NCLAT (2024.03.01) in Mr. Vikas Aggarwal Vs. Asian Colour Coated Ispat Ltd. and Ors.. [(2024) ibclaw.in 127 NCLAT, Comp. App. (AT)(Ins) No. 1104, 1105, 1107 and 1108 of 2020] held that;
We carefully note that there is a categorical right carved out in favour of the Financial Creditors, through the specific term i.e., the ‘Excluded Rights’ which have not been assigned to the SPV. The
Resolution Plan defined the term ‘Remaining Debt’ which has been assigned to the SPV of the Respondent No. 2 and perusal of the relevant provisions clearly reveal that such ‘Remaining Debt’ assigned to the SPV of the i.e. Respondent No. 2 explicitly preclude the “Excluded Rights”.
the doctrine of subrogation is an absolute right of the guarantor, however, the issue becomes different, if it falls within the domain of the Code in the context of CIRP proceedings.
We note that as per notification dated 15.11.2019, the Personal Guarantors became liable under the Code and therefore, the treatment of Personal Guarantors under the Code are to be treated differently vis-à-vis under the contract of guarantees under the Indian Contract Act, 1872.
We endorse the views that resolution of debts cannot be misconstrued as full satisfaction of debts payable to the creditors and Resolution of debts under the Resolution Plan is only to the extent of the obligations against and this will not take away the rights of the Financial Creditors to proceed against the Appellants as Promotors who stood as guarantors and the assets mortgaged by others against the loan availed by the principal debtor.
Therefore, despite provisions of Section 140 and 141 of the Indian Contract Act, 1872 the Personal Guarantors cannot claim any relief in view of clear provisions of Section 238 of the Code.
Normally speaking, when the entire business or entire debt is transferred to the new entity, right to sue should automatically presumed to be transferred to the new entity.
Since IBC has categorically envisaged that no liability will remain in force against the corporate debtor after plan approval, right of subrogation will not be available to the guarantors
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Hon’ble Supreme Court upholds the decision of NCLAT where it was held that Doctrine of subrogation is an absolute right of Guarantor, however, the issue becomes different, if it falls within the domain of IBC. A Resolution Plan itself can vary and modify the rights of Creditors and Guarantors and provide for continuation of Personal Guarantees which do not need any confirmation from Personal Guarantor.
SCI (2024.04.19) in Sapna Aggarwal Vs. Asian Colour Coated Ispat Ltd. and Ors.[(2024) ibclaw.in 118 SC, Civil Appeal Nos. 4713 of 2024] held that;
1. We find no error in the order of the National Company Law Appellate Tribunal dated 01 March 2024 in Company Appeal (AT) (Ins) No 1105 of 2020.
2. The appeal is accordingly dismissed.
3. Pending application, if any, stands disposed of.
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Blogger’s Comments; The above NCLAT judgment is Per-Incuriam to the judgment of Hon’ble High Court of Delhi in Vineet Saraf vs REC Ltd. [W.P.(C) 3293/2023 & CM APPL 12815/2023] wherein it was held that;
If the debt is assigned but the guarantee is not assigned then the right in the original creditor to recover under the guarantee must at least be suspended so long as the debt is assigned. There cannot be two persons entitled to recover the amount of the same debt, one from the principal debtor, and so long as the principal debtor was in default, another from the surety.
The assignee under an absolute assignment could not be deprived of his right to recover from the debtor because the assignor had recovered from the surety.”
For the same reason, where the benefit of the principal debt is assigned, but not the benefit of the guarantee, it may be the that the assignor cannot enforce the guarantee.
For instance, in the present case, the right of subrogation, may be seen to have become illusory. If at all in the present case, the assignor is allowed to enforce the guarantee, and the guarantor subsequently pays the entire debt, the guarantor could not, then, meaningfully make a claim for subrogation, as the principal debtor still owes the debt to the assignee.
As a general rule, any person can enter into a binding contract to waive the benefits conferred upon him by an Act of Parliament, or, as it is said, can contract himself out of the Act, unless it is shown that such an agreement is in the circumstances of the particular case contrary to public policy.
It is this that Hutchens (supra) concludes, lies ill of the basic principle of guarantee - in which the guarantor secures the debt of the principal debtor. He does not, then, undertake a promise to pay an amount simpliciter, if at all such a promise could be enforceable in law.
To that end, this court finds that a mere fact of there being an exclusion of personal guarantees, and them being specifically kept out, does not, in actual terms, deal with grounds in Hutchens (supra)
A reservation of rights clause, inserted in the deed releasing or discharging the principal borrower, entered into by the creditor and the principal borrower, intends to preserve the right of the creditor to proceed against the surety. Notably, neither the Resolution Plan nor the said Assignment Agreement have been entered into by the principal borrower i.e., FPL.
Even in the case of an express reservation of rights by the creditor to proceed against the surety, a fine distinction must be drawn between a covenant not to sue and an absolute release. A reservation clause is compatible with the former while being incompatible with the latter. The reason being that the reservation of rights clause becomes overridden by the release of the principal borrower.
It may be taken as settled law that where there is an absolute release of the principal debtor, the remedy against the surety is gone because the debt is extinguished, and where such actual release is given no right can be reserved because the debt is satisfied, and no right of recourse remains when the debt is gone.
[ Link Synopsis ]
Excerpts of the order;
1. There are four appeals i.e., Company Appeal (AT) (Insolvency) No. 1104, 1105, 1107 & 1108 of 2020 filed under Section 61 of the Insolvency & Bankruptcy Code, 2016 ( in short ‘Code’) in CA No. 1393(PB)/2019 in CP No. (IB) – 50 (PB)/2018 under which the Resolution Plan was approved by the Adjudicating Authority. The Appellants have filed the present Appeals being aggrieved to the extent as it allows recourse to the Financial Creditors against the Personal Guarantors of Asian Colour Coated Ispat Limited (in short ‘Corporate Debtor’), the Respondent No. 1 herein.
# 2. Since the subject matter, the facts of all the four Appeals, the Impugned Order dated 26.10.2020 passed by the National Company Law Tribunal, New Delhi, Principal Bench (in short ‘Adjudicating Authority’) is common and these four Appeals were conjointly pleaded by Appellants as well as by the Respondents, we shall examine all these four Appeals together and decide by way of one common order covering all four appeals.
