Resolution of debts cannot be misconstrued as full satisfaction of debts payable to the creditors, rules NCLAT, Read Judgement

09 May 2024

The NCLAT, Principal Bench New Delhi opined that extinguishment of Personal Guarantors right of subrogation is unavoidable and inaccessible fact in insolvency cases and it requires to be respected by all stakeholders and any departure from such principles will have adverse impact on revival of the Corporate Debtors, interest of the Financial Creditors and overall negative impact on the national economy.

The Bench further opined that the financial creditors have reserved the rights to proceed against the personal guarantors like the Appellant herein in terms of the “Excluded Rights” in approved Resolution Plan. There was no question of transfer of a “mere right to sue” and in such circumstances, it was a structured financial deal in form of Resolution Plan exercised based on the commercial wisdom, with aim of resolution of a corporate debtor, as well as to ensure that financial creditors are able to recover their outstanding debts as guaranteed by the Personal Guarantors, the Appellants.

It was held that resolution of debts cannot be misconstrued as full satisfaction of debts

payable to the creditors and Resolution of debts under the Resolution Plan is only to the extent of the obligations against and this will not take away the rights of the Financial Creditors to proceed against the Appellants as Promotors who stood as guarantors and the assets mortgaged by others against the loan availed by the principal debtor.

Brief Facts:

The present 4 appeals have been filed against the order of the NCLT vide which the resolution plan was approved. The challenge is to the extent that recourse to the Financial Creditors against the Personal Guarantors of Asian Colour Coated Ispat Limited (‘Corporate Debtor’), the Respondent No. 1 herein is allowed.

Contentions of the Appellants:

It was submitted that since the entire debt owed by the Corporate Debtor was assigned to the SPV, such debt stood transferred from the Financial Creditors to the SPV in totality and therefore there could not have beenany concept of “Excluded Rights” being part of the Resolution Plan.

It was argued that the portion of Resolution Plan which permitted the Financial Creditors to retain the rights to pursue their legal remedies against the Appellants as the Personal Guarantor to the Corporate Debtor in absence of any debt, which ceased to exist after assignment of the entire debt to the SPV, such legal remedy in guise “Excluded Rights” could not have been approved.

It was further urged that liability towards the guarantee travels along with the debts and cannot be separated from debt assignment.

Contentions of the Respondents:

It was argued that the decision has been taken to approve the Resolution Plan by the CoC, exercising its commercial wisdom which could not be challenged by the Appellants.

It was further argued that the Resolution Plan approved by the NCLT was aimed at resolution of debt of the Corporate Debtor and not for the resolution of the Personal Guarantors to the Corporate Debtor.

Observations of the Tribunal:

The primary issue was whether the Financial Creditor can proceed against the Personal Guarantors in absence of any debt after extinguishment of such debts upon assignment in terms of the RBI Prudential Framework for Resolution of Stressed Assets dated 07.06.2019 and as stipulated in the approved Resolution Plan.

The Tribunal opined that the intent of the legislature behind the provisions of the Insolvency and Bankruptcy Code, 2016 (“IBC”) is for resolution of the Corporate Debtor and not of the Personal Guarantors of the Corporate Debtor. The financial creditors have a right to proceed against the personal guarantors of the Corporate Debtor, and further, that the personal guarantors, in terms of section 31 of the IBC are duty bound by the terms of the Resolution Plan approved by the NCLT. Further, that a Resolution Plan itself can vary and modify the rights of the creditors and guarantors of the corporate debtor and provide for continuation of personal guarantees which do not need any confirmation from Personal Guarantor to the Corporate Debtor.

It was noted that in the present resolution plan, there were clear and express provisions safeguarding the right of the Financial Creditors to pursue legal remedies against the personal guarantors, including the Appellants.

It was held that the doctrine of subrogation is an absolute right of the guarantor, however, the issue becomes different, if it falls within the domain of the IBC in the context of CIRP proceedings.

The Bench ruled that if right of subrogation is allowed to be continue, the Corporate Debtor even after resolution as a result of approved Resolution Plan, will always be subject to financial uncertainties and vagaries due to such claims by the Personal Guarantors in future, which is clearly not the intentions of the IBC.

It was expounded that extinguishment of Personal Guarantors right of subrogation is unavoidable and inaccessible fact in insolvency cases and it requires to be respected by all stakeholders and any departure from such principles will have adverse impact on revival of the Corporate Debtors, interest of the Financial Creditors and overall negative impact on the national economy.

It was held that resolution of debts cannot be misconstrued as full satisfaction of debts

The decision of the Tribunal:

Accordingly, the Bench dismissed the present appeals and upheld the order of the NCLT.

Case Title: Vikas Aggarwal v. Asian Colour Coated Ispat Limited & Ors. with connected matters

Case No.: Comp. App. (AT) (Ins) No. 1104 of 2020with connected matters

Coram: Hon’ble Justice Rakesh Kumar Jain, Mr. Naresh Salecha (Technical Member)

Advocates for Petitioner: Advs. Mr. Krishnendu Dutta Mr. Ajay Kumar, Ms. Stuti Vatsa, Mr. Vaibhav Tiwari, Mr. Vijayant Goel, Mr. Anand Chibhar,

Advocates for Respondent: Advs. Mr. Savar Mahajan, Ms. Aishwarya Gupta, Mr. Ankur Mittal, Mr. Bhaskar