Lalit Kumar Jain v. Union of India & Ors.

Key Legal Principles

Therefore, the judgment establishes the important principle that:

"Corporate debtor's insolvency/resolution does not automatically discharge the personal guarantor."

Summary (English)

LEGAL TOPIC:

Insolvency and Bankruptcy Code, 2016 — Personal guarantors of corporate debtors — Effect of approval of a resolution plan on the liability of personal guarantors.

WHY THIS CASE IS IMPORTANT FOR A CO-OPERATIVE BANK:

A co-operative bank may lend money to a company against the personal guarantee of its promoters/directors. If the company subsequently enters CIRP and its resolution plan is approved, an important question is whether the personal guarantor automatically becomes free from the guarantee liability.

The Supreme Court held that approval of a resolution plan does NOT, by itself, discharge the personal guarantor from liability under the guarantee.

FACTS:

The petitioners had furnished personal guarantees to banks and financial institutions for credit facilities granted to companies with which they were associated as directors, promoters, chairmen or managing directors.

In several cases, the guarantees had been invoked and recovery/insolvency proceedings had commenced.

The Central Government issued a notification dated 15 November 2019 bringing into force specified provisions of the IBC relating to insolvency proceedings against personal guarantors to corporate debtors.

The petitioners challenged the validity of this notification.

The Supreme Court upheld the validity of the notification and also considered the relationship between the insolvency proceedings of the corporate debtor and the liability of its personal guarantor.

IMPORTANT LEGAL ISSUE:

Whether approval of a resolution plan for the corporate debtor under Section 31 of the IBC automatically discharges the personal guarantor from his or her liability under the guarantee?

HELD BY THE SUPREME COURT:

No.

The approval of a resolution plan does not ipso facto discharge a personal guarantor of the corporate debtor from liability under the contract of guarantee.

The guarantee is an independent contractual obligation. The fact that the principal borrower has undergone insolvency proceedings, or that its liability has been dealt with under a resolution plan, does not automatically extinguish the guarantor's liability.

The Court specifically relied upon the principle that the liability of a guarantor is governed by the terms of the guarantee and the provisions of the Indian Contract Act, 1872.

IMPORTANT PARAGRAPHS:

Para 102:

The Court records that the petitioners had furnished personal guarantees to banks and financial institutions for advances made to companies and that, in many cases, the guarantees had been invoked and recovery or insolvency proceedings had followed.

Para 108:

The Court explained that sanction of a resolution plan and the finality given to it under Section 31 do not, by themselves, operate as a discharge of the guarantor's liability. The nature and extent of the guarantor's liability depend upon the terms of the guarantee.

Para 122:

The Court again explained that approval of the resolution plan does not per se discharge the guarantor's liability. The Court referred to the independent nature of the guarantee and the principle that an involuntary act of the principal debtor does not ordinarily absolve the guarantor.

Para 125:

This is the key concluding paragraph. The Supreme Court held:

"approval of a resolution plan does not ipso facto discharge a personal guarantor"

from his or her liabilities under the contract of guarantee.

The Court further held that release or discharge of the principal borrower through operation of law, liquidation or insolvency proceedings does not, by itself, absolve the surety/guarantor whose liability arises from an independent contract.

PRACTICAL APPLICATION FOR A CO-OPERATIVE BANK:

Suppose:

1. A co-operative bank lends ₹5 crore to a company.

2. The promoter/director gives a personal guarantee for the company's borrowing.

3. The company subsequently enters CIRP.

4. A resolution plan is approved under Section 31 of the IBC.

5. The resolution plan provides for payment of only part of the creditor's claim.

The approval of that resolution plan does not, merely because of the approval itself, automatically extinguish the personal guarantor's liability.

Therefore, a co-operative bank should carefully examine:

• the terms of the guarantee deed;

• the amount and nature of the guaranteed liability;

• invocation of the guarantee;

• the resolution plan and its treatment of guarantees;

• proceedings against the corporate debtor;

• proceedings against the personal guarantor; and

• the applicable provisions of the IBC and Contract Act.

IMPORTANT DISTINCTION:

This judgment does NOT mean that every personal guarantee can always be enforced for the entire original debt irrespective of the guarantee's terms or the resolution plan.

The Supreme Court expressly stated that the nature and extent of the guarantor's liability depend upon the terms of the guarantee.

Therefore, the judgment establishes the important principle that:

"Corporate debtor's insolvency/resolution does not automatically discharge the personal guarantor."

Summary (Kannada)

ಪ್ರಕರಣದ ಮುಖ್ಯ ವಿಷಯವು ಕಂಪನಿಯ ಸಾಲಕ್ಕೆ ವೈಯಕ್ತಿಕ ಗ್ಯಾರಂಟಿ ನೀಡಿರುವ ವ್ಯಕ್ತಿಯ ಹೊಣೆಗಾರಿಕೆಗೆ ಸಂಬಂಧಿಸಿದೆ.

ಒಂದು ಸಹಕಾರಿ ಬ್ಯಾಂಕ್ ಕಂಪನಿಗೆ ಸಾಲ ನೀಡಿದ್ದು, ಆ ಸಾಲಕ್ಕೆ ಕಂಪನಿಯ ನಿರ್ದೇಶಕ ಅಥವಾ ಪ್ರವರ್ತಕ ವೈಯಕ್ತಿಕ ಗ್ಯಾರಂಟಿ ನೀಡಿದ್ದಾನೆ ಎಂದು ಪರಿಗಣಿಸೋಣ. ನಂತರ ಆ ಕಂಪನಿ IBC ಅಡಿಯಲ್ಲಿ Corporate Insolvency Resolution Process (CIRP) ಗೆ ಒಳಪಡುತ್ತದೆ ಮತ್ತು ಅದರ Resolution Plan ಅನ್ನು NCLT ಅನುಮೋದಿಸುತ್ತದೆ.