# 3. Heard the Counsel for the Parties and perused the records made available including the cited judgements.
# 4. It is noted that the Corporate Insolvency Resolution Process (in short ‘CIRP’) of the Corporate Debtor was initiated on 28.07.2018 in CP No. (IB) – 50 (PB)/2018 passed by the Adjudicating Authority. The Resolution Plan of the Corporate Debtor was approved, on the recommendation of the Committee of Creditors (in short ‘CoC’) with 79.3% voting shares by the Adjudicating Authority on 19.10.2020 in CA No. 1393(PB)/2019 in CP No. (IB) – 50 (PB)/2018.
# 5. Aggrieved by the same, the present four Appeals have been filed by the Appellants challenging the Impugned Order dated 26.10.2020.
# 6. Mr. Vikas Aggarwal is the Appellant in the Appeal bearing Company Appeal (AT) (Insolvency) No. 1104 of 2020, Mrs. Sapna Aggarwal is the Appellant in Company Appeal (AT) (Insolvency) No. 1105 of 2020, Mrs. Archana Aggarwal is the Appellant in Company Appeal (AT) (Insolvency) No. 1107 of 2020 and Smt. Kamlesh Devo Aggarwal is the Appellant in Company Appeal (AT) (Insolvency) No. 1108 of 2020.
Asian Colour Coated Ispat Limited is the Corporate Debtor which underwent CIRP and is the Respondent No. 1 herein in all four appeals.
JSW Steel Coated Products Limited who is the Successful Resolution Applicant (in short ‘SRA’) is the Respondent No. 2 herein, in all four appeals.
CoC of the Corporate Debtor is the Respondent No. 3 herein in all four appeals and Mr. Kuldeep Kumar Bassi is the Respondent No. 4 herein an in all four appeals who was the Resolution Professional of the Corporate Debtor.
# 7. The Appellants brought out that the Resolution Plan submitted by the SRA/ Respondent No. 2 provided for assignment of debt of Financial Creditors to the Special Purpose Vehicle (in short ‘SPV’) of SRA named as Hasaud Steels Limited. The Appellants further brought out that on the request of the Financial Creditors, the concept of “Excluded Rights” was incorporated as part of the final Resolution Plan dated 06.05.2019 r/w Addendum dated 17.06.2019.
# 8. The Appellants stated that the Resolution Plan was approved with a voting percentage of 79.3% by the CoC and thereafter the entire debt of the Corporate Debtor owed to the Financial Creditors were assigned to the SPV and the assignment deed dated 27.10.2020 was signed.
# 9. The Appellants further stated that the Financial Creditors also gave no due Certificate dated 23.11.2020 in favour of the Corporate Debtor.
# 10. It is the case of the Appellants that since the entire debt owed by the Corporate Debtor was assigned to the SPV, such debt stood transferred from the Financial Creditors to the SPV in totality and therefore there could not have been any concept of “Excluded Rights” being part of the Resolution Plan and the approval of the Resolution Plan containing such provisions is illegal and perverse.
# 11. The Appellants emphasised that the approval of the Resolution Plan by the Adjudicating Authority ought to be within the ambit of the code and anything contravening the provisions of the code is to be treated as illegal. In this connection, the Appellants submitted that the portion of Resolution Plan which permitted the Financial Creditors to retain the rights to pursue their legal remedies against the Appellants as the Personal Guarantor to the Corporate Debtor in absence of any debt, which ceased to exist after assignment of the entire debt to the SPV, such legal remedy in guise “Excluded Rights” could not have been approved and was the not examined properly and such pleadings were not deliberated adequately by the Adjudicating Authority.
# 12. The Appellants submitted that the Impugned Order is illegal because it seeks to enforce the security interest without the existence of debt qua the Financial Creditor as the same is against the Indian Contract Act, 1872 and Transfer of Property Act, 1882.
# 13. The Appellants further submitted that such Resolution Plan approval by the Adjudicating Authority is also against the norms stipulated by the Reserve Bank of India (in short ‘RBI’) which issued detailed guidelines from time to time i.e., prudential norms which stated that in case of assignment of debt, the entire debt get extinguished and therefore no exposure remains in the books of the Financial Creditors.
14. The Appellants submitted that in terms of Section 31(1) of the Code, the Adjudicating Authority is duty bound to ensure that the Resolution Plan under consideration is in compliance with Section 30(2) of the Code especially Section 30(2) (e) of the Code which require that the Resolution Plan should not contravene any provision of the law for the time being inforce. The Appellants cited the judgement of the Hon’ble Supreme Court of India in the matter of Ebix Singapore Private Limited and Ors Vs. CoC of Educomp Solutions Limited and Ors. [(2021) 4 RCR (Civil) 282], in support of their arguments.
# 15. The Appellants brought to the notice of this appellant Tribunal about Para- 249 of the Impugned Order which categorically mentioned that whichever provision that is inconsistent with Section 30(2)(e) of the Code shall be treated as not approved.
“249. For this plan is spread in various schedules running into several pages, since all these aspects have not been brought to the notice of this Bench at the time of making submissions. we hereby hold that whichever provision that is inconsistent with Section 30(2)(e) of the Code, it shall be treated as not approved by this Bench”
(Emphasis Supplied)
# 16. The Appellants submitted that it is a settled law that once debt is assigned by the Financial Creditors in favour of any other third entity, he does not retain any independent right and subsequent rights to pursue any legal remedies arising of such debts. Elaborating further, the Appellants submitted that in the present Appeals, since the entire financial debt was transferred to the SPV by the Financial Creditors, the Financial Creditors did not have any right against the Personal Guarantors after the deed of assignment has been signed by the Financial Creditors in favour of the SPV.
# 17. The Appellants empathetically submitted that the rights arising out of the debt are integral rights and need to be transported to the third party after signing the deed of assignment. It is the case of the Appellants that no-one can claim that pure debt can be transferred but the right to sue against the Personal Guarantors to the Corporate Debtor would remain with the Financial Creditors.
# 18. The Appellants submitted that in view of this legal position, if any party who could pursue the legal remedies against the Appellants being the Personal Guarantors to the Corporate Debtor could have been only the SPV and by no way the Financial Creditors could vest themselves the rights under the illegal pretext of “Excluded Rights” which was unlawfully inserted in the Resolution Plan and was illegally approved by the Adjudicating Authority violating the provisions of the Code.
