NCLAT Delhi: After Approval Of Resolution Plan, Personal and Corporate Guarantors Have No Right Of Subrogation.

NCLAT Delhi: After Approval Of Resolution Plan, Personal and Corporate Guarantors Have No Right Of Subrogation.

The National Company Law Appellate Tribunal ('NCLAT') Delhi, comprising of Justice Ashok Bhushan (Chairperson) and Mr. Barun Mitra (Technical Member), has ruled that personal guarantors and corporate guarantors lack the right of subrogation following the approval of a resolution plan under the Insolvency and Bankruptcy Code, 2016 (IBC).

On February 7, 2003, the Yamuna Expressway Industrial Development Authority and Jaiprakash Associates Limited (JAL) entered into a concession agreement. Under this agreement, JAL was granted a concession to develop the expressway, entitling them to collect toll charges for 36 years and develop 6177 acres at the actual compensation cost. Subsequently, Jaypee Infratech Ltd. (corporate debtor) assumed all the rights and obligations outlined in the agreement.

The consortium of banks financed the project. The Corporate Insolvency Resolution Process (CIRP) initiated by IDBI Bank against the corporate debtor was reinstated by the Supreme Court. Subsequently, resolution plans proposed by Suraksha Realty and NBCC were endorsed by the Committee of Creditors (CoC) and approved by NCLT New Delhi on March 7, 2023.

JAL and Manoj Gaur (Appellants), former Managing Director and personal guarantor of the corporate debtor's loan, have filed appeals against the Order of NCLT New Delhi that sanctioned the resolution plans in the CIRP of the corporate debtor.

The NCLAT Delhi rejected the appeals, affirming that personal guarantors and corporate guarantors are not entitled to subrogation rights once a resolution plan is approved under the IBC.

The Appellate Tribunal dismissed the objection regarding the appellants' standing to challenge the NCLT Delhi's order and determined that the appeals cannot be dismissed solely based on standing. It asserted that the sole permissible ground to contest the approval of the resolution plan is if it fails to adhere to Section 30(2) of the IBC.

Drawing upon Section 140 of the Indian Contract Act, 1872 (ICA), it was noted that the provision aims to preserve securities, benefits, and any creditor's rights, even if discharged by payment or fulfilment of obligations. In the current scenario, both the corporate guarantor and personal guarantor step into the position of the principal creditor by settling the dues. Consequently, Section 140 of the ICA becomes inapplicable. Moreover, there has been a discharge of the debt owed by the principal borrower under the Resolution Plan.

The NCLAT emphasized that the Supreme Court, in Lalit Kumar Jain v. Union of India (2021), highlighted that the approval of a resolution plan and the finality it imparts do not automatically discharge the liability of the guarantor. Additionally, post-approval, the resolution plan becomes binding on the corporate debtor, its employees, members, and creditors, including its directors and guarantors, in accordance with Section 31(1) of the IBC.

It also cited the Supreme Court's ruling in Essar Steel India Ltd. Committee of Creditors v. Satish Kumar Gupta (2019), which addressed the matter under the heading "Extinguishment of Personal Guarantees and Undecided Claims."

Taking into account the aforementioned references, the NCLAT observed that the Guarantors cannot argue against being bound by Clause 34.50 of the Resolution Plan, particularly when the statute dictates that the Resolution Plan is binding on the Guarantors as well, thereby explicitly extinguishing the right of subrogation. It was noted that while the debt of the corporate debtor may have been extinguished upon the approval of the resolution plan, the same does not automatically extend to the corporate guarantors and personal guarantors. The extinguishment shall only occur in accordance with the provisions stipulated in the resolution plan.

In conclusion, the NCLAT rejected the appellants' argument, asserting that their debt is extinguished under Section 135 of the Indian Contract Act (ICA), along with their right of subrogation under Section 140 of the ICA and entitlement to the provisions of securities under Section 141 of the ICA.