Imp. rulings - Subsisting Guarantor's Liability After (a) Approval of Resolution Plan. (b) Assignment of Debt in 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]
Assignment of Debt;
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]
HC Delhi (2023.07.21) In Vineet Saraf vs REC Ltd. [W.P.(C) 3293/2023 & CM APPL 12815/2023]
DRT Ahmedabad-1 (2022.03.11) 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 ]
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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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6. 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-Ã -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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7. HC Delhi (2023.07.21) In Vineet Saraf vs REC Ltd. [W.P.(C) 3293/2023 & CM APPL 12815/2023] held that;
A writ of prohibition can therefore be issued, when a petitioner has made out a case for want of jurisdiction. However, in cases where jurisdictional challenges can be agitated before an alternate forum, circumspection must be observed before a writ of prohibition can be granted.
When a right is created by a statute, which itself prescribes the remedy or procedure for enforcing the right or liability, resort must be had to that particular statutory remedy before invoking the discretionary remedy under Article 226 of the Constitution. This rule of exhaustion of statutory remedies is a rule of policy, convenience and discretion.
Despite the existence of an alternate remedy not being a bar to grant the writ of prohibition, it is a valid consideration that needs to be given its due weightage while entertaining a petition praying for a writ of prohibition.
A Writ of Prohibition must be issued only in rarest of rare cases. Judicial disciplines of the highest order has to be exercised whilst issuing such writs. It must be remembered that the writ jurisdiction is original jurisdiction distinct from appellate jurisdiction.
From the analysis above, it can be concluded that the existence of an alternate remedy does not act as a bar to entertain a petition praying for a writ of prohibition. . . . . In such a scenario, the petitioner needs to convince the court, not merely that the proceedings or actions being taken are wholly without jurisdiction but also why the alternate forum must be deprived of an opportunity to decide upon its own jurisdiction.
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.
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8. DRT Ahmedabad-1 (2022.03.11) 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.
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