# 20. The Appellants submitted that in the case of Essar Steel India Ltd. Committee of Creditors Vs. Satish Kumar Gupta [(2020) 8 SCC 531], the Hon’ble Supreme Court of India has specifically stated that they are not commenting upon the pending litigation on account of invocation of these guarantees since these litigation were pending before the Debts Recovery Tribunal and High Court of Gujarat.
# 21. The Appellants submitted that the Impugned Order is clearly hit by the wrong interpretation of the judgments discussed in the Impugned Order and therefore the Impugned Order deserves to be set aside.
22. The Appellant cited the judgments in the matter of Vikas Aggarwal Vs. Reserve Bank of India & Ors. CWP 1160/2022 passed by the Hon’ble High Court, wherein the Hon’ble High Court has taken the suitable note regarding similar issue of assignment of debt and noted that :-
“Since the Resolution Plan approved by the NCLT on 19.10.2020 itself contemplated assignment of the debt of the principal borrower to Hasaud Steel Limited, and such assignment. by virtue of the above provisions, would take effect only if the exposure to the borrower is fully extinguished as per Clause 16 of the RBI circular RB/2018- 19/203 dt. 7.6.2019, prima facie. there would be extinguishment of debt in the books of respondents No.3 to 11. This is because if such debt is not extinguished in the books of respondents No.3 to 11, the Resolution Plan itself cannot be deemed to be implemented.”
# 23. The Appellants reiterated that the approval of Resolution Plan vide Impugned Order dated 26.10.2020 in allowing the ‘term loan and working capital lenders’ of the Corporate Debtor who were defined as ‘Direct Financial Creditors’ (in short ‘DFCs’) to have ability and right recourse against the guarantees given by the Personal Guarantors, despite the entire debt being assigned to the SPV as a result of which no debt whatsoever remained in the books of Corporate Debtor as well the Financial Creditors and therefore, no recourse to the guarantees could survive with the Financial Creditors after signing the assignment deed in favour of the SPV.
# 24. The Appellants further argued that in case the Financial Creditors retained some portion of the financial debt, perhaps the Financial Creditors could have pursued against the Personal Guarantors for remaining debts which is not the case here.
# 25. The Appellants pleaded this Appellate tribunal to look into the spirit of the Code which is for the revival of the Corporate Debtor and not to be allowed as recovery mechanism by the Financial Creditors which will defeat the very purpose of the Code and will compromise position of various Stakeholders including the Personal Guarantors to the Corporate Debtor.
# 27. The Appellants stated that the liabilities towards the guarantees which were directly connected with the debts and therefore become inseparable from the assignment and it has to be exercised only by the party in whose favour debts have been transferred and therefore the Financial Creditors have no locus to move against the Personal Guarantors and the provisions contained in the Resolution Plan were unlawful.
# 28. The Appellants emphasised that the “mere right to sue “ is clear violation of Section 6(e) of Transfer of Property Act, 1882, according to which the property of any kind may be transferred except the properties which have been excluded to be transferred and further Section 6(e) clearly indicate that “mere right to sue” cannot be transferred.
# 29. The Appellant cited judgment of Union of India Vs. Sri Sarada Mills Ltd. [(1972) 2 SCC 877] and drew attention of this Appellate Tribunal to Para 14 to 17 of the judgement which held that transfer of mere right to sue is bad in law and also in another matter of Maharaj Singh Vs. Kumud Board [MANU/UP/3476/2016]. the similar decision was rendered.
# 30. The Appellants elaborated further that since the debt stood transferred in favour of the assignee i.e., SPV, therefore, what is being pursued by the Financial Creditors against the Personal Guarantors are mere right to sue and therefore the same is expressly prohibited by the law and the Impugned Order approving the said provisions regarding “Excluded Rights” which has been used by the Financial Creditors to pursue legal remedies against the Personal Guarantors is bad in law.
# 32. The Appellants also assailed the Impugned Order with reference to Para 197 which entitled the Financial Creditors to initiate proceedings against the Personal Guarantors whereas the Financial Creditors have already made claims against the Corporate Debtor and received the payment through the Resolution Plan.
# 33. The Appellants reiterated that since no debt remains and survives both in the books of the Corporate Debtor and in the books of the Financial Creditors, the portion of the Resolution Plan which empowers the Financial Creditors to pursue legal remedies against the Personal Guarantors is against the law of the land as it is a settled law that liability towards the guarantee travels along with the debts and cannot be separated from debt assignment.
# 34. The Appellants assailed the Impugned Order whereby the Resolution Plan has extinguished its statutory rights of subrogation as guarantors of the Corporate Debtor contravening the provisions of Indian Contract Act, 1872 and the Appellant further submitted that since the terms of restructuring of debt are not spelt out in the Resolution Plan, the Appellants automatically get discharged in the capacity of Guarantor under the provision of the Indian Contract Act, 1872. The Appellant stated that after implementation of Resolution Plan of claims against the Corporate Debtor are extinguished except as provided in the Resolution Plan by the SRA and become binding on of Stakeholders including Financial Creditors, Operational Creditors, Corporate Debtor and other Stakeholders in terms of Section 31 of the Code.
Findings
64. At the outset, we take into consideration the facts regarding admitted debt and proposed payment by the SRA w.r.t. Financial Creditors and Operational Creditors and therefore following picture emerges :-
“Resolution Plan submitted by the Respondent No. 2 proposes the following :-
➤ For a consideration of Loan Assignment Payment (“LAP”), a ‘Purchaser’ will step into the shoes of the DFCs and exercise rights in respect of the entire admitted financial debt presently owed to the DFCs;
➤Admitted Financial Debt: INR 6566,99,85,203 (Total of Direct Financial Debt and Indirect Financial Debt);
➤ Corporate Guarantee Debt (i.e. the debt of financial creditors by virtue of corporate guarantee furnished by Corporate Debtor): INR 1,566,14,03,006;
➤Residual Guarantee Amount: INR 3,500,86.88,943 (difference between the Admitted Financial Debt and the Loan Assignment Payment);
➤ Remaining Debt: INR 5,000,85,82,197 (difference between Admitted Financial Debt and Corporate Guarantee Debt).”
# 65. Thus, against the admitted debts of Rs. 7801 Crores, the payment proposed by the SRA was only of Rs. 1550 Crores i.e., 19.87% of the Admitted debts, implying huge hair cut of 80.13% for creditors. In this background, it is worth noting that of Rs. 1550 Crores, Rs. 1499 Crores was as loan assignment payment and remaining payment of Rs. 25 Crores each to the Operational Creditors and other Unsecured Financial Creditors.
