Joint And Several Liability In Arbitral Award Does Not Extinguish Personal Guarantee: NCLAT Delhi

The National Company Law Appellate Tribunal (NCLAT), New Delhi, on 17 September held that an arbitral award providing for joint and several liability does not, by itself, alter the legal status of a Personal Guarantor or extinguish the original contract of guarantee.

A Bench of Judicial Member Justice Sharad Kumar Sharma with Technical Members Arun Baroka and Indevar Pandey dismissed appeals filed by personal guarantors of Oasis Alcohol Ltd., including Ravindra Gopalkrishan Agarwal, challenging the admission of insolvency proceedings under Section 95 of the Insolvency and Bankruptcy Code (IBC), 2016 by the Mumbai bench of the National Company Law Tribunal (NCLT). The Tribunal observed:

“The use of the expression “jointly and severally” in the arbitral award does not, by itself, establish that the original contract of guarantee was extinguished. It also does not establish that the Appellant acquired the legal status of a co-borrower. Because the consent award, will not alter the status of Appellant acquired under uncontroverted and subsisting contract of guarantee which was still binding the contracting parties, unless rescinded by law.”

Oasis Alcohol Ltd. had availed credit facilities from a consortium of cooperative banks in 2010, including Jankalyan Sahakari Bank Ltd., the respondent. Subsequently, some consortium banks assigned their debts to CFM Asset Reconstruction Pvt. Ltd., while Jankalyan Sahakari Bank retained its share.

The appellants had executed personal guarantees to secure the loans. The account was declared a non-performing asset (NPA) in 2013, following which SARFAESI proceedings were initiated.

In 2017, disputes were referred to arbitration under the Multi-State Cooperative Societies Act, resulting in a consent award dated 23 March 2017 which rescheduled the repayment obligations.

Jankalyan Sahakari Bank subsequently filed petitions under Section 95 of the IBC against the personal guarantors. The NCLT admitted the petitions, leading to the present appeals.

The guarantors contended that the 2017 award converted them from guarantors into co-borrowers and extinguished the original guarantees. They also argued that the debt had been assigned to CFM ARC, which sold secured property as an assignee, depriving Jankalyan Sahakari Bank of locus standi.

They further relied on a 2017 Memorandum of Understanding (MoU) and subsequent payments by a corporate guarantor to contend that their liability stood discharged. They argued that restructuring of the debt without their consent amounted to a material variation, discharging them as sureties. They also contended that the petitions were time-barred.

Jankalyan Sahakari Bank argued that the arbitral award merely rescheduled repayment and did not convert the guarantors into co-debtors or extinguish the guarantees.

The Bank further submitted that it had not assigned its debt to CFM ARC and that assignments by other consortium members did not affect its independent rights. It argued that Section 133 of the Indian Contract Act, 1872 was inapplicable as no variation had been made by the Bank. It also relied on Clause 19 of the guarantee, which extended liability to interest, damages and costs, and contended that the petitions were within limitation.

The Tribunal rejected the guarantors' contentions. It held:

“There cannot be an automatic extinguishment of contract i.e. deed of guarantee, only by way of inference assigned to it by the consenting award. The Award contemplated continued liability in the event of default. It therefore cannot be read as creating a new relationship which completely displaced the original contract of guarantee.”

The Bench noted that the Guarantee Agreement expressly provided that it would remain valid and binding until all loans and monies due and payable by the borrower were fully repaid to the Bank. There was no material to show that the Bank had expressly released the appellants from the guarantees or entered into a substituted contract with them.

It further noted that the Bank had not assigned its debt, as no assignment deeds executed by the Bank were produced. The assignment by other consortium lenders and the sale of property by CFM ARC did not discharge the guarantors' liability towards the Bank.

The Tribunal also noted that no variation by the Bank had been established to attract Section 133 of the Indian Contract Act. The guarantee itself provided that the guarantors' liability would not be affected by variations. It further held that the petitions were not time-barred.

On the appellants' reliance on the MoU, the Tribunal noted that assumption of liability by a third party did not release the guarantors in the absence of an express release by the creditor. Accordingly, the NCLAT dismissed the appeals.