Director's Resignation Did Not Discharge His Liability Under Deed Of Guarantee In Technofab Case: NCLAT

The National Company Law Appellate Tribunal (NCLAT) in Delhi has upheld the initiation of personal insolvency proceedings against a former director of Technofab Engineering Limited, holding that under the terms of the deed of guarantee executed in the case, his resignation from the company did not discharge him from liability.

The tribunal also held that the subsequent renewal of State Bank of India's credit facilities did not amount to a variation.

A bench of Judicial Member Justice N. Seshasayee and Technical Member Arun Baroka observed:

“Therefore, in view of the aforesaid clauses of the Deed of Guarantee, the resignation of the Appellant from the Corporate Debtor shall not discharge him from the continuing and irrevocable guarantee admittedly executed by him in favour of the Respondent Bank and other lenders."

It added, "We further observe that the renewal of facilities would not amount to variation"

The appeal arose from an order of the National Company Law Tribunal, Delhi, admitting personal insolvency proceedings initiated by State Bank of India against Nakul Gupta, a former director of Technofab Engineering Limited.

Technofab Engineering Limited, engaged in engineering, procurement, and construction services, obtained credit facilities of ₹907 crore in October 2017 from a consortium of six banks led by Bank of India. State Bank of India sanctioned working capital facilities of ₹117 crore as part of the consortium. Gupta, along with his father and brother, executed personal guarantees in favour of the lenders.

Gupta resigned as a director in March 2018. The consortium later revised its overall credit facilities to ₹1,075 crore, while SBI renewed its working capital facilities. After the company defaulted and its account was classified as a non-performing asset in June 2019, SBI invoked Gupta's personal guarantee and initiated personal insolvency proceedings against him.

Gupta argued that his guarantee was confined to the 2017 credit facilities and stood discharged after the consortium revised the facilities without his consent. He contended that the subsequent sanction letters amounted to novation and variation of the contract, that the defaults occurred only after the renewed facilities came into effect, and that he had declined to renew his guarantee in June 2020.

SBI contended that the deed created a continuing and irrevocable guarantee. It also argued that Gupta had not issued any notice revoking the guarantee and that renewal of the working capital facilities did not amount to either a variation or a novation of the contract.

Examining the deed of guarantee, the tribunal noted that it described the guarantee as continuing and contained clauses providing that it would not be affected by future variations in the contractual terms. It also noted that Clause 8 extended the guarantee to amounts advanced under the sanctioned facilities.

While interpreting Clause 3 of the deed, the tribunal observed that changes within the overall sanctioned limits would not release a guarantor.

It further observed, "However, in the present case, it is not where the internal limit has been enhanced or varied within the overall limits. Thus, the deed of guarantee itself implies that if in case there is an enhancement of overall credit facilities, the personal guarantor would be deemed to be discharged.”

The tribunal, however, held that SBI had not enhanced its own working capital facilities beyond ₹117 crore. It also held that the bank's renewal of those facilities did not amount to a variation.

The tribunal further noted that SBI's demand notice, loan recall notice, and recovery proceedings referred to the facilities covered by the 2017 documents and made no reference to the renewal sanction issued on January 1, 2019.

The tribunal also noted that Gupta had not issued any notice revoking the continuing guarantee to SBI. In those circumstances, it rejected his contention that his liability stood discharged and dismissed the appeal.