# 66. We would also like to take into consideration the significate provisions of Resolution Plan approved by the Adjudicating Authority by the Impugned Order dated 26.10.2021 which have been referred by all the parties in the present appeals filed before us. This important provisions reads as under :-
1. Section 1.2(d)(ii) of the Plan
“Post the payment of unpaid CIRP Costs (in the manner set out on Section 1.1 of Part B) and payments to the Operational Creditors (in the manner set out in Section 1.3. Section 1.4 and Section 1.5 of Part B below), the Admitted Financial Debt owing to the Financial Creditors will be dealt with, in the following manner:
(i) The Corporate Guarantee Debt Payment shall be paid to the Related Entity Creditors on a pro rata basis to the amount payable to such creditor, in the manner set out in Step 3 of Schedule 2 (Resolution Plan Steps)
(ii) The Remaining Debt (and all rights of the Financial Creditors in respect of such debt), shall stand assigned/novated to the purchaser and the Loan Assignment Payment shall be paid in the manner set out in Step 4 of Schedule 2 (Resolution Plan Steps). on a pro rata basis to the amount payable to the Direct Financial Creditors. Upon such assignment, the Purchaser shall be entitled to exercise all rights as a creditor in respect of the Remaining Debt, including the right to enforce any security, guarantee or mortgage granted in respect of such debt.
2. Para 1.13 of the Addendum: Definition of “Remaining Debt”–
““Remaining Debt” shall mean all rights, title, interests of the creditors in and to Admitted Financial Debt less the Corporate Guarantee Debt, along with all rights, assets, title, charges, encumbrances, mortgages and guarantees (including the personal guarantees issued by Mr. Pradeep Kumar Aggarwal to the Direct Financial Creditors, to the extent of the Loan Assignment Payment), and any beneficial interest therein, securing such debt. (but excluding the Excluded Rights), which will be assigned/novated to the Purchaser pursuant to this Resolution Plan. The assignment and novation of the personal guarantees issued by Mr. Pradeep Kumar Aggarwal to the Direct Financial Creditors, to the extent of the Loan Assignment Payment is an integral part of the Resolution Plan.”
3. Para 1.12 of the Addendum: Definition of “Excluded Rights”-
“”Excluded Rights” shall mean (A) personal guarantees provided by persons other than Mr. Pradeep Aggarwal, (B) any mortgage and/or hypothecation provided by ACCIL Hospitality Limited, and (C) corporate guarantees provided by AGR Steel Strips Private Limited and ACCIL Hospitality Limited (D) the personal guarantees provided by Mr. Pradeep Aggarwal to the Direct Financial Creditors, but only to the extent of the Residual Guarantee Amount, and (b) the mortgage created by the Company over land bearing Plot No. 6 & 13 measuring 18900 sq.mts., located in the Industrial estate, Bawal, Haryana, pursuant to the Memorandum of Entry dated June 27, 2013 executed by the Company in favour of IL & FS Trust Company Limited (now known as Vistra ITCL (India) Limited) for the benefit of Andhra Bank, Central Bank of India, Corporation Bank and Dena Bank (now Bank of Baroda), for securing the loans granted to ACCIL Auto Steel Private Limited by the aforesaid lenders.”
4. Para 1.14 of the Addendum: Definition of “Residual Guarantee Amount”
“Residual Guarantee Amount” shall mean the amount equal to the Admitted Financial Debt owed to the Direct Financial Creditors less than the Loan Assignment Payment”
(Emphasis Supplied)
# 67. Based on the averments made before us, the issue which emerges is whether recourse to the guarantee, provided by the Appellants herein, survive after the entire debt of the Corporate Debtor stand assigned in favour of the SPV of the Respondent No. 2 by the Financial Creditors as per approved Resolution Plan.
The moot question is whether the Financial Creditor can proceed against the Personal Guarantors in absence of any debt after extinguishment of such debts upon assignment in terms of the RBI Prudential Framework for Resolution of Stressed Assets dated 07.06.2019 and as stipulated in the approved Resolution Plan.
Other issues which are required to be considered shall, inter-alia, includes:
a. Whether, the right of subrogation shall stand extinguished after approval of the Resolution Plan under the Code or the same will continue to vest with Personal Guarantors in terms of the Indian Contract Act, 1872.
b. Whether, “mere right to sue” in terms of Section 6(e) of the Transfer of Property Act, 1882 will come into play in the present Appeals.
c. The implications on the rights and obligations of the Personal Guarantor to the Corporate Debtor in case the entire debt stand transferred or assigned and the Financial Creditors retained rights to peruse legal remedies against such Personal Guarantor by way of “Excluded Rights”..
All such issues are inter mingled, inter connected and to some extent depends upon each other, therefore, we shall take up and discuss al above issue in joint manner in subsequent paras.
# 68. We are of the opinion that the intent of the legislature behind the provisions of the Code is for resolution of the Corporate Debtor and not of the Personal Guarantors of the Corporate Debtor. The financial creditors have a right to proceed against the personal guarantors of the Corporate Debtor, and further, that the personal guarantors, in terms of section 31 of the Code are duty bound by the terms of the Resolution Plan approved by the Adjudicating Authority. We also feel that a Resolution Plan itself can vary and modify the rights of the creditors and guarantors of the corporate debtor and provide for continuation of personal guarantees which do not need any confirmation from Personal Guarantor to the Corporate Debtor. We carefully note that there is a categorical right carved out in favour of the Financial Creditors, through the specific term i.e., the ‘Excluded Rights’ which have not been assigned to the SPV. The Resolution Plan defined the term ‘Remaining Debt’ which has been assigned to the SPV of the Respondent No. 2 and perusal of the relevant provisions clearly reveal that such ‘Remaining Debt’ assigned to the SPV of the i.e. Respondent No. 2 explicitly preclude the “Excluded Rights”.
# 69. We have noted that the approved Resolution Plan categorically provides that nothing in the Resolution Plan shall operate or have the effect of assigning, revoking, cancelling or extinguishing the “Excluded Rights” and the Direct Financial Creditors are free to pursue such remedies and exercise such rights as they may have under applicable laws in respect of the “Excluded Rights”. We have taken into consideration of the fact that it is the Remaining Debt, as defined in the Resolution Plan including the Addendum that has been assigned to Respondent No.2 in terms of the Resolution Plan, but precluding the “Excluded Rights”. There are clear and express provisions and stipulations under the Resolution Plan safeguarding the right of the Financial Creditors to pursue legal remedies against the personal guarantors, including the Appellants.
