Personal Guarantor’s Liability Not Automatically Discharged in Insolvency Resolution Plans, Rules Delhi High Court

In a groundbreaking ruling, the High Court has clarified that the liability of a personal guarantor is not automatically discharged upon the approval of an insolvency resolution plan for the corporate debtor. The judgment comes in the case of a petitioner who sought to challenge a debt recovery notice issued by a financial institution under the Insolvency and Bankruptcy Code, 2016 (IBC).

The court's decision was based on the Interpretation of the principle established in the case of Hutchens v. State Bank of Kansas, which dealt with the discharge of a personal guarantor when the principal debtor’s debt was discharged. The court observed that the Hutchens principle needed to be considered in the relevant context and clarified that its applicability was not absolute.

The applicability of Hutchens must be examined in light of the specific terms and conditions of the resolution plan,” the court asserted. It further explained that the mere approval of the resolution plan does not necessarily release the personal guarantor from their liabilities.

The petitioner, who was a personal guarantor for the corporate debtor, contended that the financial institution was barred from seeking debt recovery as the liability of the principal debtor had been discharged through a resolution plan. However, the court noted that the petitioner’s claim was not solely based on the approval of the resolution plan, but on the legal effect of the plan’s terms, which allegedly prevented the institution from enforcing the guarantee.

One of the crucial points considered by the court was the presence of a reservation of rights clause in the Resolution Plan and Assignment Agreement. The clause sought to preserve the creditor’s right to proceed against the surety even after the approval of the resolution plan. The court emphasized that the presence of such a clause does not necessarily alter the applicability of the Hutchens principle or determine the jurisdiction of the financial institution in debt recovery proceedings.

“The right of the guarantor to be heard at a belated stage has been provided by the legislature,” the court stated, affirming the need for the petitioner to present their case before the National Company Law Tribunal (NCLT).

The High Court ultimately dismissed the writ petition and allowed the NCLT to adjudicate the matter on its merits. It also clarified that all observations made were prima facie and would be subject to the decision of the competent court/tribunal.

 Date of Decision: 21 July 2023

 VINEET SARAF  vs RURAL ELECTRIFICATION CORPORATION LTD.