Personal Guarantee Under IBC: Does a Resolution Plan Release the Guarantor?

Most lending to Indian companies of moderate size is supported by a personal guarantee from a promoter or director. When the company is admitted into insolvency and a resolution plan is approved for a fraction of the debt, the guarantor’s natural expectation is that the guarantee falls away with the debt. The law governing personal guarantees under the IBC has consistently held otherwise, and the Insolvency and Bankruptcy Code (Amendment) Act, 2026 has now put much of that position into the statute.

The Starting Point: an Independent Contract

Section 128 of the Indian Contract Act, 1872 makes the liability of the surety co-extensive with that of the principal debtor, unless the contract provides otherwise. Sections 133 to 139 set out how a surety may be discharged — by a variance in the terms of the contract, by a contract releasing the principal debtor, by a composition or an agreement not to sue, by the creditor’s act impairing the surety’s eventual remedy. What runs through them is the idea of an act of the creditor.

An insolvency resolution is not such an act. In Lalit Kumar Jain v. Union of India (Supreme Court, 21 May 2021), the Court held that the approval of a resolution plan does not by itself operate as a discharge of the guarantor. The position on a personal guarantee under IBC, as restated by the Supreme Court in later decisions, is that “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”.

BRS Ventures: the Principle Works Both Ways

In BRS Ventures Investments Ltd. v. SREI Infrastructure Finance Ltd. & Anr., 2024 INSC 548 (Civil Appeal No. 4565 of 2021, decided on 23 July 2024), a Bench of Abhay S. Oka and Pankaj Mithal, JJ., applied the same logic in the mirror situation — a plan approved in the insolvency of the guarantor.

The Court held that where a resolution plan is approved in the corporate insolvency resolution process (“CIRP”) of the surety, the surety obtains a discharge by operation of law through an involuntary process, and that this does not discharge the principal borrower. It summarised its conclusions as follows: payment of ₹38.87 crore to the financial creditor under the corporate guarantor’s plan did not extinguish the principal borrower’s liability for the balance; a holding company is not the owner of its subsidiary’s assets, so those assets cannot be included in the holding company’s resolution plan; and a financial creditor may file separate applications under Section 7 against the corporate debtor and the corporate guarantor, including simultaneously.

The Court also clarified subrogation. Under Section 140 of the Contract Act, a surety is invested with the creditor’s rights “upon payment or performance of all that he is liable for”. Where the surety pays only part, “the equitable right the surety gets under Section 140 will be confined to the debt he cleared”, and the creditor’s right to recover the balance from the principal debtor is not extinguished.

When a Plan can Extinguish a Guarantee

There is an important qualification. A plan may deal with a guarantee expressly. In SVA Family Welfare Trust & Anr. v. Ujaas Energy Ltd. & Ors., Company Appeal (AT) (Insolvency) No. 266 of 2023, decided on 21 August 2023, the NCLAT held that a resolution plan may contain a clause extinguishing security interests, including personal guarantees, where the committee of creditors (“CoC”) has consciously considered and approved that clause with the requisite majority and the plan allocates consideration for it.

The distinction is therefore between two things that are often confused:

• Automatic discharge, which does not follow from approval of a plan; and
• Negotiated extinguishment, which is a commercial decision of the CoC, must be deliberate, must be reflected in the plan’s value allocation, and is then part of the plan that binds all stakeholders under Section 31(1).

What Changed on 26 May 2026

The Insolvency and Bankruptcy Code (Amendment) Act, 2026 (Act 6 of 2026) codified the case law and adjusted the procedural framework.

Section 31(6) and its Explanations. The new sub-section provides that, unless the plan provides otherwise, claims prior to approval stand extinguished and no proceedings, including assessment proceedings, may be continued or instituted in respect of them.