# 70. As regard “right of subrogation”, we need to appreciate that Subrogation is the right to equity and natural justice. Doctrine of subrogation allows the Personal Guarantors to resume the rights or remedies of the Financial Creditors against the Corporate Debtor which implies that in case the Personal Guarantors fulfil their obligations and pay the debts in full and satisfy the Financial Creditors, such Personal Guarantors will become entitled to take over the rights or remedies which the Financial Creditors had against the Corporate Debtor.
# 71. We shall take into account the Section 140 and 141 of the Indian Contract Act, 1872 which reads as under :-
“140. Rights of surety on payment or performance.—
Where a guaranteed debt has become due, or default of the principal debtor to perform a guaranteed duty has taken place, the surety upon payment or performance of all that he is liable for, is invested with all the rights which the creditor had against the principal debtor.
141. Surety’s right to benefit of creditor’s securities.—
A surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship is entered into, whether the surety knows of the existence of such security or not; and if the creditor loses, or, without the consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security.
Illustrations
(a) C, advances to B, his tenant, 2,000 rupees on the guarantee of A. C has also a further security for the 2,000 rupees by a mortgage of B’s furniture. C cancels the mortgage. B becomes insolvent and C sues A on his guarantee. A is discharged from liability to the amount of the value of the furniture.
(b) C, a creditor, whose advance to B is secured by a decree, receives also a guarantee for that advance from A. C afterwards takes B’s goods in execution under the decree, and then, without the knowledge of A, withdraws the execution. A is discharged.
(c) A, as surety for B, makes a bond jointly with B to C, to secure a loan from C to B. Afterwards, C obtains from B a further security for the same debt. Subsequently, C gives up the further security. A is not discharged.” (Emphasis Supplied)
# 72. From Section 140 of the Indian Contract Act, 1872 it becomes clear that the surety is vested with all the rights of the creditors against the principles debtor once surety has paid his full obligations towards the Financial Creditors and he would be subrogated in the shoes of the Creditors and becomes entitled to enforce securities available to the Creditors against the Corporate Debtor. Similarly, Section 141 of the Indian Contract Act, 1872 is to protect the surety or the Guarantors against creditors act of losing or without surety/ guarantors consent parting with the security.
# 73. We also note that Personal Guarantors like Appellants herein are generally speaking the original promoters of the Corporate Debtors. They are also responsible for success or failure of such Corporate Debtor and such promotors might have been profited from such Corporate Debtors or alternatively could have been the reason for the failure of the Corporate Debtor which led to the insolvency of the Corporate Debtors.
# 74. As a general rule, the doctrine of subrogation is an absolute right of the guarantor, however, the issue becomes different, if it falls within the domain of the Code in the context of CIRP proceedings. We note that as per notification dated 15.11.2019, the Personal Guarantors became liable under the Code and therefore, the treatment of Personal Guarantors under the Code are to be treated differently vis-à-vis under the contract of guarantees under the Indian Contract Act, 1872.
In this connection, we would like to reiterate that the objective of the code is to revive and rehabilitate the Corporate Debtor and therefore the right to subrogation may not survive in such situation. The extinguishment of the Personal Guarantors right of subrogation is clear departure from establish principles of contract guarantee which are covered under Section 140 and 141 of the Indian Contract Act, 1872.
# 75. It may be alternative argument that if the Corporate Debtor is not required to pay the guarantors as a consequence of subrogation right, the Corporate Debtor may unjustly get enriched at the expense of the Guarantors, in case the financial conditions of the Corporate Debtor improve and the Corporate Debtor becomes capable to settle all the claims of the original lenders which have been paid or settled by the guarantors.
On the other hand, if such contingencies and uncertainties on account of rights of subrogation is allowed to be continue, the Corporate Debtor even after resolution as a result of approved Resolution Plan, will always be subject to financial uncertainties and vagaries due to such claims by the Personal Guarantors in future. This clearly is not the intent of the code which has been consciously made for the revival of the Corporate Debtor and has adopted the concept of clean slate theory for the reborn corporate entity under new management.
# 76. Now we will also look into the aspect of Section 140 and 141 of the Indian Contract Act, 1872 vis-à-vis Section 238 of the Code. We note that Section 238 of the Code describes categorically that the code take precedent over any inconsistency contained in any other existing law which includes Indian Contract Act, 1872, therefore, despite provisions of Section 140 and 141 of the Indian Contract Act, 1872 the Personal Guarantors cannot claim any relief in view of clear provisions of Section 238 of the Code.
# 77. The denial of right of subrogation is no more res-judicata and has been decided in catena of the judgments by the Hon’ble Supreme Court of India.
# 78. At this juncture, we will go through few of judgments on the issue of subrogation.
# 79. Essar Steel India Ltd. Committee of Creditors (Supra) :- para 102, 103 & 106.
Based on above, we observe that Hon’ble Supreme Court of India noted that the Financial Creditors can pursue their claims against the Personal Guarantors to the Corporate Debtor and right of subrogation gets extinguished, although the apex Court decided not to express conclusive opinion which might have affected them pending litigations on account of invocation of such guarantees.
80. State Bank of India Vs. v. Ramakrishnan & Anr. (Supra), para 25;
We note that the ratio emerges from above judgment is that in view of Section 31 of the Code, the Financial Creditors can pursue against the Personal Guarantors to the Corporate Debtor.
81. Lalit Kumar Jain vs. Union of India & Ors. [(2021) 9 SCC 321] para 130, 132, 133, 136, 137;
This judgement paves clear way for the Financial Creditors to pursue their legal remedies against the Personal Guarantor to the Corporate Debtor.
Having noted above judgment, it will not be worthwhile to repeat what flows clearly from above judgment. The above judgement of the Apex Court is binding and by a large applicable to the facts of these appeals.
