Whether liability of the Personal guarantor for Corporate debt will extinguish on approval of the Insolvency resolution plan?

  All creditors and other classes of claimants, including financial and operational creditors, those entitled to statutory dues, workers, etc., who participate in the resolution process, are heard and those in relation to whom the CoC accepts or rejects pleas, are entitled to vent their grievances before the NCLT. After considering their submissions and objections, the resolution plan is accepted and approved. This results in finality as to the claims of creditors, and others, from the company (i.e. the company which undergoes the insolvency process). The question which the petitioners urge is that in view of this finality, their liabilities would be extinguished; they rely on Sections 128, 133 and 140 of the Contract Act to urge that creditors cannot therefore, proceed against them separately. {Para 128}

129. In Vijay Kumar Jain v. Standard Chartered Bank67, this court, while dealing with the right of erstwhile directors participating in meetings of Committee of Creditors observed that:

“we find that Section 31(1) of the Code would make it clear that such members of the erstwhile Board of Directors, who are often guarantors, are vitally interested in a resolution plan as such resolution plan then binds them. Such plan may scale down the debt of the principal debtor, resulting in scaling down the debt of the guarantor as well, or it may not. The resolution plan may also scale down certain debts and not others, leaving guarantors of the latter kind of debts exposed for the entire amount of the debt. The regulations also make it clear that these persons are vitally interested in resolution plans as they affect them”

130. 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 liability of 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. It was observed that:

“25. Section 31(1), in fact, makes it clear that the guarantor cannot escape payment as the resolution plan, which has been approved, may well include provisions as to payments to be made by such guarantor.…”

131. And further that:

“26.1 Section 14 refers only to debts due by corporate debtors, who are limited liability companies, and it is clear that in the vast majority of cases, personal guarantees are given by Directors who are in management of the companies. The object of the Code is not to allow such guarantors to escape from an independent and co-extensive liability to pay off the entire outstanding debt, which is why Section 14 is not applied to them. However, insofar as firms and individuals are concerned, guarantees are given in respect of individual debts by persons who have unlimited liability to pay them. And such guarantors may be complete strangers to the debtor — often it could be a personal friend. It is for this reason that the moratorium mentioned in Section 101 would cover such persons, as such moratorium is in relation to the debt and not the debtor.”

132. In Committee of Creditors of Essar Steel (I) Ltd. v. Satish Kumar Gupta68 (the “Essar Steel case”) this court refused to interfere with proceedings initiated to enforce personal guarantees by financial creditors; it was observed as follows:

“106. Following this judgment in V. Ramakrishnan case [SBI v. V. Ramakrishnan, (2018) 17 SCC 394], it is difficult to accept Shri Rohatgi's argument that that part of the resolution plan which states that the claims of the guarantor on account of subrogation shall be extinguished, cannot be applied to the guarantees furnished by the erstwhile Directors of the corporate debtor. So far as the present case is concerned, we hasten to add that we are saying nothing which may affect the pending litigation on account of invocation of these guarantees. However, NCLAT judgment being contrary to Section 31(1) of the Code and this Court's judgment in V. Ramakrishnan case [SBI v. V. Ramakrishnan, (2018) 17 SCC 394], is set aside.”

133. 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. In Maharashtra State Electricity Board (supra) the liability of the guarantor (in a case where liability of the principal debtor was discharged under the insolvency law or the company law), was considered. It was held that in view of the unequivocal guarantee, such liability of the guarantor continues and the creditor can realize the same from the guarantor in view of the language of Section 128 of the Contract Act as there is no discharge under Section 134 of that Act. This court observed as follows:

 Under Section 128 of the Indian Contract Act, the liability of the surety is coextensive with that of the principal debtor unless it is otherwise provided by the contract. A surety is no doubt discharged under Section 134 of the Indian Contract Act by any contract between the creditor and the principal debtor by which the principal debtor is released or by any act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor. But a discharge which the principal debtor may secure by operation of law in bankruptcy (or in liquidation proceedings in the case of a company) does not absolve the surety of his liability (see Jagannath Ganeshram Agarwala v. Shivnarayan Bhagirath [AIR 1940 Bom 247; see also In re Fitzgeorge Ex parte Robson [[1905] 1 K.B. 462]).”

