Under the Insolvency and Bankruptcy Code, 2016 (“IBC”), the approval of a resolution plan under Section 31 of the IBC is statutorily binding on the corporate debtor, its creditors, and other stakeholders to the restructured arrangement embodied in the plan. While, it is a settled principle of law that the resolution applicant acquires the corporate debtor on a ‘clean slate basis’, in practice, resolution plans frequently involve substantial haircuts, with financial creditors agreeing to accept payments that are significantly lower than the admitted claims against the corporate debtor. This raises a critical question: if the debtor’s liability is statutorily extinguished, does that automatically release third‐party security providers such as personal or corporate guarantors, third party mortgagors/pledgors or any other third party entity which has created an encumbrance over its assets to secure the debt of the corporate debtor?
Statutory and Contractual Framework
Section 128 of the Indian Contract Act, 1872 (“Contract Act”) provides that the liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract. Traditionally, this has been understood to mean that the guarantor’s liability neither exceeds nor survives that of the principal debtor. Further, Sections 133, 134 and 135 of the Contract Act, contemplate circumstances in which a surety may be discharged. Section 133 stipulates that any variance, in the terms of the contract between the principal debtor and the creditor, made without the surety’s consent, discharges the surety as to transactions subsequent to the variance. Section 134 further provides that the surety is discharged by any contract between the creditor and the principal debtor by which the principal debtor is released, or by any act or omission of the creditor that legally results in the discharge of the principal debtor. Section 135 similarly recognizes discharge where the creditor compounds with, gives time to, or agrees not to sue the principal debtor without the surety’s consent.
However, the jurisprudence under the IBC has drawn a sharp distinction between discharge of the principal debtor by a contractual act of the creditor and discharge by operation of law. When a resolution plan is approved under Section 31 of the IBC, the modification or extinguishment of the corporate debtor’s liability does not arise from a bilateral contract between the creditor and the principal debtor. Rather, it flows from a statutory process binding all the stakeholders of the corporate debtor. Courts have therefore held that such restructuring pursuant to a resolution plan does not attract the automatic discharge contemplated under Sections 133, 134 or 135 of the Contract Act.
The Supreme Courtin State Bank of India v. V. Ramakrishnan[1] clarified that a guarantor cannot invoke Section 133 of the Contract Act to contend that a reduction or alteration of the principal debt under a resolution plan discharges the guarantee as under Section 133 of the Contract Act any change made to the debt owed by the corporate debtor, without the surety’s consent, would relieve the guarantor from payment. The Court emphasized that Section 31(1) of IBC, by making the plan binding on the guarantor in fact, makes it clear that the guarantor cannot escape payment to the creditors, as the approved resolution plan, may well include provisions as to payments to be made by such guarantor. The judgement also established that a statutory moratorium under the IBC does not protect personal guarantors, and that the operation of a resolution plan cannot be used as a tactical escape from a guaranteed debt.
Most recently, in January 2026, the Supreme Court resolved a dispute over whether Electrosteel Castings Limited[2] (“Third Party Security Provider”) remained bound as a surety following the resolution of Electrosteel Steels Limited where the Court held that “approval of the Resolution Plan does not ipso facto discharge a security provider of her or his liabilities under the contract of security”.
Practical and commercial implications
For resolution applicants, the continued enforceability of third-party guarantees has important practical consequences. It means they cannot proceed on the assumption that approval of the resolution plan automatically delivers a complete clean slate, particularly where guarantees or third-party securities form part of the broader credit structure. In practice, where the financial debt of the corporate debtor is assigned to the resolution applicant as part of the plan structure, the applicant may negotiate with the financial creditors for a corresponding assignment of the third-party security as part of the overall security package.
This approach is often adopted where the co-operation of the erstwhile promoter or third-party security provider is commercially necessary and may not otherwise be forthcoming. For example, where the principal asset of the corporate debtor is land, but a portion of that land such as a critical access route or right of way is held in the name of the erstwhile promoter, the resolution applicant may seek assignment of the personal guarantee originally issued in favour of the lenders. This enables the applicant to retain leverage in dealings with the promoter and secure the operational viability of the asset post-resolution. In most cases, creditors prefer that guarantors continue to remain liable, as this enhances their recovery prospects and preserves an additional layer of security. If guarantees are not clearly addressed in the resolution plan, this may give rise to disputes or subsequent challenges, with creditors seeking to retain and enforce their residual remedies outside the plan framework.
From a creditor’s perspective, the legal position is largely advantageous. Even in instances where the resolution plan involves a haircut, creditors retain the ability to proceed against guarantors or third-party security providers for the balance outstanding, unless the plan provides otherwise. It is therefore critical that the resolution plan clearly sets out the treatment and status of all guarantees and securities. If creditors intend to preserve their rights, the plan should avoid any waiver or release language in respect of guarantees. Ideally, it should expressly state that all guarantees and third-party securities continue in full force and effect notwithstanding approval of the resolution plan.
For guarantors and third-party security providers, the takeaway is clear that their discharge is not automatic. A person who has guaranteed the debts of a corporate debtor must proceed on the basis that the obligation survives, unless the resolution plan expressly releases or modifies it.
Equally significant is the position on subrogation. Guarantors may find that their right to step into the shoes of the creditor upon payment is curtailed under the terms of an approved plan. The Courts have recognised that resolution plans frequently exclude or restrict subrogation rights. As a result, even if a guarantor satisfies part or all of the debt, they may be left without recourse against the corporate debtor’s assets for reimbursement.
[1] Civil Appeal No. 3595 of 2018, decided on 14.08.2018
[2] UV Asset Reconstruction Company Limited vs. Electrosteel Castings Limited, decided on 06.01.2026; MANU/SC/0012/2026