Company Court Can't Shield Guarantors From Recovery Proceedings Once Liquidation Attains Finality: Delhi High Court
The Delhi High Court has made it clear that once a final winding up order has been passed against a Company and the Official Liquidator has taken charge, the Company Court is not required to come to the aid of guarantors so as to shield them from recovery proceedings initiated by creditors.A division bench of Justices Anil Kshetarpal and Harish Vaidyanathan Shankar observed,“The purpose of...
The Delhi High Court has made it clear that once a final winding up order has been passed against a Company and the Official Liquidator has taken charge, the Company Court is not required to come to the aid of guarantors so as to shield them from recovery proceedings initiated by creditors.
A division bench of Justices Anil Kshetarpal and Harish Vaidyanathan Shankar observed,
“The purpose of the Company Court under the Companies Act, 1956, is limited and well-defined. Its jurisdiction is to supervise the winding up of a company, ensure the realisation of its assets, adjudicate claims of creditors, and oversee the distribution of proceeds. The Company Court is not a forum for shielding guarantors from recovery proceedings once the liquidation process has attained finality.”
The observation comes in an appeal preferred by the personal guarantors of the Respondent-company, which was ordered to be wound up. The company's assets, comprising six units, were sold under the supervision of the Official Liquidator.
However, the Appellants contended that the OL delayed disbursement of funds and that this delay caused the banks (company's creditors) to retreat from the settlement and demand payment of Rs. 252.53 Crores.
The bank on the other hand contended that liability of the guarantors is independent of the Company's liquidation and that proceedings against them could be pursued in appropriate forums.
It was also contended that the jurisdiction of Company Court is limited to winding up the Company, realising its assets, settling admitted claims, and distributing the proceeds, and that it cannot intervene to shield guarantors once the winding up process is complete.
Agreeing, the High Court said,
“The liability of guarantors is independent of the Company's liquidation. This principle is well-established in law, as held by the Supreme Court in Lalit Kumar Jain (supra) which states that discharge of the principal borrower does not discharge the liability of personal guarantors. Accordingly, guarantors cannot invoke the jurisdiction of the Company Court to shield themselves from recovery proceedings after the winding up of the company has been completed.”
It however clarified that Appellants are free to pursue remedies available to them in other fora, such as the Debts Recovery Tribunal or Civil Courts, to challenge any action taken by the Bank against them personally.
“However, this Court cannot exercise the Company Court's jurisdiction to protect guarantors once the winding up process has been completed” the Court said and dismissed the plea.
Appearance: Mr. Alok Kumar Aggarwal, Ms. Anushruti, Ms. Anushka Sharma, Ms. Snigdha Rajpal, Ms. Aanavi O., Advs for Appellants; Ms. Ruchi Sindhwani, Sr. Standing Counsel along with Ms. Megha Bharara, Adv. Mr. Yasharth, Adv. for IDBI
Case title: PC Jhalani & Ors v. Jhalani Tools (India) Ltd & Ors
Citation: 2025 LiveLaw (Del) 1352
Case no.: CO. APP. 3/2024