• Explanation I states that this does not affect the liability of promoters, guarantors or joint obligors — the Lalit Kumar Jain principle, now in the statute.
• Explanation II provides that the indemnity or subrogation rights of a joint obligor who pays after approval of the plan stand extinguished. A guarantor who pays the creditor after the plan is approved therefore has no recourse against the resolved company. This is a significant shift in the economics of guarantees: the guarantor bears the loss, and the resolved company emerges clean.
• Explanation III deems sub-sections (5) and (6) to apply to plans approved since the Code commenced in 2016, except matters that have attained finality — the Ghanashyam Mishra clean-slate principle, given retrospective statutory form.

Section 96(4). In Part III, there is now no interim moratorium where the application concerns a personal guarantor to a corporate debtor. Section 124(4) makes the corresponding change in bankruptcy. The practical effect is that the filing of an application against a personal guarantor no longer automatically stays proceedings against that individual.

Section 14 Explanation. On the other side, the moratorium in the corporate debtor’s CIRP now expressly applies where a surety seeks to initiate or continue action against the corporate debtor under a contract of guarantee — the guarantor cannot use the company’s insolvency to press its own claim over.

Section 28A. A creditor that has taken possession of a guarantor’s asset by enforcing its security may transfer that asset during the CIRP as part of the resolution, with approval of sixty-six per cent of the corporate guarantor’s CoC where the guarantor is itself in process, or of more than three-fourths in value of the personal guarantor’s creditors.

The Supreme Court has separately upheld the constitutional validity of the provisions in Sections 96 to 100 governing the examination of applications against personal guarantors in Dilip B. Jiwrajka v. Union of India.

Practical Implications

For guarantors. The guarantee is a separate promise, and it survives the company’s resolution unless the plan deliberately deals with it. After 26 May 2026, a guarantor who pays following approval of a plan has no subrogation or indemnity claim against the resolved company. Any expectation of relief should be negotiated into the plan while the CoC is deciding, not asserted afterwards.

For lenders. Proceedings against the corporate debtor and the guarantor may run in parallel, subject to the rule against double recovery of the same debt from the same estate. A lender that accepts a plan value extinguishing a guarantee should ensure the consideration for it is identified in the plan.

For committees of creditors and resolution applicants. If a plan is to release guarantees, it must say so and the release must be priced. Silence will not produce a release, and a release that the CoC did not consciously consider is vulnerable.

For all parties. The transitional Explanations matter. Whether a CIRP had reached CoC approval, a liquidation order or an intimation of liquidation before 26 May 2026 determines which set of rules governs several of these questions.

Legal Information Disclaimer

This article provides general information about Indian law as it stood on 16 September 2026. It is not legal advice, and reading it does not create an advocate–client relationship. Statutes, rules and judicial interpretations change, and their application depends on the facts of each matter. Readers should consult the current official text of the laws and judgments cited and should not act on this information without advice specific to their circumstances. This article is published for legal awareness and education and is not intended to advertise or solicit professional work.

Sources / Authorities

1. BRS Ventures Investments Ltd. v. SREI Infrastructure Finance Ltd. & Anr., 2024 INSC 548, Civil Appeal No. 4565 of 2021, Supreme Court of India, 23 July 2024 — judgment PDF (IBBI)
2. Lalit Kumar Jain v. Union of India, Supreme Court of India, 21 May 2021 — Indian Kanoon
3. SVA Family Welfare Trust & Anr. v. Ujaas Energy Ltd. & Ors., Company Appeal (AT) (Insolvency) No. 266 of 2023, NCLAT, New Delhi, 21 August 2023 — Indian Kanoon
4. Insolvency and Bankruptcy Code, 2016 — Sections 7, 14, 28A, 31, 60, 96, 124 (as amended) — IBBI – Legal Framework
5. Insolvency and Bankruptcy Code (Amendment) Act, 2026 (No. 6 of 2026) — Gazette text (IBBI); Notification S.O. 2625(E) dated 22 May 2026 — IBBI
6. Indian Contract Act, 1872 — Sections 128, 133–139, 140
7. Ghanashyam Mishra and Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Co. Ltd., (2021) 9 SCC 657; Dilip B. Jiwrajka v. Union of India, Supreme Court of India