# 82. It is now well settled law, in light of the Essar Case (Supra) that rights of subrogation that may arise against the Corporate Debtor can be extinguished under the Resolution Plan and therefore the arguments of the Appellant on issue of rights of subrogation’s are not convincing. If the rights of subrogation are allowed to continue against the Corporate Debtor under the management of the new SRA, the same would have the effect of putting the SRA and the Corporate Debtor in the same position as prior to its insolvency resolution. The allegation of the Appellant pertaining to differential treatment due to extinguishing their rights of subrogation under the approved Resolution Plan against the Corporate Debtor is unfounded, which is only to ensure that the SRA takes control of the Corporate Debtor on a clean slate without carrying any previous liability baggage.
# 83. We feel that the extinguishment of Personal Guarantors right of subrogation is unavoidable and inaccessible fact in insolvency cases and it requires to be respected by all stakeholders and any departure from such principles will have adverse impact on revival of the Corporate Debtors, interest of the Financial Creditors and overall negative impact on the national economy.
# 84. Therefore, we are not inclined to accept the pleas of the Appellants regarding their rights of subrogation.
Be that as it may, we are of the clear opinion that the Code seeks to prevent such Personal Guarantors to the Corporate Debtor from benefitting themselves from the CIRP at the expenses of the Financial Creditors who takes a big hit through substantial hair cuts and therefore cannot be allowed to take shelter of Section 140 and 141 of the India Contract Act, 1872.
# 85. Now, we shall deal with the aspect relating to “Mere right to sue” in terms of Section 6(e) of the Transfer of Property Act, 1882 as raised by the Appellants, who submitted that mere right to sue is bad in law and is prohibited under Section 6(e) of the Transfer of Property Act, 1882.
Section 6 of the Transfer of Property Act, 1882 reads as under :-
“6. What may be transferred.—Property of any kind may be transferred, except as otherwise provided by this Act or by any other law for the time being in force:
(a) The chance of an heir-apparent succeeding to an estate, the chance of a relation obtaining a legacy on the death of a kinsman, or any other mere possibility of a like nature, cannot be transferred.
(b) A mere right of re-entry for breach of a condition subsequent cannot be transferred to any one except the owner of the property affected thereby.
(c) An easement cannot be transferred apart from the dominant heritage.
(d) An interest in property restricted in its enjoyment to the owner personally cannot be transferred by him.
4[(dd) A right to future maintenance, in whatsoever manner arising, secured or determined, cannot be transferred.]
(e) A mere right to sue 5 *** cannot be transferred.
(f) A public office cannot be transferred, nor can the salary of a public officer, whether before or after it has become payable.(g) Stipends allowed to military, 6 [naval], 7 [air-force] and civil pensioners of 8 [the Government] Government] and political pensions cannot be transferred.
(h) No transfer can be made (1) in so far as it opposed to the nature of the interest affected thereby, or (2) 9 [an unlawful object or consideration within the meaning of section 23 of the Indian Contract Act, 1872 (9 of 1872), or (3) to a person legally disqualified to be transferee].
[(i) Nothing in this section shall be deemed to authorise a tenant having an untransferable right of occupancy, the farmer of an estate in respect of which default has been made in paying revenue, or the lessee of an estate under the management of a court of Wards, to assign his interest as such tenant, farmer or lessee.]”
(Emphasis Supplied)
It may be argued that the purpose of stipulating Section 6(e) i.e., nontransferable of mere right to sue or such actionable claims is to prohibit the practice of gambling out of litigation.
We observe that right to sue has been preceded by the word “mere” meaning only right to sue but if the right to sue is not simpliciter right or involves direct or indirect interests in the property (including financial debt) such right to sue can be argued to be assignable and therefore may not fall in the ambit of Section 6(e) of the Transfer of Property Act, 1882.
Normally speaking, when the entire business or entire debt is transferred to the new entity, right to sue should automatically presumed to be transferred to the new entity.
# 86. In the present Appeals, we have already noted the final Resolution Plan dated 06.05.2019 r/w Addendum dated 17.06.2019, contained specific clause regarding the rights of the Financial Creditors along with the rights of the SPV.
# 87. We are conscious of the fact that clear and deliberate decision was taken by the SRA/ the Respondent No. 2, the CoC / the Respondent No. 3 which included the original Financial Creditors under which the Financial Creditors retained the rights to pursue their legal remedies against the Personal Guarantors.
# 88. This is quite clear that the creditors took huge hit only to help revive the Corporate Debtor through the new management of the Respondent No.2. We have already noted that the Code was promulgated with a clear aim to revive the Corporate Debtor and help the Corporate Debtor to stand on its own legs and help the national economy. It was never contemplated that the other parties who were to meet their contractual liabilities, will get scot free or shall be entitled to exit the scene without fulfilling their obligations. Afterall, the code is not for Resolution of such Personal Guarantors and it may not be out of context to note that the Financial Creditors sanction huge credit facilities to the Corporate Debtor based on several protections including the Personal Guarantees of the Promotors which are generally in nature of irrevocable continuing guarantees.
# 89. The Appellant cited judgment of Union of India Vs. Sri Sarada Mills Ltd. [(1972) 2 SCC 877] and drew attention of this Appellate Tribunal to Para 14 to 17 of the judgement which held that transfer of mere right to sue is bad in law and also in another matter of Maharaj Singh Vs. Kumud Board [MANU/UP/3476/2016]. the similar decision was rendered :-
“14. Section 6(e) of the Transfer of Property Act states that a mere right to sue cannot be transferred. A bare right of action might be claims to damages for breach of contract or claims to damages for tort. An assignment of a mere right of litigation is bad… The reason behind the rule is that a bure right of action for damages is not assignable because the law will not recognise any transaction which may savour of maintenance of champerty. It is only when there is some interest in the subject matter that a transaction can be saved from the imputation of maintenance. That interest must exist apart from the assignment and to) that extent must be independent of it.
