Approval of a Resolution Plan does not ipso facto discharge a Personal Guarantor of a Corporate Debtor of his liabilities under Contract of Guarantee; Allahabad High Court reiterates

Allahabad High Court

Allahabad High Court: In a writ petition filed against the demand notice under Section 3 read with Section 5 of the U.P. Government Electrical Undertakings (Dues Recovery) Act, 1958, for recovery of electricity dues of a company, the division bench of Sunita Agarwal and Vipin Chandra Dixit, JJ. held that the challenge to the demand notice for dues of electricity, issued jointly in the name of the Directors of the corporate debtor, the defaulter company which went into insolvency cannot be sustained on the ground that in view of the acceptance of the resolution plan under Section 31 of the Insolvency and Bankruptcy Code (‘IBC') all liabilities of the Directors, who may be the guarantor, stood automatically discharged/extinguished.

The issue in this case was whether the director of the company who is claimed to be the personal guarantor in the matter of payment of electricity dues of the company would be able to sustain the challenge to the demand of dues of electricity from the personal assets of the directors, in view of the insolvency proceedings concluded in relation to the defaulter company, namely the corporate debtor.

The Court after referring to Laxmi Pat Surana v. Union Bank of India, (2021) 8 SCC 481 said that it is well settled that IBC is a complete Code and in view of the provision of Section 238 of the IBC, the provisions of the Code will prevail notwithstanding anything inconsistent therewith contained in any other law for the time being in force. The Code is beneficiary legislation intended to put the corporate debtor back on its feet and is not merely money recovery legislation. The Corporate Insolvency Resolution Process (‘CIRP') is not intended to be adversial to the corporate debtor but is intended at protecting the interest of the corporate debtor.

In the instant case, the recovery of electricity dues has been initiated against the Directors of the company during the period when the defaulter company was in insolvency. The resolution plan submitted by the resolution applicant was approved under the order of the National Company Law Tribunal (‘NCLT')

The Court said that a reading of the order of the NCLT clearly shows that the reliefs, waiver and claims made by the resolution applicant were granted to the extent that after the payment of dues of the creditor as per the resolution plan, a creditor cannot initiate proceedings for recovery of claims against the corporate debtor which are not part of the resolution plan. All encumbrance on the assets of the corporate debtor prior to the plan stood permanently extinguished on completion of procedural formalities as provided in Companies Act, 2013.

The Court took note of SBI v. V. Ramakrishnan, (2018) 17 SCC 394, wherein it was held that the object of the Code is not to allow personal guarantors such as Directors who are in management of the companies to escape from an independent and co-existent liability to pay off the entire outstanding debt. The decision in Sanjeev Shriya v. SBI, 2017 SCC OnLine All 4067, wherein moratorium was applied to enforcement of guarantee against personal guarantor to the debt, has been overruled.

Further, the Court said that in Laxmi Pat Surana v. Union Bank of India, (2021) 8 SCC 481, while dealing with the action under Section 7 of IBC ,2016 against the corporate debtor, it was noted that Section 7 is an enabling provision, which permits the financial creditor to initiate CIRP against a corporate debtor.

Moreover, the Court referred to Vijay Kumar Jain v. Standard Chartered Bank, (2019) 20 SCC 455; SBI v. V. Ramakrishnan, (2018) 17 SCC 394; Essar Steel India Ltd. Committee of Creditors v. Satish Kumar Gupta, (2020) 8 SCC 531, wherein it was held 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. Thus, the Court said that approval of a resolution plan does not ipso facto absolve the surety/guarantor of his or her liability, which arises out of an independent contract of guarantee. To what extent, the liability of a guarantor can be pressed into service would depend on the terms of the guarantee/contract, itself.

Thus, the Court rejected the main contention of the petitioner to challenge the recovery, on the ground that approval of the resolution plan in the insolvency proceeding in relation to the defaulter company would ipso facto discharge both the Directors of the defaulter Company.

[Narendra Singh Panwar v Pashchimanchal Vidyut Vitran Nigam Limited, 2023 SCC OnLine All 19, order dated 12-01-2023]

Advocates who appeared in this case :

Counsel for Petitioner: Advocate Ashish Kumar Singh, Advocate Ajay Kumar Singh

Counsel for Respondent: Advocate Kartikeya Saran, Advocate Pranjal Mehrotra

*Apoorva Goel, Editorial Assistant has reported this brief.

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