While rejecting consortium-mandate and discharge objections, the New Delhi Bench of the National Company Law Tribunal (NCLT) has reaffirmed that a guarantor’s liability is co-extensive with the principal debtor and is not extinguished by the latter’s CIRP or liquidation. The NCLT clarified that a personal guarantor’s liability under a continuing guarantee is independent of the principal debtor’s insolvency proceedings and survives the conclusion of CIRP or liquidation of the corporate debtor.
The period of limitation against a personal guarantor runs from the date of failure to comply with the demand raised under the guarantee, and not from the date of default of the principal borrower, added the Tribunal.
The Division Bench comprising Manni Sankariah Shanmuga Sundaram (Judicial Member) and Reena Sinha Puri (Technical Member) rejected the objection that the application was barred by limitation, holding that the liability of the principal borrower and the Personal Guarantor arise from distinct legal obligations, and the period of limitation in respect of the Personal Guarantor is to be examined with reference to the guarantee obligations and the demand raised upon the guarantor. As per Clause 8 of the Agreement of Guarantee, the guarantee is in the nature of a continuing guarantee, and the liability of the guarantor continues so long as the debt remains unpaid.
The limitation against the Personal Guarantor commences upon failure to comply with the demand raised under the guarantee, since the demand notice was issued on June 29, 2021, and the application was filed on Aug 27, 2021, the application was held to be within the prescribed period of limitation, added the Tribunal.
The NCLT further held that an individual consortium lender is competent to file an application under Section 95 of the IBC, since Section 95 permits a creditor to file an application either by itself, jointly with other creditors, or through a resolution professional, and does not require all consortium lenders to collectively institute proceedings against a personal guarantor.
On the question of discharge of the guarantor upon insolvency of the principal debtor, the Tribunal held that the liability of a guarantor is co-extensive with that of the principal debtor unless otherwise provided by the contract, and the liquidation, resolution or discharge of the principal debtor by operation of law does not automatically discharge the guarantor from liability under a valid and subsisting guarantee.
Also read EPF Wage Ceiling To Rise From ₹15,000 To ₹25,000; Supreme Court Disposes PIL After Cabinet Approval
Briefly, State Bank of India filed an application under Section 95(1) of the Insolvency and Bankruptcy Code, 2016, read with Rule 7(2) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019, seeking initiation of the insolvency resolution process against Amit Sethi, the Personal Guarantor to M/s Santosh Overseas Limited, for an outstanding default of Rs. 72.72 crores as on Feb 08, 2019.
SBI had extended loan facilities to M/s Santosh Overseas Limited from 2015, which were renewed and enhanced from time to time and were secured, inter alia, by the personal guarantee of Amit Sethi. The borrower company as well as the personal guarantors failed to adhere to the financial terms and conditions, and the account was classified as a Non-Performing Asset on March 31, 2017. SBI issued a demand notice, and upon failure of the guarantors to discharge the outstanding dues, the present application was filed. The Adjudicating Authority appointed Deepak Mittal as the Resolution Professional, who thereafter submitted his report under Section 99 of the IBC.