15…A bare right of action is not assignable. When however the right of action is one of the incidents attached to the property or contract assigned it will not be treated as a bare fight of action.“ It is submitted that the same has been reiterated by Supreme Court as well as high courts in various judgments, for instance in Agri Marketing Co. vs. Imperial Exports Limited, 2001 SCC OnLine Bom 841, by the Hon’ble Bombay High Court. Thus, the survival of guarantees is clearly in contravention of Section 6(e) of the Transfer of Property Act, 1882 and as such in violation of Section 30(2)(e) of the Code. (Emphasis supplied)
# 90. We also look into the cited judgment about Section 6(e) of the Transfer of Property Act, 1882 and the relevant portion of the judgment passed in Union of India Vs. Sri Sarada Mills Ltd. [(1972) 2 SCC 877] and Maharaj Singh Vs. Kumud Board [MANU/UP/3476/2016], reads as under :
16. For the case in hand we are concerned with Section 6(e) which says a “mere right to sue” cannot be transferred. Section 6 come up for consideration in Union of India Sri Sarada Miis Led MANU/SC/0410/1972: A.I.R. 1973 SC 281 wherein it held that a bare right of action, might be, claims to damages for breach of contract or claims to damages for tort and assignment of the mere right of litigation, is bad. An assignment of property is valid even although that property may be incapable of being received without litigation. The reason behind the rule is that a bare right of action for damages is not assignable because the law will not recognize any transaction which may savour maintenance of champerty. It is only when there is some interest in the subject matter that a transaction can be saved from imputation of maintenance. That interest must exist apart from the assignment and to that extent must be independent of it.“ (Emphasis Supplied)
Thus, one significant part is noted from above judgment is that some independent intent must exist apart from the assignment. We note that in the present appeals what has been assigned was ‘remaining debts’ and what survived as independent intent was “Excluded Rights” of the Financial Creditors to pursue necessary legal remedies against the Personal Guarantors to the Corporate Debtor. Thus, in light of above cited judgments it emerges that there has been no violation of Section 6(e) of the Transfer of Property Act, 1882 as alleged by the Appellants.
# 91. In light of such “Excluded Rights” continuing to exist with the Financial Creditors under the terms of the approved Resolution Plan, transfer of “mere right to sue” under the provisions of the Transfer of Property Act, 1882 Section 6(e) is not applicable. We observe that when the Resolution Plan provides for specific provisions, whereby the Financial Creditors exclusively retain the rights to proceed against the Personal Guarantors and provisions stating that nothing in the Resolution Plan shall have the effect of assigning such rights to the Resolution Applicant, it is clear that the CoC in its commercial wisdom has approved such provisos for continued rights of the Financial Creditors against the Personal Guarantors and that there has been no assignment of such rights to proceed against the Personal Guarantors to the SPV of the Successful Resolution Applicant/ Respondent No. 2. This was in fact proposed by the SRA in finally approved Resolution Plan and seems to be have done after due deliberations with the CoC. In such eventuality there is no applicability of transfer of “mere rights to sue”, as the said rights were never assigned and have been retained by the Financial Creditors all along. The Appellants cannot seek undue benefits on account of the Resolution Plan and avoid their huge financial liabilities accrued based on the Personal Guarantees given by the Personal Guarantors to the Corporate Debtor.
# 92. We are of clear opinion that the financial creditors have reserved the rights to proceed against the personal guarantors like the Appellant herein in terms of the “Excluded Rights” in approved Resolution Plan. There is no question of transfer of a “mere right to sue” and in such circumstances, we feel that it is a structured financial deal in form of Resolution Plan exercised based on the commercial wisdom, with aim of resolution of a corporate debtor, as well as to ensure that financial creditors are able to recover their outstanding debts as guaranteed by the Personal Guarantors, the Appellants herein. We endorse the views that resolution of debts cannot be misconstrued as full satisfaction of debts payable to the creditors and Resolution of debts under the Resolution Plan is only to the extent of the obligations against and this will not take away the rights of the Financial Creditors to proceed against the Appellants as Promotors who stood as guarantors and the assets mortgaged by others against the loan availed by the principal debtor.
# 93. The above proposition is further fortified by section 238 of the Code which specifically provides that the provisions of the Code shall have an overriding effect on inconsistent laws. Section 238 of the Code is reproduced herein below-
*238. Provisions of this Code to override other laws. -The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.” (Emphasis Supplied)
# 94. We have already noted overall adverse financial scenario of the Corporate Debtor for which the Resolution Plans were invited after admission of the Corporate Debtor under the CIRP by the Adjudicating Authority. It is a matter record that after several detailed rounds of negotiation, the final Resolution Plan dated 06.05.2019 r/w Addendum dated 17.06.2019 was approved and the “Excluded Rights” were carved out in favour of the Financial Creditors.
# 95. In the present Appeals, it has been argued that after the entire debts have been transferred in favour of the SPV by the Financial Creditors, the legal remedies including right to recovery from the Personal Guarantors (Appellants herein) and also get transferred to the SPV and nothing remain with the Financial Creditors of the Respondent No. 2.
# 96. We have already seen that in catena of judgment including Lalit Kumar Jain (Supra) and in the matter of State Bank of India Vs. v. Ramakrishnan & Anr. (Supra), the issue has been well settled that the Financial Creditors can independently pursue its legal remedies against the Personal Guarantors.
# 97. We also take into account the averments made by the Appellants regarding the judgment of Hon’ble High Court in the matte of Vikas Aggarwal Vs. Reserve Bank of India (Supra) regarding extinguishment of debts. We have already recorded the relevant para of the said judgment while discussing the averments made by the Appellants in our earlier discussion. On this judgement, during the hearing, one specific query was put by the bench as whether any final decision has been taken by the Hon’ble High Court on these observations, however, it was stated that the Hon’ble High Court only noted but did not give any ruling and left to the DRT to look into. Thus, the averments of the Appellants in citing the Vikas Aggarwal (Supra) cannot give any rescue to the Appellants.
# 98. Now we will take issue regarding alleged non existing of debts in the books of the Financial Creditors and regarding treatment in the books of the financial creditors with respect to such continuing rights of the financial creditors against the personal guarantors of the Corporate Debtor after the approval of the Resolution Plan. We feel that it the prerogative and within the purview of such Financial Creditors (within the applicable regulatory framework as applicable ) and it does not come to rescue of the Appellants to escape their liability under the guarantee agreements on the-basis of such grounds.
We observe that the treatment in the Books of the Financial Creditors is based on RBI Prudential norms which were issued with several purposes, including and not limited to, discouraging the Financial Creditors to resort to ever greening of loans. We feel that such RBI guidelines do not intent to give undue benefits to the Personal Guarantors of the Corporate Debtors or debar the Financial Creditors in pursuing their legal rights to recover their outstanding debts from the Personal Guarantors to the Corporate Debtor. After all, it cannot be anyone’s case to write off public money by such circuitous route or hypothetical legal assumption.