136. 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.

137. 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 writ petitions, transferred cases and transfer petitions are accordingly dismissed in the above terms, without order on costs.

In the Supreme Court of India

(Before L. Nageswara Rao and S. Ravindra Bhat, JJ.)

Transferred Case (Civil) No. 245/2020

Lalit Kumar Jain  Vs Union of India 

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Whether the borrower can initiate an insolvency proceeding against the corporate person who is a guarantor regarding the loan account given to the partnership firm?

To get over this position, much reliance was placed on

Section 5(5A) of the Code, which defines the expression

“corporate guarantor” to mean a corporate person, who is the

surety in a contract of guarantee to a Corporate debtor. {Para 23}

24. Accepting the aforementioned argument of the appellant

would result in diluting or constricting the expression “corporate

debtor” occurring in Section 7 of the Code, which means a

corporate person, who owes a debt to any person. The “debt” of a corporate person would mean a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt. The expression “debt” in Section 3(11) is wide enough to include liability of a corporate person on account of guarantee given by it in relation to a loan account of any person including not being a corporate person in the event of  default committed by the latter. It would still be a “financial debt” of the corporate person, arising from the guarantee given by  it, within the meaning of Section 5(8) of the Code.

25. Notably, the expression “corporate guarantee” is not defined

in the Code. Whereas, expression “corporate guarantor” is

defined in Section 5(5A) of the Code. If the legislature intended to exclude a corporate person offering guarantee in respect of a loan secured by a person not being a corporate person, from the

expression “corporate debtor” occurring in Section 7, it would

have so provided in the Code (at least when Section 5(5A) came to be inserted defining expression “corporate guarantor”). It was

also open to the legislature to amend Section 7 of the Code and

replace the expression “corporate debtor” by a suitable

expression. It could have even amended Section 3(8) to exclude

liability arising from a guarantee given for the loan account of an

entity not being a corporate person. Similarly, it could have also

amended expression “financial debt” in Section 5(8) of the Code,

“claim” in Section 3(6), “debt” in Section 3(11) and “default” in

Section 3(12). There is no indication to that effect in the

contemporaneous legislative changes brought about.

26. The expression “corporate debtor” is defined in Section 3(8)

which applies to the Code as a whole. Whereas, expression

“corporate guarantor” in Section 5(5A), applies only to Part II of

the Code. Upon harmonious and purposive construction of the

governing provisions, it is not possible to extricate the corporate

person from the liability (of being a corporate debtor) arising on

account of the guarantee given by it in respect of loan given to a

person other than corporate person. The liability of the

guarantor is coextensive with that of the principal borrower. 

27. In law, the status of the guarantor, who is a corporate

person, metamorphoses into corporate debtor, the moment

principal borrower (regardless of not being a corporate person)

commits default in payment of debt which had become due and

payable. Thus, action under Section 7 of the Code could be

legitimately invoked even against a (corporate) guarantor being a corporate debtor. The definition of “corporate guarantor” in

Section 5(5A) of the Code needs to be so understood.

28. A priori, we find no substance in the argument advanced

before us that since the loan was offered to a proprietary firm

(not a corporate person), action under Section 7 of the Code

cannot be initiated against the corporate person even though it

had offered guarantee in respect of that transaction. Whereas,

upon default committed by the principal borrower, the liability of the company (corporate person), being the guarantor, instantly triggers the right of the financial creditor to proceed against the corporate person (being a corporate debtor). Hence, the first question stands answered against the appellant. 

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 2734 OF 2020

LAXMI PAT SURANA  Vs  UNION BANK OF INDIA 

Author: A.M. Khanwilkar, J.

Bench: A.M. Khanwilkar, Dinesh Maheshwari,B R Gawai JJ

Dated: March 26, 2021.

