No Ipso Facto Absolvement Of Guarantor’s Liability Upon Approval Of Resolution Plan: Allahabad High Court

Background Facts

M/s Trimurti Concast Pvt. Ltd. (“Corporate Debtor”) was admitted into Corporate Insolvency Resolution Process (“CIRP”) by the Adjudicating Authority (NCLT). Paschimanchal Vidyut Vitran Nigam Ltd. (“PVVNL”) being a creditor of the Corporate Debtor filed an application before NCLT claiming payment of its electricity dues. On 22.3.2022, the NCLT approved a resolution plan for the Corporate Debtor in which PVVNL was recognized as an Operational Creditor and Rs. 6,62,848/- was proposed to be paid against the dues of Rs. 9 Crore.

On 30.06.2022, the electricity connection of the Corporate Debtor was permanently disconnected. PVVNL issued a demand notice dated 30.06.2022 to the Corporate Debtor and its directors namely Mr. Narendra Singh Panwar (“Petitioner”) and Mr. Sri Ashok Sharma for recovery of electricity dues. Mr. Narendra Singh Panwar challenged the demand notice before the High Court.

Contentions Of Petitioner

The Director of the Corporate Debtor contended that the approved Resolution Plan was binding the Corporate Debtor and all Stakeholders. As the NCLT had already recognized PVVNL as Operational creditor for settlement of its claim, all claims against the Corporate Debtor stood extinguished. The approval of the resolution plan in the insolvency proceeding against the Corporate debtor/Defaulter Company, would ipso facto discharge the Directors of the defaulter Company.

Further, during the pendency of the writ petition liquidation order was passed against the Corporate Debtor. It was submitted that once the affairs of the Corporate debtor have been wound up and its assets liquidated, the Petitioner no more remains the Director of the Corporate Debtor. Hence, no recovery can be made from the ex-Directors of a company which has ceased to be in existence.

Contentions Of Respondent

PVVNL argued that Clause 4.3(f) and Clause 6.15 of the Electricity Supply Code, 2005 empowered the electricity department to issue recovery proceeding against the Directors of the Defaulting Company/Corporate Debtor. Further, Mr. Ashok Sharma (Director) had undertaken on affidavit while availing electricity connection that he would be always ready and bound to deposit the dues of the Corporate Debtor, upon the orders of Executive Engineer, U.P Power Corporation Ltd. By giving the said undertaking, the Director became personal guarantor of the Corporate Debtor and thus liable to pay the dues.

High Court Verdict

The Bench placed reliance on the Supreme Court judgment in Lalit Kumar Jain v Union of India and Ors., (2021) 9 SCC 321, wherein it has been held that:

“125. In view of the above discussion, it is held that approval of a resolution plan does not ipso facto discharge a personal guarantor (of a corporate debtor) of her or his liabilities under the contract of guarantee. As held by this court, the release or discharge of a principal borrower from the debt owed by it to its creditor, by an involuntary process, i.e. by operation of law, or due to liquidation or insolvency proceeding, does not absolve the surety/guarantor of his or her liability, which arises out of an independent contract.”

The Bench held that the approval of a resolution plan does not ipso facto absolve the surety/guarantor of his or her liability, which arises out of an independent contract of guarantee. To what extent, the liability of a guarantor can be pressed into service would depend on the terms of the guarantee/contract itself.

The Bench further noted that the question as to what extent Mr. Ashok’s affidavit would operate as personal guarantee against him is neither been pressed nor required to be answered by the Court. The petition was dismissed.

Case Title: Narendra Singh Panwar v Pashchimanchal Vidyut Vitran Nigam Limited & Ors.

Citation: 2023 LiveLaw (AB) 15

Case No.: WRIT - C No. - 26355 of 2022

Counsel for Petitioner: Ashish Kumar Singh,Ajay Kumar Singh.

Counsel for Respondent: C.S.C.,Kartikeya Saran and Pranjal Mehrotra.

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