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2019 (11) TMI 1169 - HC - Insolvency and BankruptcyCIBIL rating - Removal of name of the petitioner from the list of defaulters maintained by Credit Information Bureau (India) Limited - liability of a guarantor towards a creditor in respect of a guarantee given by such guarantor to secure the claim of a creditor for the credit facilities advanced by such creditor to the company - Whether the liability of a guarantor of a debt of a corporate-debtor stands reduced/extinguished upon an Insolvency Resolution Plan in respect of the corporate debtor, being approved under the Insolvency and Bankruptcy Code, 2016? HELD THAT - Section 14 of the Code of 2016 does not apply to a personal guarantor. The Code of 2016 does not allow personal guarantors to escape their liability. When an application under Section 7 of the Code of 2016 is admitted by the Adjudicating Authority, the steps taken subsequent thereto flows out of the statute. The two termination points of an application under Section 7 of the Code of 2016, after the admission of such application, do not result in any variance, made without the surety s consent, in the terms of the contract between the principal debtor and the creditor to constitute a discharge of a surety under Section 133 of the Act of 1872. The ratio of Canonnore Spinning and Weaving Mills Ltd 2002 (4) TMI 943 - SUPREME COURT being binding precedents and the factual scenarios obtaining therein being same as that obtaining in the present case, the ratio laid down therein are applied in the facts of the present case, wherein it was being held that a definite volition on the part of the creditor is required to take place for the guarantor to stand discharged in terms of section 141 of the Act of 1872. It has held that, the liability of the guarantor cannot but be stated to be a strict liability and even if the principal debtor is discharged from his liability unless such discharge is through the act of the creditor without consent of the surety/guarantor, the creditor s right of action against the surety is preserved. The issue is answered in the negative and against the writ petitioner - no relief can be granted to the writ petitioner - petition dismissed.
Issues Involved:
1. Whether the liability of a guarantor of a debt of a corporate debtor stands reduced/extinguished upon an Insolvency Resolution Plan in respect of the corporate debtor being approved under the Insolvency and Bankruptcy Code, 2016? 2. To what relief or reliefs are the parties entitled? Issue-wise Detailed Analysis: 1. Whether the liability of a guarantor of a debt of a corporate debtor stands reduced/extinguished upon an Insolvency Resolution Plan in respect of the corporate debtor being approved under the Insolvency and Bankruptcy Code, 2016? The petitioner argued that the personal guarantee given by him stood extinguished upon the approval of the Resolution Plan by the National Company Law Tribunal (NCLT) for the corporate debtor. The petitioner relied on Sections 135, 139, and 145 of the Contract Act, 1872, asserting that the liability of the guarantor is co-extensive with that of the principal debtor. Since the principal debtor’s liability was settled under the Resolution Plan, the petitioner claimed his liability as a guarantor was also extinguished. The petitioner further contended that the creditor's actions were inconsistent with his rights as a guarantor, thus discharging him from the contract of guarantee. In contrast, the respondent bank argued that the approval of a Resolution Plan does not discharge the guarantor’s liability. They cited Sections 128, 133, 134, and 135 of the Contract Act, 1872, and various provisions of the Insolvency and Bankruptcy Code (IBC), 2016, including Sections 14(3), 30(4), 60(2), and 238. The bank emphasized that the contract of guarantee is independent and the Resolution Plan does not affect the guarantor’s liability. They referred to precedents such as Maharashtra State Electricity Board v. Official Liquidator, United Bank of India v. Modern Stores (India) Ltd., and Industrial Finance Corporation of India Ltd. v. Canonnore Blending and Weaving Mills Ltd., asserting that the discharge of the principal debtor by operation of law does not absolve the surety of his liability. After considering the arguments, the court noted that the Resolution Plan approved by the NCLT did not specifically address the personal guarantee given by the petitioner. The court emphasized that the liability of the guarantor is coextensive with that of the principal debtor unless otherwise provided by the contract. The court observed that the petitioner failed to produce the contract of guarantee to establish any contrary stipulation. The court also highlighted that the statutory right exercised under Section 7 of the IBC, 2016, does not constitute a voluntary compromise or composition with the corporate debtor. The court referred to the Supreme Court's decision in V. Ramakrishnan & Anr., which held that Section 14 of the IBC, 2016, does not apply to personal guarantors and that personal guarantors cannot escape their liability. The court concluded that the Resolution Plan and the subsequent actions under the IBC, 2016, do not discharge the guarantor’s liability under Sections 133, 134, 135, or 139 of the Contract Act, 1872. The court applied the binding precedents of Canonnore Spinning and Weaving Mills Ltd., Maharashtra State Electricity Board, and Modern Stores (India) Ltd., and held that the liability of the guarantor does not get extinguished upon the approval of the Resolution Plan. 2. To what relief or reliefs are the parties entitled? Given the conclusion that the liability of the guarantor does not get extinguished upon the approval of the Resolution Plan, the court answered the first issue in the negative and against the petitioner. Consequently, no relief was granted to the petitioner. The writ petition was dismissed, and the subsisting interim order was vacated. Conclusion: The court dismissed the writ petition, holding that the liability of a guarantor does not stand reduced or extinguished upon the approval of an Insolvency Resolution Plan for the corporate debtor under the IBC, 2016. The court emphasized that the statutory proceedings under the IBC, 2016, do not affect the independent contract of guarantee and the guarantor's liability remains intact.
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