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Whether the court can hold surety liable for the dishonour of cheque if the complainant has failed to prove that accused had issued cheque toward liability of principal debtor?

Complainant in cross-examination further disclosed that he received the cheque Ex. 15 from Srushti Financer. However, there is no material on record nor it is the case of the complainant that any liability of Rs. 14,50,000 was existing against Srushti Financer and same is accepted by the accused and issued cheque Ex. 15 for discharging liability of Srushti Financer. No any document is placed on record by complainant to show any relation of the accused in respect of any loan transaction between the complainant and Srushti Financer. It is also not case of the complainant that accused accepted the liability of Srushti Financer and issued the cheque. No any document creating the liability of the accused is produced on record. If the cheque is drawn by the accused without accepting liability of another in writing, it does not attract Section 138 of N.I.Act. In this regard, reliance can be placed on the case of Hiten Sagar & Anr. v. IMC Ltd. & Anr. MANU/MH/0276/2001 : 2001 (3) CCC 571 (Bom.) : 2001 Cri. LJ 4311 wherein this Court has held that:

If the cheque drawn for discharge of liability of another person without creating any document, it does not come under section 138 of N.I.Act.

6. So, in view of the above reason, it is clear that on the date of cheque Ex. 15, no any evidence liability was existing against the accused and no any evidence that liability on the date of cheque was existing against the Srushti Financer and same was accepted by the accused and hence he issued the cheque.

IN THE HIGH COURT OF BOMBAY

Criminal Application No. 3661 of 2007

Decided On: 24.04.2008

 Nandkishore Mehra  Vs.  Sudhir Transport Ltd. and Ors.

Hon'ble Judges/Coram:

V.K. Tahilramani, J.

Citation: MANU/MH/1616/2008

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When compromise made between creditor and principal debtor is binding on guarantor?

This Court has held in United Bank of India
v. Bengal Behar Construction Company Ltd. and
others, (1998) 8 SCC 653, that the Clauses in the
letter of guarantee are binding on the guarantors
as follows:
“In view of the above, the question regarding
confirmation of the decree against the
guarantors now needs to be settled. ……………… we
see no reason why the guarantors should not be
made liable under the letters of guarantee,
the terms whereof clearly stipulate that on
the failure of the principal debtor to abide
by the contract, they will be liable to pay
the amount due from the principal debtor by
the appellants. Clause 15 of the letter of
guarantee, in terms states that any action
settled or stated between the bank and the
principal debtor or admitted by the principal
debtor shall be accepted by the guarantors as
conclusive evidence. In view of this
stipulation in the letter of guarantee, once
the decree on admission is passed against the
principal debtor, the guarantors would become
liable to satisfy the decree jointly and
severally.”
(Emphasis supplied)
Thus, we see no reason why the Joint Memo, which
states compromise arrived at between the Central
Bank of India and the principal debtors, would not
bind C.L. Vimla when under Clause (2) she has
admitted that any judgment or award obtained by
the Central Bank of India against the principal
debtor would bind the parties.
 The mere fact of ignorance cannot be a valid
ground. The respondent, C.L. Vimala and her son,
N.Surya Bhagavan who signed the joint memo, were
residing in the same house. We see no reason why
the Respondent would not know of the joint memo,
when she could have by reasonable means made
herself aware of the proceedings.
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 4043 OF 2015
(Arising out of SLP(C) No.10173 of 2011)
Central Bank of India … Appellant
:Versus:
C.L. Vimla & Ors. … Respondents
Citation;2016(1) MHLJ 134

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When liability of guarantor is not co-extensive with that of principal debtor ?