ಈ ಸಂದರ್ಭದಲ್ಲಿ ಕೇವಲ Resolution Plan ಅನುಮೋದನೆಯಾಗಿದೆ ಎಂಬ ಕಾರಣದಿಂದ ವೈಯಕ್ತಿಕ ಗ್ಯಾರಂಟಿದಾರನ ಹೊಣೆಗಾರಿಕೆ ಸ್ವಯಂಚಾಲಿತವಾಗಿ ಮುಕ್ತಾಯವಾಗುವುದಿಲ್ಲ ಎಂದು ಸುಪ್ರೀಂ ಕೋರ್ಟ್ ಸ್ಪಷ್ಟಪಡಿಸಿದೆ.

ವೈಯಕ್ತಿಕ ಗ್ಯಾರಂಟಿಯು ಪ್ರತ್ಯೇಕವಾದ contractual obligation ಆಗಿದೆ. Principal Borrower ಅಥವಾ Corporate Debtor ವಿರುದ್ಧ insolvency ಅಥವಾ resolution proceedings ನಡೆದರೂ, ಅದರ ಪರಿಣಾಮವಾಗಿ guarantor ತನ್ನ ಗ್ಯಾರಂಟಿ ಹೊಣೆಗಾರಿಕೆಯಿಂದ ಸ್ವಯಂಚಾಲಿತವಾಗಿ ಮುಕ್ತನಾಗುವುದಿಲ್ಲ.

ಪ್ಯಾರಾ 125 ಈ ಪ್ರಕರಣದ ಅತ್ಯಂತ ಪ್ರಮುಖ ಭಾಗವಾಗಿದೆ. ಸುಪ್ರೀಂ ಕೋರ್ಟ್ ಸ್ಪಷ್ಟವಾಗಿ ಹೇಳಿದ್ದು:

"Resolution Plan ಅನ್ನು ಅನುಮೋದಿಸಿದ ಮಾತ್ರಕ್ಕೆ Personal Guarantor ತನ್ನ guarantee liability ಯಿಂದ ಸ್ವಯಂಚಾಲಿತವಾಗಿ ಮುಕ್ತನಾಗುವುದಿಲ್ಲ."

ಅಂದರೆ, Corporate Debtor ಗೆ Resolution Plan ಅನುಮೋದನೆಯಾದರೂ, Personal Guarantor ನ liability ಯನ್ನು ಪ್ರತ್ಯೇಕವಾಗಿ ಪರಿಗಣಿಸಬೇಕಾಗುತ್ತದೆ.

ಸಹಕಾರಿ ಬ್ಯಾಂಕಿಗೆ ಪ್ರಾಯೋಗಿಕ ಮಹತ್ವ:

ಸಹಕಾರಿ ಬ್ಯಾಂಕ್ ಕಂಪನಿಗೆ ಸಾಲ ನೀಡುವಾಗ ಅದರ promoter/director ನಿಂದ personal guarantee ಪಡೆದಿದ್ದರೆ, ಕಂಪನಿ ನಂತರ CIRP ಗೆ ಒಳಪಟ್ಟ ಸಂದರ್ಭದಲ್ಲಿ guarantee documentation ಅತ್ಯಂತ ಮುಖ್ಯವಾಗುತ್ತದೆ.

ಬ್ಯಾಂಕ್ ಪರಿಶೀಲಿಸಬೇಕಾದ ಪ್ರಮುಖ ಅಂಶಗಳು:

1. Guarantee Deed ನ ನಿಖರವಾದ ಷರತ್ತುಗಳು;

2. Guarantor ನ liability ಯ ವ್ಯಾಪ್ತಿ;

3. Guarantee ಅನ್ನು ಸರಿಯಾಗಿ invoke ಮಾಡಲಾಗಿದೆಯೇ;

4. Corporate Debtor ನ Resolution Plan ನಲ್ಲಿ guarantee ಕುರಿತು ಏನು provision ಇದೆ;

5. Resolution Plan ಮೂಲಕ creditor ಗೆ ಎಷ್ಟು ಮೊತ್ತ ಪಾವತಿಸಲಾಗುತ್ತಿದೆ;

6. Personal Guarantor ವಿರುದ್ಧ ಯಾವ proceedings ಲಭ್ಯವಿವೆ; ಮತ್ತು

7. IBC ಹಾಗೂ Indian Contract Act ನ ಅನ್ವಯವಾಗುವ provisions.

ಮುಖ್ಯ ಕಾನೂನು ತತ್ವ:

"Corporate Debtor ನ insolvency ಅಥವಾ Resolution Plan ನ ಅನುಮೋದನೆಯಿಂದ Personal Guarantor ನ guarantee liability ಸ್ವಯಂಚಾಲಿತವಾಗಿ ಕೊನೆಗೊಳ್ಳುವುದಿಲ್ಲ."

ಆದರೆ Guarantor ಎಷ್ಟು ಮೊತ್ತಕ್ಕೆ ಮತ್ತು ಯಾವ ರೀತಿಯಲ್ಲಿ ಹೊಣೆಗಾರನಾಗಿರುತ್ತಾನೆ ಎಂಬುದು Guarantee Deed ನ ಷರತ್ತುಗಳು ಮತ್ತು ಅನ್ವಯವಾಗುವ ಕಾನೂನಿನ ಮೇಲೆ ಅವಲಂಬಿತವಾಗಿರುತ್ತದೆ.