The New Delhi Principal Bench of the National Company Law Appellate Tribunal (NCLAT) has held that a personal guarantee expressly drafted as a continuing and irrevocable guarantee does not stand discharged merely because the guarantor resigns as director of the corporate debtor. Revocation of such guarantee under Section 130 of the Contract Act requires notice to the creditor and operates only prospectively.
The Tribunal further held that, on the facts of this case, renewal of the working capital facilities by SBI did not amount to novation or such variance as would discharge the guarantor under Sections 62 or 133 of the Contract Act. Even otherwise, Section 133 discharges the surety only as to transactions subsequent to the variance, while liability for earlier debt continues.
The Tribunal also reinforced that where the creditor’s claim and debt trace back to the original loan and guarantee documents, the guarantor cannot avoid insolvency proceedings by arguing that later renewals automatically extinguished the original guarantee, especially when the guarantee itself states that future variations do not affect liability. Accordingly, the NCLAT upheld the initiation of personal insolvency proceedings against Nakul Gupta.
The Division Bench comprising Justice N Seshasayee (Judicial Member) and Arun Baroka (Technical Member) first examined the nature of the 2017 deed of guarantee and accepted SBI’s submission that the guarantee was continuing and irrevocable. The Tribunal noted that under the guarantee, the guarantor’s liability was payable on demand, the guarantor was deemed to be principal debtor for enforcement purposes, and the guarantee was expressly stated to continue notwithstanding disputes between the bank and borrower.
On the resignation point, NCLAT held that merely stepping down as director did not discharge Nakul Gupta from his obligations under the guarantee. The Tribunal emphasised that a continuing guarantee under Section 129 extends to a series of transactions and that revocation under Section 130 can operate only for future transactions and only upon notice to the creditor. It found that no such notice of revocation had been issued to SBI.
On the argument of variance and novation, NCLAT held that there had been no further variation or enhancement by SBI itself after the Oct 11, 2017 letter of arrangement for Rs. 117 crores, and that renewal of facilities would not amount to variation. It specifically observed that even the sanction letter dated Jan 01, 2019 was a renewal of working capital facilities and, since its terms were not accepted by the borrower or guarantor including the appellant, it was never put into effect.
The Tribunal also addressed Clause 8 of the deed of guarantee, which described the guarantee as continuing for all amounts advanced under the credit facilities. It held that this clause supported SBI’s position that the guarantee survived and that the appellant could not seek discharge merely because of later events after his resignation. NCLAT also agreed with the Adjudicating Authority’s view that even if there was an increase in sanction limits without the guarantor’s consent, the guarantor would still remain liable for the debt existing prior to such variance.
While discussing Section 133 of the Contract Act, NCLAT reiterated the legal principle that variance without the surety’s consent discharges the surety only for transactions subsequent to the variance, and not for transactions already covered. It added that the debt registered with the Information Utility flowed from the loan and guarantee documents of Oct 17, 2017, and the NeSL material did not show any fresh debt arising from a separate unguaranteed facility under the Jan 01, 2019 renewal.
Briefly, the appeal arose from an order dated Feb 27, 2024 by the NCLT, New Delhi, admitting a Section 95 application and initiating personal insolvency proceedings against Nakul Gupta, an erstwhile director of Technofab Engineering Limited, on the basis of the Resolution Professional’s report under Section 99 of the IBC. The underlying case concerned default in repayment of credit facilities availed by Technofab Engineering Limited from a consortium of banks, including State Bank of India.
Technofab Engineering Limited had been granted consortium credit facilities aggregating to Rs. 907 crores in October 2017, of which SBI’s share was Rs. 117 crores. In support of those facilities, the corporate debtor and its then directors, including Nakul Gupta, executed the working capital consortium agreement, joint deed of hypothecation, and deeds of guarantee.
Nakul Gupta’s case was that he resigned as director on March 08, 2018 and that this fact was communicated to the consortium. He argued that after his resignation, the consortium led by Bank of India enhanced the aggregate limits from Rs. 907 crores to Rs. 1075 crores through a sanction dated Oct 24, 2018, and SBI also renewed its facilities by sanction letter dated Jan 01, 2019 with effect from Dec 14, 2018, allegedly without his consent or fresh guarantee. He therefore contended that his 2017 guarantee stood discharged and could not be used for defaults arising under the renewed facilities.
Also Read Delhi HC Issues Notice on Bail Plea of Son of Former Oswal Family Employee in Assault Case
He further argued that there was no default under the earlier 2017 sanction, that the account was classified as NPA only on June 27, 2019, and that any default occurred only after the renewed sanction had come into effect. On that basis, he asserted discharge under Section 133 of the Indian Contract Act, claiming that there had been variance in terms without his consent and, in substance, novation of the original arrangement.
SBI opposed the appeal by relying on the terms of the deed of guarantee dated Oct 17, 2017. It argued that the guarantee was continuing, irrevocable, enforceable on demand, and not affected by variation in contractual terms. SBI also contended that resignation from directorship did not revoke the guarantee, that revocation under Section 130 required notice to the creditor, and that no such notice had been issued to SBI. SBI further maintained that renewal of facilities did not amount to variation or novation so far as SBI’s own Rs. 117 crores exposure was concerned.
