Dissenting Banks Cannot Continue Recovery Against Guarantors Once Resolution Plan Attains Finality: NCLAT

The National Company Law Appellate Tribunal (NCLAT) at Delhi has recently held that once an approved resolution plan expressly extinguished securities and attachments of personal guarantors and attained finality, dissenting financial creditors could not continue recovery proceedings against such assets.

A bench of Chairperson Justice Ashok Bhushan and Technical Member Barun Mitra allowed an appeal filed by Puro Natural Sugars JV and deleted portions of a National Company Law Tribunal (NCLT) order that had restricted the scope of release of guarantor and third-party assets.

Shivaji Cane Processors Limited, an MSME, was admitted into the corporate insolvency resolution process (CIRP) on 18 February 2021. The company had availed consortium loans secured by mortgage deeds, third-party guarantees and personal guarantees.

Puro Natural Sugars JV submitted a resolution plan. The Committee of Creditors approved it with 78.03% voting share, though two consortium banks dissented.

On 1 May 2023, the NCLT rejected the plan on the ground that it extinguished the rights of dissenting creditors to proceed against personal guarantors and their securities. The NCLAT later set aside that decision and approved the plan.The Supreme Court later dismissed the appeal filed by one of the dissenting banks, bringing the resolution plan to a close.

Even after receiving their payments under the plan, the banks continued recovery proceedings against the personal guarantors and held on to attached properties.

This prompted the successful resolution applicant to move the NCLT seeking enforcement of the plan.

While the NCLT allowed the application and restrained recovery proceedings, it observed that personal properties not specifically mortgaged or addressed in the resolution plan would remain unaffected.

Challenging these observations, Puro Natural Sugars JV moved the NCLAT.

The appellate tribunal examined Clause C-13(7) of the resolution plan, which stated:

“All encumbrances, security interest, liens and/or attachments (including pursuant to applicable law) created or exists over the assets of the erstwhile promoters, directors and guarantors of Corporate Debtor shall be irrevocably released and all enforcement commenced by any person over any of the assets of the erstwhile promoters, directors and guarantors of corporate debtor charged with the financial creditors to secure the debt of corporate debtor shall stand released.”

The bench held that the clause was wide and expressly covered attachments, whether charged or not charged. It noted that these provisions had already been upheld by the NCLAT in earlier proceedings and that the Supreme Court had dismissed the challenge. The terms of the plan had therefore attained finality and were binding under Section 31 of the Insolvency and Bankruptcy Code.

Rejecting the banks' contention that assets attached under the Maharashtra Cooperative Societies Act fell outside the CIRP, the Tribunal held that once the entire claim of the financial creditors stood resolved under the approved plan, they could not retain attachments or continue enforcement to recover the same dues.

“We thus do not find any substance in the submission of learned counsel appearing on behalf of respondents No. 1 & 2 that respondents No. 1 & 2 can keep third-party securities and securities of personal guarantors and promoters which were not covered by any mortgage and which were under attachment to recover the dues of respondent Nos. 1 & 2” the Bench observed.

The NCLAT further held that the NCLT erred in observing that the liabilities of personal guarantors, being independent, were not extinguished. In the present case, the resolution plan had expressly dealt with the extinguishment of securities and attachments relating to guarantors.

Allowing the appeal, the NCLAT deleted paragraphs 55 to 57 of the NCLT's order. In those paragraphs, the NCLT had limited the release of guarantor assets only to properties that were mortgaged or specifically addressed in the resolution plan.

It further directed that if the banks fail to release the assets of promoters, personal guarantors, and third parties, the NCLT shall forward the order to the Insolvency and Bankruptcy Board of India for consideration of prosecution under Section 74(3) of the Code.

For Appellants: Senior Advocate Krishnendu Datta, Advocates Ramchandra Madan, Tushar Nigam, Himanshu Yadav, Alina Merin Mathew and Harshit Chaudhary,

For Respondents: Senior Advocate Abhijeet Sinha, Advocates Ayush Pratap Singh, Udayraj Patwardhan, Udayraj Patwardhan and Shreya