Introduction

Personal guarantees are one of the most common contractual comforts which may be provided as part of the security package in a transaction to secure a debt availed by the principal debtor. This article primarily revolves around the invocation of a personal guarantee provided by an individual, for a company undergoing the corporate insolvency resolution process (“CIRP“) under the provisions of the Insolvency and Bankruptcy Code, 2016 (“IBC“) initiated by its creditors and having a third-party resolution applicant taking over the management and control of the company.

Recently, the Hon’ble Debts Recovery Tribunal bench at Ahmedabad (“DRT“) vide its order dated 11th of March, 2022¹ (“Order“) dismissed the original application (“Original Application” / “OA“) filed by various banks and stakeholders led by the State Bank of India (“Applicants” / “Applicant Banks“) against Mr. Prashant Ruia (the “Defendant No. 1“) and other defendants (hereinafter collectively referred to as the “Defendants“). The said Order mainly deals with determining the existence of debt as defined under Section 2 (g) of The Recovery of Debts and Bankruptcy Act, 1993 (“RDB Act“) subsequent to the assignment of the same for a valuable consideration under a resolution plan and the consequent validity of the invocation of a personal guarantee provided as a part of the original security package for the Debt.

Facts

The primary facts and issue of the case are laid out hereunder:

1. The Defendant No.1 and other promoters had executed various personal guarantees (“Personal Guarantees“) to ensure repayment of amounts due and payable by Essar Steel India Limited (now known as ArcelorMittal Nippon Steel Limited) (“Principal Borrower“) under various credit / financial facilities (“Debt“) availed by the Principal Borrower from the Applicant Banks.
2. The Principal Borrower underwent CIRP pursuant to which the National Law Tribunal, Ahmedabad bench (“NCLT“) approved the resolution plan of Arcelor Mittal India Private Limited (the “Resolution Applicant“) under Section 31 of IBC on 08th March, 2019 which was thereafter also confirmed by the Hon’ble Supreme Court on 15th November, 2019². In terms of the said resolution plan, the creditors including the Applicant Banks had assigned the Debt (excluding the Personal Guarantees) to the Resolution Applicant.
3. The Applicant Banks contended that the liability of the Defendants subsists and continues even after the approval and implementation of the resolution plan under IBC. Moreover, since the liability of the Defendants is under a separate contract of personal guarantee, their liability subsists. The Applicant banks also stressed on the fact that under the assignment agreement, the Personal Guarantees had not been assigned to the Resolution Applicant and therefore the Applicant Banks were deemed to have retained their recovery rights towards the unrecovered interest portion of the Debt from the Defendants.
4. The main issue before the DRT was whether having assigned the “debt” as defined u/s 2 (g) of the RDB Act, for valuable consideration, as part of the resolution plan under IBC, did the Applicant Banks have any recourse and recovery rights against the Defendants?

Order

The Hon’ble DRT perused the assignment agreement executed by the financial creditors of the Principal Borrower in favour of the Resolution Applicant. It observed that according to the provisions as laid out in the assignment agreement, the assignors (including the Applicant Banks) agreed to unconditionally and irrevocable transfer, sell, assign and release to the assignee (being the Resolution Applicant itself in this case) on an “as is, where is”, “as is, what is” and “without recourse” basis all the loans of the Principal Borrower albeit excluding the guarantees made in connection with the said loans.

The Hon’ble DRT stated that legal effect of an assignment is that the Debt as a whole stands entirely discharged upon receipt of the amounts under the resolution plan by the Applicant Banks. If the Applicant Banks have no amounts due to be recovered from the Principal Borrower, the Defendants too stand to be discharged from the obligation of fulfilling their liabilities in spite of the fact that the Personal Guarantees have been retained and specifically excluded in the resolution plan and the assignment agreement.

Further, placing due reliance and importance to the resolution plan, the Hon’ble DRT took cognizance of the provisions of the resolution plan, wherein it was stated that the payments made to the financial creditors would be treated as full and final payment of the entire outstanding dues. The provisions of the resolution plan also stated that all claims along with any related proceedings, including proceedings for enforcement of any security interest pertaining to the Principal Borrower shall stand extinguished, settled, abated and satisfied. Even on perusal of the deed of guarantee(s) executed by the Defendants with reference to the provisions of the resolution plan formulated for the Principal Borrower, the Hon’ble DRT stated that on a conjoint reading of both, the invariable conclusion was that the Debt of the Principal Borrower due to its financial creditors stood fully and finally satisfied.

In light of the aforementioned, the Hon’ble DRT dismissed the OA on account of there being no cause of action for any recovery post the assignment becoming infructuous.

Conclusion

The Order provides perspective on the position of law on guarantee invocations vis-à-vis existence of debt in cases where debts have been assigned. The Supreme Court has of course in various judgments held that an involuntary act of the principal debtor would not absolve the guarantor of its liability and the sanction of a resolution plan does not automatically operate as a discharge of the guarantor’s liability.

In this case however, there was a situation where the Debt secured by the Personal Guarantee was satisfied vis-à-vis the Applicant Bank but remained due and owing to the resolution applicant. The Personal Guarantee however was not so assigned and continued to operate in favour of the Applicant Bank. In effect, the singular Debt owed by both the Principal Borrower and the guarantors to the Applicant Bank would operate as two debts – one owed by the Principal Borrower to the resolution applicant in view of the assignment of that Debt; and the second, owed by the guarantors to the Applicant Bank under the guarantees which were not so assigned. It appears that in view thereof the DRT has held that there remains no underlying debt due to the Applicant Bank in its books from the Principal Borrower as the same was assigned and therefore the Applicant Bank cannot in law trigger the Personal Guarantees.

While this Order does clarify the position that assigning the benefit of guaranteed debt while retaining the benefit (and a right of invocation) of the guarantee itself is not enforceable, it does not as such deviate from the position adopted by the Supreme Court that what determines the liability of a guarantor would depend in each case on the terms of the guarantee, the resolution plan and the facts of the matter at hand and the sanction of a resolution plan does not, as a matter of course, discharge the guarantors of their liabilities even if the debt due from the corporate debtor is settled.

Footnotes

1. IA No. 92 of 2022 in OA No. 650 of 2018

2. (2020) 8SCC531

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.