Settlement In Corporate Debtor's Liquidation Does Not Extinguish Personal Guarantee Obligations: NCLT Chennai

The National Company Law Tribunal (NCLT) at Chennai has reiterated that a settlement reached during the liquidation of a corporate debtor does not absolve a personal guarantor of liability under a separate contract of guarantee.

A bench of Judicial Member Sanjiv Jain and Technical Member Venkataraman Subramaniam admitted an insolvency petition filed by Aditya Birla Finance Limited against G. Thiyagarajan, who had furnished a personal guarantee for credit facilities extended to Velohar Infra Private Limited.

Referring to the Supreme Court's decision in Lalit Kumar Jain v. Union of India, the tribunal observed that a personal guarantor's liability survives the discharge of the principal borrower through liquidation or insolvency proceedings.

"It is thus clear that release or discharge of principal borrower from debt owed to it by an involuntary process i.e. by operation of law or due to liquidation or insolvency process does not absolve the surety or guarantor of his/her liability, which arises out of an independent contract," the bench observed.

Aditya Birla Finance had extended credit facilities of ₹3.5 crore to Velohar Infra. Thiyagarajan and another individual executed a deed of guarantee for repayment of the facilities. The loan account was classified as a non-performing asset on November 1, 2017.

Opposing the insolvency plea, Thiyagarajan argued that the lender had already received about ₹1.03 crore under a settlement arrived at among creditors during the liquidation proceedings of the corporate debtor. He contended that the compromise discharged his liability as guarantor.

The tribunal did not accept the argument. The tribunal rejected the guarantor's contention that receipt of about ₹1.03 crore during the corporate debtor's liquidation had discharged his liability.

It also found no weight in the objection that the petition was barred by limitation.

It found that the deed executed by Thiyagarajan was a continuing guarantee and that the guarantee had been invoked on October 15, 2022.

Referring to the Supreme Court's decision in Syndicate Bank v. Channaveerappa Beleri, the tribunal observed that a claim may remain enforceable against a guarantor because of the continuing nature of the guarantee.

"The guarantee against the Respondent was invoked on 15.10.2022 and thus this petition filed on 09.06.2023 is within limitation," the bench observed.

Thiyagarajan had also argued that he had resigned from the company in October 2016. The tribunal found that the resignation did not affect his obligations under the guarantee.

"As regards submission that the Respondent resigned from the Company/Corporate Debtor on 15.10.2016 and he is no more the Director of the Company, law is well settled that resignation would not absolve the guarantor from his liability to repay the debt under the guarantee agreement until and unless he is discharged," the tribunal held.

The NCLT consequently admitted the petition and initiated insolvency proceedings against Thiyagarajan as a personal guarantor.

For Petitioner: Advocate Shiksha

For Respondent: Advocate S. Satish