Creditors Can Recover Unpaid Dues From Personal Guarantor Despite Partial Recovery Under Resolution Plan: NCLAT

The National Company Law Appellate Tribunal (NCLAT) in New Delhi on Tuesday has reiterated that approval of a resolution plan and acceptance of a haircut by financial creditors does not extinguish their right to proceed against personal guarantors for unpaid dues.

The tribunal observed, “The filing and admission of claims in the CIRP of the corporate guarantor does not amount to full satisfaction of the debt and does not bar the recovery of the remaining dues from other obligants, including the personal guarantors. It is well settled that recovery proceedings can validly continue against the personal guarantors for the unpaid amount.”

A bench of Justice Mohammad Faiz Alam Khan and Technical Member Naresh Salecha dismissed the appeals filed by two personal guarantors who had furnished guarantees for loans extended by consortium banks to Diamond Power Transformers Ltd. (the corporate debtor).

The personal guarantors argued that Diamond Power Infrastructure Ltd. (the corporate guarantor) had already undergone insolvency resolution and its resolution plan had been approved. They contended that since the consortium banks had accepted settlement of their admitted claims under that plan, no surviving debt remained recoverable from them.

Opposing the plea, the consortium banks argued that their dues had not been fully satisfied. They said the unpaid amount included interest and penal interest crystallised by the Debt Recovery Tribunal (DRT), Ahmedabad.

According to the banks, the resolution plan addressed only the claims admitted in the CIRP of the corporate guarantor. It did not extinguish the entire debt or discharge the liabilities of the personal guarantors.

The NCLAT noted that the DRT had already adjudicated the liabilities of the corporate debtor as well as the personal guarantors. It had issued a recovery certificate for Rs. 109.11 crore along with interest and penal interest.

Referring to settled principles governing guarantees, the tribunal held that a personal guarantor's liability remains co-extensive with that of the principal debtor under Section 128 of the Indian Contract Act.

It relied on the Supreme Court's ruling in Lalit Kumar Jain v. Union of India, which held that approval of a resolution plan does not discharge a guarantor's liability.

The tribunal also rejected the personal guarantors' contention that the entire debt stood extinguished after approval of the resolution plan.

Referring to the Calcutta High Court's decision in Gouri Shankar Jain v. Punjab National Bank, it reiterated that acceptance of a haircut under a resolution plan does not impair a creditor's right to recover the unpaid balance from a guarantor.

The tribunal noted that payments had been made to secured financial creditors under the resolution plan. However, it found that the consortium banks' dues remained unsatisfied, particularly the interest component awarded by the DRT.

Accordingly, the tribunal dismissed the appeals and upheld the admission of the Section 95 (personal guarantor) insolvency proceedings against the personal guarantors.