# 99. The Hon’ble Supreme Court, in Swiss Ribbons Pvt Ltd vs Union of India [(2019) 4 SCC 17], has categorically recognised the concept of preserving the corporate debtor as a going concern while ensuring maximum recovery for all creditors to be the intent of the Code.
# 100. We note that the Hon’ble Supreme Court of India has described the specific role to the Adjudicating Authority before according its approval to the Resolution Plan i.e., the Resolution Plan to be in compliance with Section 30(2) of the Code and is capable of effective implementation under Section 31(1) of the Code. The relevant portion of the judgment passed in the matter of Ebix Singapore Private Limited (Supra) reads as under :-
“Essentially, the Adjudicating Authority functions as a check on the role of the RP to ensure compliance with Section 30(2) of the IBC and satisfies itself that the plan approved by the CoC can be effectively implemented as provided under the proviso to Section 31(1) of the IBC’. (Emphasis Supplied)
# 101. We will look into aspect about role of commercial wisdom of CoC vis-à-vis judicial review and interference, which has been elaborately discussed in the case of K. Shashidhar Vs. Indian Overseas Bank (Supra) which reads as under :-
“52. As aforesaid, upon receipt of a “rejected” resolution plan the adjudicating authority (NCLT) is not expected to do anything more: but is obligated to initiate liquidation process under Section 33(1) of the I&B Code. The legislature has not endowed the adjudicating authority (NCLT) with the jurisdiction or authority to analyse or evaluate the commercial decision of CoC much less to enquire into the justness of the rejection of the resolution plan by the dissenting financial creditors. From the legislative history and the background in which the I&B Code has been enacted, it is noticed that a completely new approach has been adopted for speeding up the recovery of the debt due from the defaulting companies. In the new approach, there is a calm period followed by a swift resolution process to be completed within 270 days (outer limit) failing which, initiation of liquidation process has been made inevitable and mandatory. In the earlier regime, the corporate debtor could indefinitely continue to enjoy the protection given under Section 22 of the Sick Industrial Companies Act, 1985 or under other such enactments which has now been forsaken. Besides, the commercial wisdom of CoC has been given paramount status without any judicial intervention, for ensuring completion of the stated processes within the timelines prescribed by the I&B Code. There is an intrinsic assumption that financial creditors are fully informed about the viability of the corporate debtor and feasibility of the proposed resolution plan. They act on the basis of thorough examination of the proposed resolution plan and assessment made by their team of experts. The opinion on the subject-matter expressed by them after due deliberations in CoC meetings through voting, as per voting shares, is a collective business decision. The legislature, consciously, has not provided any ground to challenge the “commercial wisdom” of the individual financial creditors or their collective decision before the adjudicating authority. That is made non-justiciable
59. In our view, neither the adjudicating authority (NCLT) nor the appellate authority (Nclat) has been endowed with the jurisdiction to reverse the commercial wisdom of the dissenting financial creditors and that too on the specious ground that it is only an opinion of the minority financial creditors. The fact that substantial or majority per cent of financial creditors have accorded approval to the resolution plan would be of no avail, unless the approval is by a vote of not less than 75% (after amendment of 2018 w.e.f. 6-6-2018, 66%) of voting share of the financial creditors. To put it differently, the action of liquidation process postul postulated in Chapter III of the I&B Code, is avoidable, only if approval of the resolution plan is by a vote of not less than 75% (as in October 2017) of voting share of the financial creditors. Conversely, the legislative intent is to uphold the opinion or hypothesis of the minority dissenting financial creditors. That must prevail, if it is not less than the specified per cent (25% in October 2017; and now after the amendment w.e.f. 6-6- 2018, 44%). The inevitable outcome of voting by not less than requisite per cent of voting share of financial creditors to disapprove the proposed resolution plan, de jure, entails in its deemed rejection.”
(Emphasis Supplied)
# 102. We observe that commercial wisdom of the CoC has been given supremacy and no grounds exist for the Adjudicating Authority or Appellate Tribunal to interfere.
# 103. In this connection, we note that the Adjudicating Authority has examined all the legal submissions including the provisions of Transfer of Property Act, 1882 and therefore approved the Resolution Plan including the rights of the Financial Creditors to pursue remedy against the Personal Guarantors and as recorded in the Impugned Order in Para 197 which reads as under :-
“197. With regard to guarantee liability, when loan assignment is done, the ability of guarantee being connected to the debt, it cannot be separated from assignment, it goes along with assignment, therefore he promoter director cannot take out this argument against the plan. Right of subrogation is not a primary right, it is not conditional that creditor shall hot proceed against the guarantor unless right of subrogation is available to the guarantor against the principal debtor. This right of subrogation is not a right emanated out of any contractual rights; indeed this right will be available to the guarantor only after it has paid the dues of the principal debtor to the creditor. The creditor is under no obligation as to this subrogation right. It is the guarantor who comes forward to take the liability of surety upon itself notwithstanding whether it could realise its monies in the event creditor realised principal debtor dues from the guarantor. Since IBC has categorically envisaged that no liability will remain in force against the corporate debtor after plan approval, right of subrogation will not be available to the guarantors. It makes no difference to the right to proceed against the surety. The right to proceed against guarantor will remain in force because loan has been assigned to a purchaser. To the extent it has paid to the creditor, it is entitled to proceed against the guarantor Resolution of debts cannot be misconstrued as full satisfaction of debts payable to the creditors. This is only a compromise or arrangement to the extent of the obligations against an insolvent company, but this will not take away the right of creditors to proceed against others who stood as guarantors and the assets mortgaged by others against the loan availed by the principal debtor.” (Emphasis Supplied)
# 104. We do not find any error in the Impugned Order.
# 105. In fine, the Appeals devoid of any merit, fail and stand rejected. No costs. Interlocutory Applications, if any, are Closed.
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Hon'ble NCLAT has observed that;
ReplyDelete# 76. Now we will also look into the aspect of Section 140 and 141 of the Indian Contract Act, 1872 vis-à-vis Section 238 of the Code. We note that Section 238 of the Code describes categorically that the code take precedent over any inconsistency contained in any other existing law which includes Indian Contract Act, 1872, therefore, despite provisions of Section 140 and 141 of the Indian Contract Act, 1872 the Personal Guarantors cannot claim any relief in view of clear provisions of Section 238 of the Code.
The provisions of Section 238 are antithesis to the provision of the Code under Section 30(2)(e) reading as under;
"(e) does not contravene any of the provisions of the law for the time being in force."