IBC - Approval Of Resolution Plan Does Not By Itself Discharge Liabilities Of Personal Guarantor Of Corporate Debtor: Supreme Court

The Supreme Court has held that the approval of a resolution plan does not ipso facto discharge a personal guarantor of a corporate debtor.

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, the bench comprising Justices L. Nageswara Rao and S. Ravindra Bhat observed in the judgment in which it upheld the provisions of Insolvency and Bankruptcy Code, 2016 which applies to personal guarantors of corporate debtors.

One of the contentions raised by the petitioners who challenged the notification was that once a resolution plan is accepted, the corporate debtor is discharged of liability. Therefore, according to them, the guarantor whose liability is co-extensive with the principal debtor, i.e. the corporate debtor, too is discharged of all liabilities.

Rejecting this contention, the bench, referring to recent judgments in State Bank of India v. V. Ramakrishnan, Committee of Creditors of Essar Steel (I) Ltd. v. Satish Kumar Gupta, observed 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. It said that an involuntary act of the principal debtor leading to loss of security, would not absolve a guarantor of its liability. While dismissing the petitions, the court observed thus:

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.

112. For the foregoing reasons, it is held that the impugned notification is legal and valid. 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 question which the petitioners urge was that in view of the finality of resolution plan, the liabilities of guarantors would be extinguished. They relied on Sections 128, 133 and 140 of the Contract Act to urge that creditors cannot therefore, proceed against guarantors separately after the approval of resolution plan.

In this regard, the Supreme Court observed :

"The rationale for allowing directors to participate in meetings of the CoC is that the directors' liability as personal guarantors persists against the creditors and an approved resolution plan can only lead to a revision of amount or exposure for the entire amount. Any recourse under Section 133 of the Contract Act to discharge the liabilityof the surety on account of variance in terms of the contract, without her or his consent, stands negated by this court, in V. Ramakrishnan where it was observed that the language of Section 31 makes it clear that the approved plan is binding on the guarantor, to avoid any attempt to escape liability under the provisions of the Contract Act".

The Court also noted that in the Essar steel case, the Supreme Court had refused to interfere with proceedings initiated to enforce personal guarantees by financial creditors.

Taking note of these precedents, the SC observed :

"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. However, this court has indicated, time and again, that an involuntary act of the principal debtor leading to loss of security, would not absolve a guarantor of its liability"