Imp. Rulings - Subsisting Guarantor's Liability After Approval of Resolution Plan.
Index;
NCLAT (2024.01.24) in UV Asset Reconstruction Company Ltd. Vs. UV Asset Electrosteel Castings Ltd. [Company Appeal (AT) (Insolvency) No. 975 of 2022]
NCLAT (2023.11.24) in Puro Naturals JV Vs. Warana Sahakari Bank & Ors. (Company Appeal (AT) (Insolvency) Nos. 651, 661-663 and 1005 of 2023 ]
NCLAT (2023.08.21) In SVA Family Welfare Trust & Anr. Vs. Ujaas Energy Ltd. & Ors. [Company Appeal (AT) (Insolvency) No. 266 of 2023. (2023) ibclaw.in 546 NCLAT]
Supreme Court of India (2021.05.21) in Lalit Kumar Jain Vs, Union of India & Ors. [Transferred Case (CIVIL) NO. 245/2020]
Supreme Court of India (2018.08.14) in State Bank of India Vs. V. Ramakrishnan & Anr. [Civil Appeal No. 3595 of 2018 With Civil Appeal No. 4553 of 2018]
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Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.
# 37. Resolution plan.
A resolution plan shall provide for the measures, as may be necessary, for insolvency resolution of the corporate debtor for maximization of value of its assets, including but not limited to the following: -
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(d) satisfaction or modification of any security interest;
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1. NCLAT (2024.01.24) in UV Asset Reconstruction Company Ltd. Vs. UV Asset Electrosteel Castings Ltd. [Company Appeal (AT) (Insolvency) No. 975 of 2022] held that;
The authority which floats the contract or tender, and has authored the tender documents is the best judge as to how the documents have to be interpreted. If two interpretations are possible then the interpretation of the author must be accepted.
Whether any particular contractual promise is to be classified as a guarantee so as to attract all or any of the legal consequences to which I have referred depends upon the words in which the parties have expressed the promise.
Where the contractual promise can be correctly classified as a guarantee it is open to the parties expressly to exclude or vary any of their mutual rights or obligations which would otherwise result from its being classifiable as a guarantee.
Every case must depend upon the true construction of the actual words in which the promise is expressed.
From the above, it is clear that the contract of guarantee is a contract to perform the promise or discharge the liability of a third person in case of his default.
From the above, it is clear that the question as to whether the deed in question is a deed of guarantee or not depends upon the terms under which the guarantor binds himself. Under law, he cannot be made liable for more than what he has undertaken.
Reading the documents in their plain terms, the intent being clear, the same cannot be construed as letters of guarantee which necessarily requires, as per Section 126 of the Indian Contract Act, 1872, a promise to discharge the liability of a third person in case of his default.
It is also held that approval of a resolution plan relating to a corporate debtor does not operate so as to discharge the liabilities of personal guarantors (to corporate debtors).
The finding of the Adjudicating Authority that approval of Resolution Plan has led to extinguishment and effacement of the entire debt of ESL has to be held to be finding qua the Corporate Debtor only.
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2. NCLAT (2023.11.24) in Puro Naturals JV Vs. Warana Sahakari Bank & Ors. (Company Appeal (AT) (Insolvency) Nos. 651, 661-663 and 1005 of 2023 ] held that.
This Tribunal took the view that Resolution Plan providing for extinguishment of personal guarantee as approved by the CoC, did not contravene any provisions of Section 30(2)(e) of the Code.
We, thus, answer Question No.(I) holding that Resolution Plan in question has consciously dealt with securities and personal guarantees given to the Financial Creditors including the dissenting Financial Creditors and the said clauses of the Resolution Plan do not contravene any provisions of Section 30, sub-section (2) as well as CIRP Regulations, 2016.
According to the scheme of the IBC, the payment to which a Financial Creditor, who does not vote in favour of the Resolution Plan is entitled for payment in accordance with sub-section (1) of Section 53, in the event of liquidation of the Corporate Debtor
And further dissenting Financial Creditor has to be paid in priority to the Financial Creditors who vote in favour of such Resolution Plan.
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3. NCLAT (2023.08.21) In SVA Family Welfare Trust & Anr. Vs. Ujaas Energy Ltd. & Ors. [Company Appeal (AT) (Insolvency) No. 266 of 2023. (2023) ibclaw.in 546 NCLAT] held that
In view of the above discussion, it is 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 this court, the release or discharge of a principal borrower from the debt owed by it to its creditor, by an involuntary process, i.e. by operation of law, or due to liquidation or insolvency proceeding, does not absolve the surety/guarantor of his or her liability, which arises out of an independent contract.”
Now, after portion of Part-III has been applied to Personal. Guarantors of Corporate Debtor, one would have to resort to those provisions under IBC if Personal Guarantors of Corporate Debtor are to be proceeded against. In Resolution Plan of Corporate Debtor provision relating to right of Financial Creditor to proceed against Personal Guarantor can be there, but enforcement of such right has to be as per provisions of law as discussed.”
The decision of the CoC to accept the value for relinquishment of personal guarantee was a commercial decision of the CoC which cannot be allowed to be impugned at the instance of dissenting Financial Creditor.
We are of the view that the Adjudicating Authority committed error in rejecting the Application for approval of the Resolution Plan on the ground that plan could not have contained a provision for extinguishment of personal guarantee of the personal guarantors.
Plan allocates a plan value for extinguishment of personal guarantee which has been accepted by the Financial Creditors by a vote share of 78.04%.
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4. Supreme Court of India (2021.05.21) in Lalit Kumar Jain Vs, Union of India & Ors. [Transferred Case (CIVIL) NO. 245/2020] held that;
# 111. In view of the above discussion, it is 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 this court, the release or discharge of a principal borrower from the debt owed by it to its creditor, by an involuntary process, i.e. by operation of law, or due to liquidation or insolvency proceeding, does not absolve the surety/guarantor of his or her liability, which arises out of an independent contract.
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5. Supreme Court of India (2018.08.14) in State Bank of India Vs. V. Ramakrishnan & Anr. [Civil Appeal No. 3595 of 2018 With Civil Appeal No. 4553 of 2018] held that;
As per section 128 of the Indian Contract Act, 1872, the liability of the surety is co-extensive with that of the principal debtor and the creditor may go against either the principal debtor, or the surety, or both, in no particular sequence [Chokalinga Chettiar v. Dandayunthapani Chattiar, AIR 1928 Mad 1262].
The liability of the principal debtor and the surety is co-extensive and is joint and several [Bank of Bihar v. Damodar Prasad, AIR 1969 SC 297].
The Report of the said Committee makes it clear that the object of the amendment was to clarify and set at rest what the Committee thought was an overbroad interpretation of Section 14. That such clarificatory amendment is retrospective in nature
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