IBC Not A Tool To Erase Third-Party Liabilities, NCLT Jaipur Rejects Resolution Plan for Goenka Diamonds

The National Company Law Tribunal (NCLT) at Jaipur recently observed that the resolution process cannot be used to extinguish liabilities or securities of third parties who have no connection with the corporate debtor. The tribunal rejected the resolution plan submitted for Goenka Diamond and Jewels Limited and ordered liquidation of the company.

A bench of Judicial Member Reeta Kohli and Technical Member Kavita Bhatnagar said the plan attempted to discharge independent guarantees and security deeds that were not tied to Goenka Jewels.

The coram noted that “Personal Guarantee Contract and the Security Deeds by themselves constitute an independent contract between the Guarantor/Surety and the Financial Institutions. The liability envisaged under such contracts are independent in themselves as the contract of guarantee is an independent contract. Moreover, permitting the SRAS to extinguish the liabilities of parties unrelated to the Corporate Debtor will be in gross violation of the basic objectives of the Code which is meant for resolution of Corporate Debtor and the basic tenets of contract law”.

The CIRP against Goenka Jewels began on 9 December 2022 on an application filed by Union Bank of India. The Successful Resolution Applicant, Navneet Nandlal Goenka, submitted his final plan on February 15, 2024 proposing a resolution of Rs 50.71 Crore. The Committee of Creditors approved it on March 12, 2024 with 86.56 percent votes, after which Resolution Professional Sourabh Malpani sought the tribunal's approval.

Union Bank of India objected to the plan because it sought to discharge liabilities of personal guarantors and other third parties whose assets secured the bank's loans. The bank also said that no valuation of these securities was carried out.

Malpani argued that the plan complied with the Code and had the approval of a significant majority of the CoC. He said the tribunal could not interfere with the commercial wisdom of the lenders.

The tribunal held that CoC approval could not validate a plan that violated statutory requirements. It said the plan had been approved without examining feasibility, viability, source of funds or the impact of extinguishing third-party securities.

It recorded that “the Resolution Plan is rejected being in violation of Section 30(2), Section 32A of the Code and Regulation 38 of CIRP Regulations 2016 and also being against the mandate and spirit of Code as the Resolution Plan envisages extinguishment of securities of unrelated parties at the expense of public financial institutions”.

It also said that “The code was never intended to be a tool in the arsenal of the suspended management for discharging or extinguishing the liabilities of persons who do not have any relation to the operation Corporate Debtor and that too at the expense of public sector banks. Furthermore, permitting SRAs to extinguish and revoke guarantees provided by individuals who are neither directors nor key”.

The tribunal ordered liquidation of Goenka Jewels and appointed Vijendra Bangar as the Liquidator. He was directed to issue a public announcement and serve copies of the order on government authorities.