NCLAT upheld the enforceability of the corporate guarantee, ruling that the Resolution Plan does not discharge the guarantor's liability.
The National Company Law Appellate Tribunal (NCLAT), Principal Bench of Justice Ashok Bhushan (Chairperson) and Barun Mitra (Technical Member) was hearing an appeal and held that the approval of a Resolution Plan under the Insolvency and Bankruptcy Code does not automatically discharge a corporate guarantor's liability, which remains enforceable unless explicitly addressed in the Resolution Plan.
In the appeal concerning Ushdev Enfitech Limited, a suspended director challenged the National Company Law Tribunal’s (NCLT) decision to admit ICICI Bank Ltd.'s Section 7 application, which sought the initiation of Corporate Insolvency Resolution Process (CIRP) against Ushdev Enfitech Limited. The backdrop of the case involved ICICI Bank extending credit facilities to Ushdev International Ltd., which were secured by a corporate guarantee from Ushdev Enfitech Ltd. Following defaults and the invocation of the guarantee, ICICI Bank's Section 7 application led to the initiation of CIRP proceedings.
Despite the initiation of CIRP for Ushdev International Ltd., ICICI Bank's Section 7 application against Ushdev Enfitech Ltd. was admitted by the NCLT in April 2023. The appellant contended that the approval of a Resolution Plan for the principal borrower had extinguished the debt and thus rendered the Section 7 application untenable. They argued that under Section 134 of the Indian Contract Act, the corporate guarantee should be considered discharged and that the liability limit specified in the guarantee had not been exceeded.
In contrast, ICICI Bank maintained that the corporate guarantee remained enforceable regardless of the Resolution Plan's approval, asserting that the Adjudicating Authority had misinterpreted the enforceability of excluded securities and that Clause 33 of the guarantee, which limited liability, did not apply since the principal borrower’s debt exceeded the specified threshold.
The NCLAT, upon review, determined that the Resolution Plan did not extinguish the corporate guarantee. Referring to the Supreme Court's ruling in Lalit Kumar Jain v. Union of India and Others, REEDLAW 2021 SC 05510, the Tribunal emphasized that a personal guarantor's liabilities are not automatically discharged by the approval of a Resolution Plan unless explicitly stated. The Tribunal examined the relevant clauses of the Resolution Plan and the Corporate Guarantee and found that the guarantee remained enforceable. The decision was aligned with established judicial precedents that confirm a guarantor’s liability persists unless specifically addressed or legally extinguished.
Ultimately, the Tribunal upheld the appeal, confirming that the corporate guarantee provided by Ushdev Enfitech Ltd. to ICICI Bank remained valid and enforceable despite the Resolution Plan's approval for Ushdev International Ltd., reaffirming the principle that personal guarantees are not automatically discharged under the IBC unless explicitly stated in the plan.
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