-1 (11.03.2022) in State Bank of India & Ors. Vs. Mr. Prashant S. Ruia & Anr.  [Interlocutory Application No.106 of 2022 in Original Application No. 650 of 2018 ] held that;

• It is required to be noted that in the present case, the principal debtor is discharged on account of assignment of the entire debt owed by it to the Applicant Banks. 

• The legal effect of such assignment is that the debt as a whole is discharged upon receipt of the amounts under the approved Resolution Plan, whereafter, the debt is totally extinguished leaving nothing for recovery from the guarantors. 

• It is therefore, clear that the sanction of a resolution plan and finality imparted to it by Section 31 does not per se operate as a discharge of the guarantor’s liability. As to the nature and extent of the liability, much would depend on the terms of the guarantee itself.

• In other words, in the absence of any subsisting underlying debt due from ESIL, the Secured Financial Creditors cannot in law trigger the personal guarantees that have been given by the defendants.

• That the present Original Application does not survive as the cause of action for recovery of alleged debt of the Financial Creditors has come to an end on assignment of the entire debt of the Corporate Debtor by the Financial Creditors in favour of AMIPL.

Excerpts of the order;

# 11. It is a settled law that the liability of a guarantor is co-extensive with that of the Principal Borrower as per Section 128 of the Contract Act. The Defendants in the present case admittedly stood as sureties for the financial assistance granted by the Applicants to Essar Steel and therefore they were jointly and severally liable to pay the dues of the Applicants along with the Principal Borrower. Therefore, the Applicants were entitled to file Original Application against the Principal Borrower and/or guarantors for recovery of their debt before this Tribunal u/s 19 of the RDB Act. Under the contract of guarantee executed with the Applicants, the Defendants were liable to pay the dues of the Applicants. It is a different matter that the Applicants later on entered into the Deed of Assignment for its debt with the Resolution Applicant— ArcelorMittal. But the contract of guarantee between the Applicants and Defendants was in existence at the time of filing the present OA and it is still subsisting . Therefore, the Applicants were entitled to recover their debt, if any, from the Defendants. In view of the provisions of Section 2(g) read with Section 19 of the RDB Act, it cannot be said that there was lack of inherent jurisdiction of this Tribunal at the time of filing the OA by the Applicants against the Defendants.

 

# 31. The ratio of law laid down by the Hon’ble Apex Court in Lalit Kumar Jain Vs. Union of India & Ors. is to the effect that the guarantors are not ipso facto absolved from their liability on approval of resolution plan. It is required to be noted that in the present case, the principal debtor is discharged on account of assignment of the entire debt owed by it to the Applicant Banks. The legal effect of such assignment is that the debt as a whole is discharged upon receipt of the amounts under the approved Resolution Plan, whereafter, the debt is totally extinguished leaving nothing for recovery from the guarantors. Moreover, the Applicant Banks have no dues recoverable from the principal borrower after assignment of debt. As stated hereinabove, if the Applicants have nothing to recover on the books of accounts from the principal borrower, the guarantors stand absolved from their liabilities under the guarantees and they stand discharged in spite of the fact that the personal guarantees have been retained and specifically excluded by the Applicant Banks in the approved Resolution Plan. Therefore, the aforesaid judgement would not be helpful to the Applicant Banks in the present case.

 

# 32. Upon a comprehensive reading of the decision of Hon’ble Supreme Court in Lalit Kumar Jain’s Case (Supra), the irresistible conclusion that emerges is that the Hon’ble Supreme Court has only dealt with the validity of the notification in relation to the personal solvency under the IBC and has restricted its analysis as regards the constitutionality of the Notification. While upholding the validity of the said Notification, the Court has not dwelt into individual facts and circumstances of any particular case. The instructive observations of the Hon’ble Supreme Court in Lalit Kumar Jain’s Case (Supra) are reproduced below;- 

• # 108. It is therefore, clear that the sanction of a resolution plan and finality imparted to it by Section 31 does not per se operate as a discharge of the guarantor’s liability. As to the nature and extent of the liability, much would depend on the terms of the guarantee itself. However, this court has indicated, time and again, that an involuntary act of the principal debtor leading to loss of security, would not absolve a guarantor of its liability.

 

From the judgment of Hon’ble Supreme Court of India, it is clear that both the nature as well as the extent to a guarantor’s liability in any particular case would depend upon the terms of the guarantee itself, which is an independent contract.

 

# 36. A conjoint reading of the clauses of the Deed of Guarantee and the approved Resolution Plan reveals that the Secured Financial Creditors have assigned their entire debt from the Borrower (i.e.ESIL) to the resolution applicant (i.e.Arcelor) under the Resolution Plan and have also accepted the amounts paid to them by Arcelor in discharge of the total debt owed by the ESIL to such Financial Creditors. This factual matrix invariably leads to the singular conclusion that the debt owed by the ESIL to the said Financial Creditors stands fully and finally satisfied.

 

# 39.  . . . . . . In the present case it is not disputed that the personal guarantees executed by the Defendants in favour of the Bank are retained by the assignor (Secured Creditors). However, it is also an admitted fact that the Secured Financial Creditors have under the Resolution Plan accepted the amounts paid to them by Arcelor in discharge of the total debt owed by the ESIL to such Financial Creditors. I am therefore of the view that there is no existing debt which can be claimed against the personal guarantees given by the defendants, for there is no subsisting underlying “debt” due from the Borrower (ESIL) which legally acts as a precondition for the Secured Financial Creditors to invoke the Guarantees. In other words, in the absence of any subsisting underlying debt due from ESIL, the Secured Financial Creditors cannot in law trigger the personal guarantees that have been given by the defendants.

 

# 40. In view of the aforesaid discussion, I am of the opinion that the present Original Application does not survive as the cause of action for recovery of alleged debt of the Financial Creditors has come to an end on assignment of the entire debt of the Corporate Debtor by the Financial Creditors in favour of AMIPL. In this context , it is worthwhile to refer to following observations of the Hon’ble Supreme Court in the case of “Shipping Corporation of India (Supra) ;-

• “Thus it is clear that by the subsequent event if the original proceeding has become infructuous, ex debito justitiae, it will be the duty of the court to take such action as is necessary in the interest of justice which includes disposing of infructuous litigation. For the said purpose it will be open to the parties concerned to make an application under Section 151 of CPC to bring to the notice of the court the facts and circumstances which have made the pending litigation infructuous. Of course, when such an application is made, the court will inquire into alleged facts and circumstances to find out whether the pending litigation has in fact become infructuous or not.”

 

# 41. In the facts and circumstances of the present case, I am inclined to exercise powers u/s 19(25) of the RDB Act (which are analogous to the powers of the Court u/s 151 of the CPC) to dismiss the present Original Application as having become infructuous. Hence, I pass the following order:

1. The present Interlocutory Application filed by the Defendants is allowed.

2. Since no debt is found due and recoverable by the Applicant Banks from the Defendants, the present Original Application is hereby dismissed with no order as to cost.

 

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