With the coming into force of the Insolvency and Bankruptcy Code, 2016 (‘IBC’) various issues pertaining to the Guarantors also appeared in the forefront. Since the inception of IBC in December 2016 certain aspects pertaining to the rights and liabilities of the Guarantors have been settled by the Judiciary and necessary amendments have also been carried out by the Parliament to plug loopholes as and when the same emerged to the surface. In case of a company undergoing insolvency proceedings under the IBC, there are two sets of guarantors i.e. Corporate Guarantor and Personal Guarantor.
The first and foremost issue which came up before the Court was whether the moratorium under IBC would extend to personal guarantors of Corporate Debtor. In Sanjeev Shriya v State Bank of India & Ors, Allahabad High Court held that a moratorium under section 14 of the IBC would extend to personal guarantors as well, whereas, the Bombay High Court in the matter of Sicom Investments and Finance Limited vs. Rajesh Kumar Drolia & Ors
held that moratorium would not extend to personal guarantors.
There was difference of opinion between the Courts which was elevated to the Hon’ble Supreme Court. In the matter of State Bank of India V. Ramakrishna & Anr, wherein the Hon’ble Supreme Court finally settled the issue held that no such moratorium is applicable as regards a personal guarantee. Further, the Parliament also simultaneously brought an amendment to the IBC, whereby it clarified that moratorium shall not apply to a surety in a contract of guarantee to a Corporate Debtor.
Subsequently, at the stage of invitation of claim, whether a guarantor who has not invoked his Corporate Guarantee can still file its claim before the Resolution Professional of Corporate Debtor came in light, when the Adjudicating Authority, in the matter of Axis Bank V. Edu Smart Services Pvt. Ltd., held that only the claims which are matured at the stage of initiation of Corporate Insolvency Resolution Process (CIRP) can be filed before the Resolution Professional and as Axis Bank failed to invoke Corporate Guarantee before the initiation of CIRP, their claim being ‘un-matured’ cannot be filed before the Resolution Professional. However, in the appeal, the said view was overturned by Hon’ble NCLAT and it was held that maturity of a claim has no nexus with filing of claim and accordingly, a claim whether matured or not can be filed before the Resolution Professional.
Initially, the Hon’ble NCLAT held that proceedings against Guarantors are legally tenable under the IBC without taking re-course against the Principal Borrower. Thereafter, an issue of simultaneous initiation of CIRP against the Guarantor(s) for the same very claim emerged, wherein, the Hon’ble Appellate Tribunal in the matter of Dr. Vishnu Kumar Agarwal V. Piramal Enterprises Ltd., held that simultaneous proceedings cannot be filed against the Guarantor(s) for the same amount of claim. However, the said order is now pending before the Hon’ble Supreme Court, wherein, the Hon’ble Supreme Court has passed a status quo order but the final outcome is still awaited.
It is interesting to note that apart from simultaneous initiation of proceedings against the principal borrower and guarantor, the terms of the Resolution Plan approved in the case of a Corporate Debtor also plays vital role in determining the rights and liabilities of the Guarantors. One might say that such rights of guarantors are protected under the India Contract Act, 1872 and anything in violation to the provisions of Indian Contract Act, 1872 cannot pass a muster under Section 30(2)(e) of the IBC but the judicial approach is divergent as in the matter of State Bank of India vs. V. Ramakrishnan & Anr., the Hon’ble Supreme Court has categorically held that guarantors cannot take benefit of Section 133 of Contract Act, 1872, and such scaling down of debt of the principal borrower in terms of the Resolution Plan would not relieve the Guarantor for the remainder debt as the guarantor in terms of Section 31 of the IBC is bound by the terms of the Resolution Plan and hence, the Resolution Plan may provide for payments which can be recovered from the guarantor.
Similarly, in case of Sharon-Biomedicine, wherein terms of Resolution Plan, the Committee of Creditors had written-off certain debt qua the principal borrower, the said debt was not written-off qua the guarantors of Sharon bio-medicine which was also approved by the Adjudicating Authority. The guarantors being aggrieved by the said order preferred an appeal on the ground that the guarantor is not liable for any variance between the creditor and principal borrower without his consent in terms of Section 133 of Contract Act and its liability is co-extensive to the corporate debtor by virtue of Section 128 of Companies Act and hence, any scaling down of debt under resolution plan would result in scaling down of debt qua the guarantor as well, therefore, such resolution plan which provides for waiving off of debt qua principal borrower and not qua guarantor is in contravention to the provisions of the Indian Contract Act and is liable to be set aside. However, the said appeal was dismissed by Hon’ble NCLAT by virtue of Section 31 of the IBC that the guarantors are bound by the terms of the Resolution Plan and even the Hon’ble Supreme Court decided not to interfere with the said order.
The provisions of IBC are silent on the aspect of the rights and liabilities of guarantors and on initiation of simultaneous proceedings against the guarantors, it appears that the Resolution of Corporate Debtor will not in any manner absolve the guarantors from discharging their obligations under the Deed of Guarantee.