The guarantor cannot benefit from the “right of subrogation” even after the conclusion of the CIRP against the principal debtor: NCLT Hyderabad

The National Company Law Court (“NCLT”), Hyderabad Bench, consisting of Dr. N. Venkata Ramakrishna Badarinath (Judicial member) Shri Veera Brahma Rao Arekapudi (Technical Member), while ruling on a motion filed in State Bank of India v Shri. Ghanshyam Surajbali Kurmi, ruled that a guarantor cannot benefit from a right of subrogation even after the conclusion of the principal debtor’s corporate insolvency resolution process (“CIRP”). Nothing prevents the Financial Creditor from initiating insolvency proceedings against the Guarantor after the conclusion of the CIRP of the Principal Debtor.

Background Facts

The State Bank of India (“Financial Creditor”) had extended various credit facilities to Apex Drugs Limited (“Corporate Debtor”) in the amount of Rs. 208 21 65,555.24 crores. The debtor company was the main borrower and Shri. Ghanshyam Surajbali Kurmi (“personal guarantor”) has acted as a personal guarantor to ensure the reimbursement of the financial assistance thus obtained.

The debtor company failed to comply with the terms of the sanction and neglected to manage the loan accounts in accordance with the terms of the sanction of the restructuring program. Consequently, the accounts of the Debtor Company were classified as Non-Performing Assets (NPA) as of 30.06.2013. Therefore, the Debtor Company was admitted into the Corporate Insolvency Resolution Process (“CIRP”) by the NCLT Hyderabad Bench (“Arbitration Authority”) see an order dated 06.09.2018.

The financial creditor had also issued a formal notice dated 16.08.2021 to the personal guarantor, demanding payment of the amount in default and had subsequently filed a request under Article 95(1) of the IBC, requesting the initiation of the insolvency resolution process against the Personal Guarantor. The contracting authority see an order dated 29.11.2021 granted an interim moratorium and appointed Shri Kanchinadham Ravi Kumar as resolution professional, ordering him to file his report under IBC Section 99. Accordingly, Resolution Professional filed its report stating that the amount of debt as at 31.07.2021 was Rs. 208,21,65,555.24/- and the Personal Guarantor had confirmed that no payment had been made to the Financial Creditor and lack of resources to pay the amount. Accordingly, the Resolution Practitioner has recommended the IBC Section 95 petition be admitted.

Assertions of the personal guarantor

The personal guarantor argued that the financial creditor was part of the creditors’ committee (CoC) and had a voting share of 70.10%. The CoC had approved the resolution candidate’s resolution plan with 100% of the votes, which was then approved by this contracting authority. Clause F of the approved resolution plan states that, “Once the consideration provided for in the resolution plan has been paid, all rights, securities and interests, including but not limited to the mortgage, pledge, guarantee and mortgage created, will be satisfied in lieu and place of said payment.” Thus, the liability of the personal guarantor was released when the resolution plan was approved and all the rights of the financial creditor against the personal guarantor were lost after the latter gave its approval to the said resolution plan.

Financial creditor litigation

The Financial Creditor argued that the Resolution Plan approved by the Adjudicating Authority becomes a statutory regime and is therefore an act of application of the law. With the approval of the resolution plan under the IBC, the debtor company is released by operation of law and not at the request of the creditor, even if one or more of the creditors is or is not in favor of the resolution plan. .

We relied on the judgment of the Supreme Court in Lalit Kumar Jain vs Union of IndiaTransferred Case (Civil) No. 245/2020), where it held that:

“111. In view of the above analysis, it is considered that the approval of a resolution plan does not ipso facto release a personal guarantor (of a social debtor) from his obligations under the guarantee contract As the Court has held, the release or release of a principal borrower from the debt he owes to his creditor, by an involuntary process, that is to say by operation of law, or by reason of ‘liquidation or insolvency proceedings, does not exonerate the surety/guarantor from his liability, which arises from an independent contract.

It was further argued that any relief sought by the Resolution Plaintiff for the former management would end up casting doubt on the independence of the Resolution Plaintiff from the Suspended Management. Clause F of the resolution plan clearly outlines the intent of the resolution applicant to seek relief and concessions with respect to the debtor company only. Interpreting said clause to extinguish the personal guarantee of the personal guarantor is inconsistent with the objectives of the IBC and would create a scenario that would have adverse cascading effects.

Further, the liability of the personal guarantor extends to that of the primary borrower and according to Section 134 of the Indian Contracts Act 1872, a guarantor is only released from liability to the creditor if the creditor, on his own initiative, releases the principal. Debtor. The main ingredient of this article is the release of the debtor by a voluntary act of the creditor and not by operation of law.

Decision of the contracting authority

The contracting authority asserted that according to Section 134 of the Indian Contracts Act 1872, a guarantor is only released from liability to the creditor if the creditor, on his own initiative, releases the principal debtor by a voluntary act of the creditor and not due to the application of the law. The Chamber also affirmed that the decision in Lalit Kumar Jain vs Union of IndiaTransferred Case (Civil) No. 245/2020) was perfectly applicable and held that a guarantor cannot benefit from a right of subrogation after the conclusion of the CIRP, when payment is made by the guarantor in respect of the debt for which the guarantee is provided.

It has been observed that “therefore, we are also of the view that the conclusion of the corporate insolvency resolution plan does not preclude the financial creditor against the guarantor, and the financial creditor may always contact this arbitration authority as provided by the code.” Further, the relief provided in clause F applies only to the debtor company, which is consistent with the aims and objectives of the IBC. If Clause F is interpreted as extinguishing the Personal Guarantor’s Guarantee, this would create a scenario that would have adverse effects. Clause F does not release the guarantors of the debtor company from any future obligation.

It was held that the financial creditor is also free to initiate provisional resolution proceedings against the personal guarantor, since the resolution plan approved by the adjudicating authority is not intended for recovery but for recovery.

The bench found that there was no merit in the submissions made by the personal guarantor and therefore initiated the insolvency resolution process against Shri. Ghanshyam Surajbali Kurmi.

Case title: State Bank of India v Shri. Ghanshyam Surajbali Kurmi, CP (IB) No. 297/95 of IBC/HDB/2021

Counsel for the Applicant: Sri. Amir Bavani, lawyer.

Counsel for the Respondent: Sri. Varun Ambati, lawyer.

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