 We are of the opinion that the questions that
need to be decided by us are regarding the
liability of the guarantor under Section 128 of
the Indian Contract Act, 1872. The legislature has
succinctly stated that the liability of the
guarantor is co-extensive with that of the
principal debtor unless it is otherwise provided
by the contract. This Court has decided on this
question, time and again, in line with the intent
of the legislature. In Ram Kishun and Ors. v.
State of U.P. and Ors., (2012) 11 SCC 511, this
Court has held that “in view of the provisions of
Section 128 of the Contract Act, the liability of
the guarantor/surety is co-extensive with that of
the debtor.” The only exception to the nature of
the liability of the guarantor is provided in the

Section itself, which is only if it stated
explicitly to be otherwise in the Contract.
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 4043 OF 2015
(Arising out of SLP(C) No.10173 of 2011)
Central Bank of India … Appellant
:Versus:
C.L. Vimla & Ors. … Respondents
Citation; 2015(4) ALLMR414 SC

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Whether surety who is defendant can obtain attachment before judgment and Injunction against principal debtor to protect his own interest?

In view of the aforesaid observations, and especially in view of the provisions of Order 38, Rule 5 read with sections 94(b) & (e) and 151 of the Code of Civil Procedure, in order to protect the interest of the surety and in view of the peculiar circumstances of the facts in the present matter, I am of the opinion that the present applicant, who is the surety, is entitled to apply under Order 38, Rule 5 of the Code of Civil Procedure for attachment of the property of the principal debtor, i.e., the present non-applicant No. 1 before judgment, or even he can apply under Order 39, Rules 1 and 2 read with sections 94 and 151 of the Code of Civil Procedure, to protect his interest and in the ends of justice.

Bombay High Court

Jugalkishore Rampratapji Rathi vs Brijmohan S/O Rampratapji Rathi ... on 10 November, 1992

Equivalent citations: 1994 (2) BomCR 537

Bench: S Mutalik

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Whether liability of guarantor is co-extensive to liability of principal debtor?

The decree is a money decree against all the defendants-respondents and a mortgage decree only against defendant-respondent No. 2 so far as the shop is concerned. The decree does not put any fetter on the right of the decree-holder to execute it against any party, whether as a money decree or as a mortgage decree. The execution of the money decree is not made dependent on first applying for execution of the mortgage decree. The choice is left entirely with the decree-holder. There is no preliminary mortgage decree either. It is a final mortgage decree for sale of shop after three months. The decree is not in the prescribed Form No. 5 of Appendix `D' to the Code of Civil Procedure. The decree does not postpone the execution. It is simultaneous and is jointly and severally against all the defendants-respondents, including the guarantor. It is the right of the decree-holder to proceed with it in a way he likes. There is nothing in law which provides a composite decree to be first executed only against the property.

The decree for money is a simple decree against the judgment-debtors, including the guarantor and in no way subject to the execution of the mortgage decree against the judgment debtor No. 2-Respondent No. 2. If, on principle, a guarantor could be sued without even suing the principal- debtor there is no reason, even if the decretal amount is covered by the mortgage decree to force the decree-holder to proceed against the mortgaged property first and then to proceed against the guarantor.

 If the composite decree is a decree which is both a personal

decree as well as a mortgage decree, without any limitation on its execution, the decree-holder, in principle, cannot be forced to first exhaust the remedy by way of execution of the mortgage decree alone and told that only if the amount recovered is insufficient, he can be permitted to take recourse to the execution of the personal decree. For a simple mortgage decree as prescribed in Form No. 5 of Appendix `D' of the Code of Civil Procedure it could be so because the decree provides like that. It is only when the sum realised on sale of the mortgaged property is insufficient then the judgment-debtor can be proceeded with personally.

 In the instant case, the guarantor never took any plea in the suit to the effect that his liability is only contingent if remedies against the principal debtors fail to satisfy the dues of the decree-holder. If such a plea had been taken and the court trying the suit had considered the plea and gave and finding in favour of the guarantor, then it would have been a different position. But on the face of the decree, which has become final, the court cannot construe it otherwise than its tenor. No executing court can go beyond the decree. All such pleas as to the rights which the guarantor had, had to be taken during trial and not after the decree while execution is being levied. 

Supreme Court of India

State Bank Of India vs Indexport Registered And Ors on 30 April, 1992

Equivalent citations: 1992 AIR 1740, 1992 SCR (2)1031

Bench: Yogeshwar Dayal (J)

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