In a recent judgment dated November 13, 2019 passed by the Calcutta High Court in the matter of Gouri Shankar Jain ("Petitioner") vs. Punjab National Bank ("Bank") and Anr. (W.P. No. 10147(W) of 2019), the Hon'ble Court held that the liability of a guarantor of a debt of a corporate debtor does not stand extinguished in the event an insolvency resolution plan in respect of the said corporate debtor has been approved under the Insolvency and Bankruptcy Code, 2016 ("IBC").
Following is a summary of the judgment.
Brief facts:
The Bank had initiated a corporate insolvency resolution process against one Divya Jyoti Sponge Iron Private Limited ("Corporate Debtor") before the National Company Law Tribunal, Kolkata by filing an application under Section 7 of the IBC. The Learned Tribunal had admitted the application by an order dated August 23, 2017, and by an order dated March 13, 2018, the Learned Tribunal approved the resolution plan. Under the said resolution plan, the liabilities of the Corporate Debtor as against the creditors of the Corporate Debtor were dealt with in finality.
The Petitioner was a guarantor of credit facilities obtained by the Corporate Debtor from the Bank.
Meanwhile, on March 26, 2019, the Bank had issued a notice under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 to the Petitioner on the basis of the guarantee mentioned hereinabove. Thereafter, the Petitioner was named as a defaulter in the list of defaulters maintained by TransUnion CIBIL Limited.
Issue:
Whether the liability of a guarantor of a debt of a corporate debtor stands reduced/extinguished upon an insolvency resolution plan in respect of the corporate debtor, being approved under the IBC?
Judgment:
Whether the liability of a guarantor of a debt of a corporate debtor stands reduced/extinguished upon an insolvency resolution plan in respect of the corporate debtor, being approved under the IBC?
The Hon'ble Court relied on the Supreme Court's judgment in the matter of Maharashtra State Electricity Board Bombay vs. Official Liquidator High Court, Ernakulum and Anr. (1982 Vol 3 SCC 258), wherein it was held that a discharge secured by operation of law by the principal debtor in a bankruptcy or liquidation proceeding in the case of a company does not absolve the surety of his liability. It noted that the aforesaid ratio was also applied by the division bench of Calcutta High Court in the matter of United Bank of India vs. Modern Stores (India) Ltd. (AIR 1988 Cal 18), wherein it was held that mere omission to sue the principal debtor or to proceed against the principal debtor does not operate as a discharge of the sureties' liabilities.
Further, the Hon'ble Court also relied on the Supreme Court's judgment in the matter of Industrial Finance Corporation of India Ltd. vs. Canonnore Blending and Weaving Mills Ltd. and Ors. (AIR 2002 SC 1814), wherein it was inter alia held that, in the event the principal debtor is discharged of his liability by the creditor with the consent of the surety/guarantor, the creditor's right of action against the surety stays preserved.
Lastly, the Hon'ble Court placed its reliance upon the Supreme Court's judgment in the matter of State Bank of India vs. V. Ramakrishnan and Anr. (2018 Volume 17 SCC 394), wherein it was held that Section 14 of the IBC does not apply to a personal guarantor and the object of the IBC was not to allow personal guarantors to escape from their independent and coextensive liability with the corporate debtor.
In essence, the Court opined that approval of resolution plan in relation to a corporate debtor would not extinguish/reduce the liability of a guarantor of such corporate debtor.
This update has been contributed by Arka Majumdar (Partner) and Avin Sarkar (Associate).
7A, 7th Floor, Tower C, Max House,
Okhla Industrial Area, Phase 3,
New Delhi – 110020
The rules of the Bar Council of India do not permit advocates to solicit work or advertise in any manner. This website has been created only for informational purposes and is not intended to constitute solicitation, invitation, advertisement or inducement of any sort whatsoever from us or any of our members to solicit any work in any manner. By clicking on 'Agree' below, you acknowledge and confirm the following:
a) there has been no solicitation, invitation, advertisement or inducement of any sort whatsoever from us or any of our members to solicit any work through this website;
b) you are desirous of obtaining further information about us on your own accord and for your use;
c) no information or material provided on this website is to be construed as a legal opinion and use of this website will not create any lawyer-client relationship;
d) while reasonable care has been taken in ensuring the accuracy of the contents of the website, Argus Partners shall not be responsible for the results of any actions taken on the basis of information provided in this website or for any error or omission in the website; and
e) in cases where the user has any legal issues, the user must seek independent legal advice.