Personal Guarantors Cannot Re-agitate Limited Liability After DRT Crystallises Liability For Entire Debt: NCLAT

The National Company Law Appellate Tribunal (NCLAT) has ruled that personal guarantors of an insolvent company cannot re-agitate the extent of their liability under a Deed of Guarantee after the Debt Recovery Tribunal (DRT) has already adjudicated the issue and its order has attained finality.

“In any case the liability of the Appellants had already been adjudicated by the Ld. DRT vide order dated 03.08.2021 in O.A. No. 83/2017 for Rs 1,49,26,12,243/-, wherein the validity of the Deed of Guarantee was upheld and the guarantors were held jointly and severally liable for the entire dues. The said order had attained finality and was never challenged by the Appellants, therefore, now the Appellants cannot seek to re-agitate the extent of their liability in collateral proceedings under Section 114 of the Code,” the bench of Officiating Chairperson Justice Yogesh Khanna and Technical Members Ajai Das Mehrotra and Barun Mitra ruled.

The three appeals were filed by personal guarantors of Archon Engicon Ltd. against an order of the Ahmedabad Bench of the National Company Law Tribunal (NCLT). The NCLT had held that their liability was not limited under the Deed of Guarantee dated June 12, 2014.

The guarantors relied on Clause 24 of the deed, which stated that the guarantee was restricted to the market value of properties mortgaged or to be mortgaged to secure Archon Engicon's credit facilities. They also relied on sanction letters, an inter-creditor agreement, and a transaction audit report to contend that their liability was limited to the value of the properties offered as collateral.

The NCLAT noted that the same issue had already come up before it when the guarantors challenged the admission of proceedings against them. At that stage, the NCLAT had left the question of the extent of the guarantee to be considered while finalising the repayment plan.

When the matter came up again, the NCLAT noted that the guarantors had not challenged the DRT's August 3, 2021 order. The court also recorded that they had participated in the DRT proceedings, filed written statements and had not disputed execution of the guarantee deed.

The NCLAT also examined the terms of the guarantee deed. Clauses 1, 6 and 9 required the guarantors to meet the principal debt, along with interest, costs and charges, while also providing that the guarantee could be enforced even if securities remained unrealised.

Clause 24, meanwhile, stated that the guarantee was restricted to the market value of the properties offered as security. The NCLAT noted that the NCLT had considered Clause 24 along with Clauses 1, 6 and 9 and held that Clause 24 dealt with the security arrangement rather than limiting the primary contractual liability under the other clauses.

In simple terms, the NCLAT found that the clause referring to the value of the mortgaged properties could not be used to override the clauses that made the guarantors liable for the debt.

The NCLAT also rejected the challenge concerning the guarantors' repayment plans. The plans were considered at several meetings of the Committee of Creditors (CoC), with the guarantors being given opportunities to improve them. bhumika-nilay-r-shah-701752

The final repayment plan failed to secure the required 66% voting share. Only 21.35% voted in favour, while 20.14% voted against, 42.16% abstained and 15.91% were absent.

The NCLAT observed that Section 114 requires the adjudicating authority to consider the repayment plan based on the creditors' meeting report. It does not give the NCLT power to substitute its own commercial view when the required statutory majority has not been achieved.

Since the plan did not receive the required 66% approval, it was rejected. The NCLAT dismissed the appeals and upheld the NCLT's order.