Resignation As Director Does Not Extinguish Personal Guarantee Liability: NCLT Indore

The Indore Bench of the National Company Law Tribunal (NCLT) on 11 September held that a personal guarantee does not cease merely because the guarantor resigns as a director of the corporate debtor, observing that a personal guarantee is an independent contractual undertaking that continues unless validly revoked in accordance with law.

A Bench comprising Judicial Member Brajendra Mani Tripathi and Technical Member Man Mohan Gupta observed:

“A personal guarantee is an independent contractual undertaking. Resignation from the office of director does not, by itself, revoke or extinguish a guarantee already furnished in favour of the creditor.”

The State Bank of India (SBI) filed the application against Mahesh Rajpal, personal guarantor of Rajpal Abhikaran Pvt. Ltd. The bank had sanctioned a drop-line overdraft facility of Rs. 20 crore to the corporate debtor, supported by a Deed of Guarantee executed by Rajpal on 24 March 2016.

Following default, the account was classified as a non-performing asset (NPA), and demand notices were issued under the SARFAESI Act in 2019. SBI invoked the guarantee, but neither the corporate debtor nor Rajpal paid the outstanding dues. The bank claimed Rs. 23.70 crore as on 30 June 2021, comprising Rs. 18.40 crore towards principal and Rs. 5.29 crore towards interest, apart from further interest and charges.

SBI issued a demand notice to Rajpal on 6 July 2021, stating that despite availing the credit facility, the corporate debtor had failed to comply with the sanction terms and had not cleared the dues despite repeated requests.

The corporate debtor was admitted into the corporate insolvency resolution process (CIRP) on 26 March 2021, which was ongoing when SBI filed the application on 12 August 2021.

Rajpal contended that the loan and guarantee documents had been pre-signed before his resignation as director on 17 March 2016, as evidenced by Form DIR-12. He argued that the documents lost legal significance after his resignation. He also relied on a letter dated 3 May 2016 by which the corporate debtor communicated withdrawal of his guarantee to SBI, which the bank acknowledged on 5 May 2016.

He further argued that a revival letter dated 18 March 2019 amounted to novation of the contract, to which he was not a party. He also raised objections concerning the sufficiency of mortgaged assets valued at Rs. 40 crore and the pendency of proceedings before the Debt Recovery Tribunal (DRT). On limitation, he relied on Supreme Court and NCLAT precedents to contend that the application was time-barred.

Moreover, he submitted that after SBI received Rs. 19.11 crore under the corporate debtor's resolution plan, the bank should recover any residual amount from personal guarantors connected with the management of the corporate debtor rather than from him.

Resolution Professional Sajjan Kumar Dokania examined the application and accompanying documents and found that the debt subsisted and the guarantee remained valid. He recommended admission of the application.

He noted that the corporate debtor's Board Resolution named Rajpal as guarantor for the loan and that the guarantee was a third-party personal guarantee independent of his position as director. He also noted that no evidence of repayment or cancellation of the guarantee had been produced.

SBI submitted that Rajpal's resignation as director did not revoke the guarantee, as the guarantee constituted an independent contract. On limitation, it argued that acknowledgment of the withdrawal letter by itself could not be treated as acceptance of revocation. Since the default occurred on 30 August 2019, the application was within limitation.

The Tribunal rejected Rajpal's objections. It held that the guarantee was an independent contract and was not extinguished by his resignation as director. The guarantee agreement also expressly provided that the guarantor's liability would remain unaffected by changes in the status of the borrower or guarantor.

Further, the Bench held that the withdrawal letter, which was merely acknowledged as received, did not establish that SBI had accepted revocation of the guarantee. It also rejected the argument that Rajpal's absence from the revival letters or balance confirmations defeated his liability, noting that under Section 128 of the Contract Act, the surety's liability is co-extensive with that of the principal debtor.

On limitation, it noted that the default occurred on 30 August 2019, while the application was filed on 12 August 2021. It therefore held that the application was filed within the three-year limitation period under Article 137 of the Limitation Act read with Section 238A of the IBC.

The Tribunal also held that the pendency of DRT proceedings or the availability of sufficient secured assets did not bar initiation of insolvency proceedings against a personal guarantor. However, any recoveries were required to be duly accounted for to prevent double recovery.

It also noted that the corporate debtor's resolution plan had subsequently been approved and SBI had received Rs. 19.11 crore. It held that this subsequent recovery did not discharge Rajpal's liability as personal guarantor.

Accordingly, the NCLT admitted SBI's application, initiated the personal insolvency resolution process against Rajpal.