The National Company Law Appellate Tribunal (NCLAT) at Delhi has recently held that resignation as a director from the board of a company does not, by itself, discharge obligations undertaken under a continuing guarantee. A guarantor can continue to be held liable under the terms of gurantee unless discharged by the guarantor.
A bench of Judicial Member Justice Sharad Kumar Sharma and Technical Members Arun Baroka and Indevar Pandey observed,
“In view of the aforesaid contractual arrangement, the Appellant's resignation as director did not, by itself, terminate the contractual obligations already undertaken under the earlier guarantees. Rather it keeps the contractual obligations of the Appellant intact under the guarantee, till the same is released or discharged by the borrower, which is not the case here.”
The appeal was filed by Parveen Gupta against the admission of insolvency proceedings against him as a personal guarantor of Shree Raj Mahal Jewellers Private Limited by the National Company Law Appellate Tribunal, Delhi.
The dispute arose from credit facilities extended by the Bank of India to Shree Raj Mahal Jewellers Private Limited. During his association with the company, Parveen Gupta executed several deeds of guarantee in favour of the bank.
He subsequently resigned as a director on 1 October 2014. The corporate debtor's account was later classified as a Non-Performing Asset (NPA), following which the bank issued a notice under Section 13(2) of the SARFAESI Act. Meanwhile, the Corporate Debtor was admitted into CIRP in April 2019, later followed by liquidation.
The bank subsequently invoked the personal guarantees and eventually initiated proceedings against the appellant under Section 95 of the IBC. The NCLT admitted the application after considering the report submitted by the resolution professional under Section 99 of the Code.
The appellant challenged the impugned order on the grounds of limitation, novation and discharge of surety, forgery of the guarantee documents and failure of the creditor to enforce the available collateral securities.
He argued that he resigned as the director and completed the requisite formalities with the Ministry of Corporate Affairs. He expressly denied executing guarantees post his resignation.
It was further contended that the subsequent credit arrangements, including the sanction of an ad hoc facility of ₹4 Crores after his resignation, altered the earlier contractual arrangements and discharged him from liability.
The bank, however, argued that acknowledgements of debt contained in OTS proposals submitted on behalf of the corporate debtor extended the limitation period under Section 18 of the Limitation Act.
It was also contended that the earlier guarantees remained enforceable, that the disputed signatures have not been proved to be forged, and that the Appellant has not established discharge under Sections 134 and 139 of the Indian Contract Act, 1872.
The bench, referring to the guarantee invocation notice issued in April 2016 and the subsequent OTS proposals submitted in March 2018 and January 2021, held that the acknowledgements of liability by the corporate debtor had the effect of extending limitation. It was noted that the fact that an OTS proposal was rejected does not, by itself, negate an acknowledgement contained in it.
The tribunal further noted that the guarantee deed specifically provided that acknowledgements or admissions made by the borrower or its authorised representative would bind the guarantors. Relying on precedent, the NCLAT concluded that the Section 95 application was within the extended limitation period.
The Bench examined the guarantee deed and observed that it was a continuing guarantee. The tribunal noted that the guarantee expressly stipulated that any amendment, variation or restructuring of loan facilities would not result in the discharge of the guarantor.
It held that resignation as a director did not extinguish obligations already undertaken in a personal capacity and that no material had been produced to show that the bank had expressly released or discharged the appellant from his guarantee obligations. The Bench observed,
“We find that the Appellant has not established, merely by relying upon his resignation and the subsequent revision of credit facilities, that the earlier guarantee was wholly substituted or discharged. It required a specific release or discharged from the guarantee by the financial creditor which is not the case here. We, therefore, find no merit in contention of the Appellant that the said guarantee has been discharged by novation of the contract.”
The appellate tribunal on the defence of forgery, however, held that proceedings under the IBC are summary in nature and are not intended to adjudicate detailed allegations of forgery requiring extensive evidence. It further noted that even without considering the disputed documents, the debt and default stood established through earlier admitted guarantees executed by the appellant.
The NCLAT further observed that the mere existence of collateral security or a creditor's decision not to immediately enforce it does not automatically release a guarantor from liability.
Accordingly, it upheld the NCLT's order admitting the Section 95 application and dismissed the appeal.
For Appellants: Senior Advocate Gaurav Mitra with Advocates Siddharth Arora, Jasleen Kaur, Aarushi & Abhishek Arora
For Respondent: Advocates Karan Gandhi & Sikhar Tiwari For R1; Advocates Honey Satpal, Akash Agarwalla, Aman, Tanya Gupta for R2