Resignation From Directorship Does Not Discharge Personal Guarantor From Liability Under Continuing Guarantee: NCLAT

The National Company Law Appellate Tribunal (NCLAT) New Delhi held that once a personal guarantee is executed, the resignation from the directorship does not discharge the guarantor from liability, particularly when the guarantee is a continuing one, unless it has been expressly revoked. A bench of Justice Ashok Bhushan and Mr. Barun Mitra (Technical Member) held that “we are therefore of the considered view that the Adjudicating Authority has rightly concluded that simply because the Appellant had resigned from the Directorship of the Corporate Debtor, this cannot be sufficient ground leading to revocation of his personal guarantee or discharge from his surety obligations arising out of the Deed of Guarantee of 2009 which was a continuing guarantee.” Background: The appeal arose out of an order passed by National Company Law Tribunal (NCLT) New Delhi by which it had admitted a petition under section 95 of the Insolvency and Bankruptcy Code, 2016 (IBC) filed by State Bank of India against Subhash Aggarwal, personal guarantor to M/s J.V. Strips Ltd. Aggarwal had executed a personal guarantee of ₹3.84 crore out of a total sanctioned limit of ₹41.25 crore. The guarantee was subsequently enhanced and revised multiple times until 2018. The account of the corporate debtor was classified as Non-Performing Assets (NPAs) in 2018. The Appellant argued that he had resigned from the company in 2012 and that subsequent renewals and deeds of guarantee executed in 2014 and thereafter were forged and fabricated. Despite these allegations, the petition under section 95 of the IBC was admitted by the NCLT. Aggrieved, the Aggarwal had filed an appeal before the NCLAT. The Appellant submitted that the deed of guarantee executed in 2009 was not continuing and was never invoked, therefore no liability existed. It was further contended that the guarantee ceased to have effect after resignation and therefore any variation or alteration thereafter discharged from the liability under sections 62 and 133 of the Indian Contract Act. It was further argued that the 2014 guarantee was a forged document as it had been executed without his consent. It was also argued that the petition was time barred as it was filed in 2022 whereas the account was classified as NPA in 2018. Lastly, it was submitted that the RP illegally filed multiple reports thereby violating the ten day limit prescribed under section 99 of the IBC. Per contra, SBI submitted that the 2009 deed of guarantee was a continuing and irrevocable under section 129 of the Contract Act. It was further submitted that resignation of director from his position does not terminate a personal guarantee unless expressly revoked under section 130 of the Contract Act. It was also argued that clause 14 of the 2009 deed permitted variations in the credit limits without affecting the surety's liability. Lastly, it was submitted that the application was within limitation as it had been filed within 3 years from the date of default following the loan recall notice. Findings: The Tribunal observed that the 2009 guarantee was a continuing and irrevocable in nature and expressly extended to any variations in the loan account. It observed that “that the Deed of Guarantee of 2009 was a 'continuing' guarantee which was 'irrevocable' in nature is evident from a plain reading of Clauses 8 and 11 of the Guarantee Deed. Further, Clause 14 amply makes it clear that the terms of the Guarantee Deed of 2009 provided scope for subsequent variations.” The Tribunal rejected the selective reading of the guarantee's clauses holding that “We are therefore not inclined to agree with the skewed and selective reading of the clauses by the Appellant that Clause 8 of the 2009 Guarantee Deed limited the continuance of the guarantee only to the amount mentioned in Clause 1.” Relying on Sitamran Gupta, the Tribunal held that once a guarantee is executed, it cannot subsequently be revoked by resignation or cessation of role. Quoting from Sitaram Gupta, it observed that “Having entered into the agreement in the manner indicated above, it was, therefore, not open to the appellant to turn around and say that in view of Section 130 of the Act, since the guarantee was revoked before the loan was advanced, he was not liable to pay the decretal amount as a guarantor.” Applying the ratio of the above judgment to the present case, the Tribunal held that all guarantees executed after the 2009 guarantee were supplemental in nature and would not change the legal status of a personal guarantor nor extinguish his liability. It held that “the Appellant cannot be seen to reason out that he was not bound by the transactions emanating out of the Guarantee Deed of 2009 as this deed was of a continuing nature and would remain operational even for subsequent transactions. All guarantees after the Guarantee Deed of 2009 were supplemental ...

Resignation From Directorship Does Not Discharge Personal Guarantor From Liability Under Continuing Guarantee: NCLAT

Mohd Malik Chauhan

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Resignation From Directorship Does Not Discharge Personal Guarantor From Liability Under Continuing Guarantee: NCLAT

Mohd Malik Chauhan

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