Discharge Of Liability Of The Principal Burrower Or Guarantor Does Not Automatically Discharge The Other In A Contract Of Guarantee: NCLT Chandigarh

The National Company Law Tribunal, Chandigarh Bench, comprising of Shri Harnam Singh Thakur (Judicial Member) and Shri Subrata Kumar Dash (Technical Member), while adjudicating a petition under Section 7 of Insolvency and Bankruptcy Code, 2016 (“IBC”) in Jammu Kashmir Bank Limited vs Ace Engineering (India) Pvt Ltd. has held that even if, either the principal borrower or guarantor has been discharged then the other party would not stand discharged automatically till the liability is met out or discharged. Background Facts Ace Engineering (India) Pvt. Ltd (“Corporate Debtor”) availed credit loan facilities with cash credit limit of Rs. 9 crores and bank guarantee facility of Rs. 5 crores from the Jammu and Kashmir Bank Limited (“Financial Creditor”) in 2012. The Loan Agreement and other security documents were executed between the parties. In 2015, the Corporate Debtor was granted a one-time Secured Overdraft Facility (“SOD”) of Rs. 4 crores for completion of an order worth 16.14 crores for a period of 6 months or till the completion of the supply order (whichever was earlier) at an effective rate of 13% p.a. with monthly rests or such other rate of interest prescribed by the Financial Creditor from time to time. However, The Financial Creditor did not receive payments from the Corporate Debtor. The Credit Facility Account of the Corporate Debtor became irregular and was thus declared as a Non-Performing Asset on 31.03.2016. The recall notice was sent by the Financial Creditor on 10.04.2017. However, it was contended by the Corporate Debtor that there was no financial debt due as the Financial Creditor had already received the payment in lieu of full and final settlement of accounts and had issued release letters in favour of the guarantors. The Corporate Debtor and guarantors entered into an Agreement to Sell dated 20.04.2015 and a Power of Attorney dated 20.04.2016 whereby the director of the non-applicant company agreed to transfer the property to guarantors in consideration of repayment of entire loan liability due towards the Financial Creditor. Notice was received under Section 13 of the SARFAESI Act and an agreement was executed between the parties, following which the guarantors requested the Financial Creditor to release the property. This was accepted by the Financial Creditor and a letter dated 15.06.2017 was issued by the Financial Creditor, absolving the guarantors of their loan liability subject to full and final payment of 10 crores. It was submitted that 11 crores were paid in view of the settlement in terms of the letter by the Financial Creditor. Further the bank issued a possession notice on 18.08.2017 and after payment of the entire amount of more than 11.30 crores on 05.01.2018; the Financial Creditor issued a partial release letter on the same day. Hence the liability of the borrower and guarantors is joint & several/ Coextensive and the settlement is binding on all parties. The Financial Creditor countered the submissions of the Corporate Debtor in the Rejoinder by stating that although part-payments have been made by the Corporate Debtor which have been duly reflected in the accounts of the Financial Creditor, the Corporate Debtor is still liable for an outstanding amount of 10.90 crores as on 30.06.2019. It submitted that the agreement of the Financial Creditor with the Corporate Debtor is a separate legal contract and deed of guarantee executed by guarantors can be enforced without having anything to do with the guarantor. It was further submitted that the letter dated 05.01.2018 does not absolve the Corporate Debtor from paying its entire dues as it states that the remaining outstanding amount shall remain recoverable from the Corporate Debtor. Observations of the Tribunal The Tribunal relying on the judgment of the Hon’ble Supreme Court in Lalit Kumar Jain vs UOI & Ors observed that the contract with the principal borrower and the contract with the surety/guarantor stand on a completely different footing under the provisions of the Indian Contract Act, 1872. It was further observed that even though a civil suit has been filed between the parties, it would not affect the Corporate Insolvency Resolution Process (“CIRP”) in view of the Decision of the NCLAT in Harkirat S. Bedi vs Oriental Bank of Commerce, Company Appeal (AT) (Ins) No. 499 of 2019 and Karan Goel vs. M/s. Pashupati Jwellers & Anr-Company Appeal (AT) (Insolvency) No. 1021 of 2019. The Tribunal further held that the liability of the principal borrower and guarantor is joint and several in a contract of guarantee. Hence even if either of them has been discharged, the other party doesn’t stand automatically discharged till the liability is met out or discharged. The Tribunal observed that in light of all the documents placed before it, it was evident from the record that an amount of 10.11 crores was outstanding with further...

Discharge Of Liability Of The Principal Burrower Or Guarantor Does Not Automatically Discharge The Other In A Contract Of Guarantee: NCLT Chandigarh

Udai Yashvir Singh

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Udai Yashvir Singh

Discharge Of Liability Of The Principal Burrower Or Guarantor Does Not Automatically Discharge The Other In A Contract Of Guarantee: NCLT Chandigarh

Udai Yashvir Singh

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