Abstention Not Consent: NCLT Ahmedabad Rejects Archon Engicon Guarantors' Resolution Plan For Failing 75% Vote

The National Company Law Tribunal (NCLT) at Ahmedabad has recently held that abstention by creditors cannot be treated as consent while voting on a repayment plan under the Insolvency and Bankruptcy Code, 2016, and rejected a proposal submitted by personal guarantors for failing to meet the mandatory voting threshold.

A coram of Judicial Member Shammi Khan and Technical Member Sanjeev Sharma found that the plan received only 21.35% votes in favour, while 20.14% voted against, 42.60% of the voting share abstained, and 15.91% remained absent. The tribunal held that abstention does not count toward approval and cannot be used to satisfy the statutory majority requirement.

“Abstention does not constitute approval or consent; the Code and IBBI (Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Regulations, 2019 require affirmative majority for approval under Section 114 and more particularly Section 111 of the Code which mandates approval by a majority of more than three-fourth in value of the creditors present in person or by proxy and voting.”

Under Section 111 read with Section 114 of the IBC, a repayment plan for personal guarantors must be approved by more than three-fourths in value of creditors present and voting. The tribunal noted that there was no procedural irregularity in the conduct of the Committee of Creditors meetings or the e-voting process. However, since the statutory threshold was not achieved, the plan stood rejected.

The personal guarantors argued that their repayment proposal, which offered around Rs 1.60 crore and Rs 2.75 crore, was both feasible and viable. They pointed out that the amounts were higher than the realisable value of the attached assets, especially given the ongoing proceedings initiated by the Enforcement Directorate.

The tribunal, however, was not persuaded. It held that considerations of commercial viability cannot override the clear statutory requirements laid down under the Code.

The Bench drew support from the Supreme Court's ruling in K. Sashidhar v. Indian Overseas Bank, reiterating that it cannot step into the shoes of the Committee of Creditors where the required voting majority is absent. It also clarified that Section 114 does not give the Adjudicating Authority the power to approve a plan on its own when creditors have not endorsed it.

A similar approach was taken on the question of liability. The guarantors had sought to limit their responsibility to the value of the mortgaged properties under the Deed of Guarantee. The tribunal rejected this, noting that earlier clauses in the agreement clearly impose joint and several liability for the entire debt. Any later clause attempting to restrict that obligation, it held, cannot override the primary terms of the contract.

The tribunal also took note of prior proceedings before the Debts Recovery Tribunal, which, by its order dated August 3, 2021, had already determined and crystallised the guarantors' liability and issued a recovery certificate for the full amount.

Since that finding had attained finality, the tribunal held that the guarantors could not reopen the issue. The plea of limited liability, it said, was barred by constructive res judicata and could not be raised again.

It further held that attachment of assets by the Enforcement Directorate does not discharge the liability of personal guarantors, which remains co-extensive with that of the principal borrower.

In view of the failure of the repayment plan, the tribunal allowed the Resolution Professional's application under Section 114 of the IBC, discharged the Resolution Professional from the process, and granted liberty to creditors to initiate bankruptcy proceedings against the personal guarantors within three months.

For Applicant/RP : Advocates Gaurav Jalendra, Pravincharan (RP in person)

For Respondent: Advocate Sahil Rao

For the FC/SBI: Aishwarya Reddy