Guarantor Cannot Enjoy 'Right Of Subrogation' Even After CIRP Against Principal Debtor Gets Concluded: NCLT Hyderabad

Background Facts

The State Bank of India ("Financial Creditor") had granted various credit facilities to Apex Drugs Limited ("Corporate Debtor") amounting to Rs. 208,21,65,555.24 Crores. The Corporate Debtor was the Principal Borrower and Shri. Ghanshyam Surajbali Kurmi ("Personal Guarantor") stood as personal guarantor in order to secure the repayment of the financial assistance so availed.

The Corporate Debtor failed to adhere to sanction terms and neglected to operate loan accounts as per terms and conditions of the restructuring package sanction. As a result, the accounts of the Corporate Debtor were classified as Non-Performing Asset (NPA) on 30.06.2013. Consequently, the Corporate Debtor was admitted into Corporate Insolvency Resolution Process ("CIRP") by the NCLT Hyderabad Bench ("Adjudicating Authority") vide an order dated 06.09.2018.

The Financial Creditor had also issued a demand notice dated 16.08.2021 to the Personal Guarantor, demanding payment of the amount in default and had subsequently filed a petition under Section 95(1) of the IBC, seeking initiation of the Insolvency Resolution Process against the Personal Guarantor. The Adjudicating Authority vide an order dated 29.11.2021 had granted interim-moratorium and had appointed Shri Kanchinadham Ravi Kumar as Resolution Professional, directing him to file his report under Section 99 of the IBC. Accordingly, Resolution Professional filed his report stating that the amount of Debt as on 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. Hence, the Resolution Professional recommended the admission of the petition filed under Section 95 of the IBC.

Contentions Of The Personal Guarantor

The Personal Guarantor submitted that the Financial Creditor was part of the Committee of Creditors (CoC) and had voting share of 70.10%. The CoC had approved resolution plan of Successful Resolution Applicant with 100% voting, which was further approved by this Adjudicating Authority. The Clause F of the approved Resolution Plan states that, "Once the consideration as envisaged in the resolution plan is paid, all rights, security and interest including but not limited to mortgage, pledge, guarantee and hypothecation created shall stand satisfied in lieu of the said payment." Thus the liability of the Personal Guarantor was discharged upon approval of Resolution Plan and any rights of Financial Creditor against the Personal Guarantor were forfeited after the latter gave its approval to the said resolution plan.

Contentions Of The Financial Creditor

The Financial Creditor submitted that the Resolution Plan approved by Adjudicating Authority becomes a statutory scheme and is therefore, an act of operation of law. With approval of the Resolution Plan under the IBC, the Corporate Debtor is discharged by the operation of law and not at the instance of the creditor even if one or any of the creditors may or may not be in favour of the resolution plan.

Reliance was placed on the Supreme Court judgment in Lalit Kumar Jain vs Union of India, Transferred Case (Civil) No. 245/2020), where it 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."

It was further argued any relief sought by the Resolution Applicant for the ex-management would eventually cast a doubt upon the independence of the Resolution Applicant vis-à-vis Suspended Management. The Clause-F of Resolution Plan clearly depicts the intention of Resolution Applicant of seeking reliefs and concessions as far as the Corporate Debtor only. Interpreting the said clause to extinguish the Personal Guarantee of Personal Guarantor is not tune with objectives of the IBC and would create a scenario which would have adverse cascading effects.

Further, the liability of Personal Guarantor is co-extensive with that of Principal Borrower and as per the Section 134 of the Indian Contract Act, 1872 a guarantor is discharged of its liability towards the creditor only if the creditor on its own instance discharges the Principal Debtor. The main ingredient of this section is discharge of the debtor through voluntary act of creditor and not due to operation of law.

Decision Of The Adjudicating Authority

The Adjudicating Authority affirmed the view that as per Section 134 of the Indian Contract Act, 1872, a guarantor is discharged of its liability towards the creditor only if the creditor on its own instance discharges the principal debtor through voluntary act of the creditor and not due to operation of law. The Bench also affirmed that the decision in Lalit Kumar Jain vs Union of India, Transferred Case (Civil) No. 245/2020) was squarely applicable and held that a guarantor cannot enjoy a right of subrogation after conclusion of CIRP, when the payment is made by the guarantor with respect to the debt for which the guarantee is provided.

It was observed that "therefore, we are also of the view that conclusion of Corporate Insolvency Resolution Plan does not bar Financial Creditor against Guarantor, and Financial Creditor can always approach this Adjudicating Authority as envisaged under the Code." Further, the relief under Clause-F is applicable to Corporate Debtor alone, which is in line with the aims and objectives of the IBC. If Clause F is interpreted as the extinguishment of the Guarantee of the personal guarantor, that would create a scenario which would have adverse effects. Clause F does not discharges the guarantors of the Corporate Debtor from any future liabilities.

It was held that the Financial Creditor is also at liberty to initiate Interim Resolution Process against the Personal Guarantor as the resolution plan approved by Adjudicating Authority is not for recovery but revival.

The Bench held that there was no merit in submissions made by Personal Guarantor and accordingly initiated 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 Petitioner: Shri. Amir Bavani, Advocate.

Counsel For Respondent: Shri. Varun Ambati, Advocate.

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