Settlement Between Debtor and Creditor Doesn't Release Personal Guarantor From Liability: NCLAT

The National Company Law Appellate Tribunal (NCLAT) at New Delhi has recently held that a personal guarantor remains liable under a continuing guarantee even if the principal debtor enters into a mediated settlement with the financial creditor, unless the creditor expressly releases the guarantor. It also held that part-payments made by the principal debtor extend the limitation period for proceedings against the guarantor.

A bench of Judicial Member Justice N Seshasayee and Technical Members Arun Baroka and Indevar Pandey made these observations while dismissing the appeal of Upkar Kaur, the personal guarantor to Jagtar Singh & Sons Hydraulics Pvt. Ltd.

The appellate tribunal found that “the guarantee executed by the Appellant was never extinguished, substituted, or discharged. The settlement of 2019 did not cancel the old contract, nor did it release the guarantor. Instead, the breach of the settlement caused the full liability to revive.”

It further held that “an acknowledgment or part-payment by the principal debtor extends limitation against the guarantor also, unless the guarantee has been expressly revoked or the creditor has agreed to treat the guarantor differently.”

The case arose from two loans granted by Intec Capital Limited to the company, a first loan of Rs 3.18 crore sanctioned in March 2013, for which Kaur signed a personal guarantee, and a second loan of Rs 41.32 lakh sanctioned in May 2016 to regularise the earlier facility. After a recall notice in July 2017 and an arbitration award in August 2018, CIRP was admitted in September 2019.

During the appeal, the promoters of the company and Intec Capital entered into a mediated settlement on December 2, 2019 before fomer SC judge Justice (Retd.) AK Sikri, which the NCLAT recorded as binding. The settlement fixed reduced amounts payable for both loans, and the company issued post-dated cheques. Several payments were made in 2020 and 2021, but repayments stopped after April 29, 2021.

Pursuant to the settlement terms, the financial creditor revived CIRP before the NCLT, which was allowed on November 23, 2021. A demand notice was then issued to Kaur in January 2022, followed by the Section 95 application in May 2022.

Kaur argued that the Section 95 application was time-barred because limitation should run from the 2017 recall notice. She also argued that the 2019 settlement constituted a new contract under Section 62 of the Contract Act, under which only the promoters who had given personal undertakings were liable. She submitted that her guarantee applied only to the first loan, that she was not guarantor for the 2016 loan, that misaddressed notices invalidated proceedings, and that the original guarantee stood revoked once the settlement introduced new guarantors.

The tribunal rejected these contentions. On limitation, it held that the debt did not end in 2017 because the corporate debtor continued to deal with the creditor even after 2017, including entering into a settlement in December 2019 before the tribunal and making part-payments in 2020 and 2021. It held that part-payments on September 11, 2020 and April 29, 2021 were acknowledgements extending limitation.

It also relied on the recorded settlement and the revival of CIRP to conclude that “that the debt was still subsisting and that the breach of settlement had reopened the underlying liability,” adding that this directly contradicts the argument that the debt had become time-barred long ago.

On the guarantee, the tribunal noted that the deed made Kaur's liability unconditional, continuing and unaffected by any changes in the loan terms. It recorded that the guarantee was intended to stay in force until all dues were cleared, that variations or concessions granted to the borrower did not release the guarantor, and that the guarantee would end only if the creditor formally discharged her.

The tribunal found that the 2019 settlement did not replace or cancel the original loan but merely offered a revised payment schedule. Since the settlement itself stated that a default would revive the entire unpaid amount, the tribunal held that the original loan obligations and the guarantee continued to operate.

Addressing the argument that the promoters' personal undertakings replaced her guarantee, the tribunal held that “when two individuals give a personal undertaking, it does not mean the earlier guarantor has been released” and that only the creditor could release a guarantor.

No such release had ever been given. It emphasised that the revival of CIRP following breach of the settlement showed that the debtor's liability had revived and therefore “the guarantor necessarily remained liable as well, because the guarantor's liability is co-extensive with that of the debtor.”

The appeal was dismissed.