The Impact of Resolution Plans on Personal Guarantors: A NCLAT Perspective
An Examination of the NCLAT’s Stance on Personal Guarantors in Resolution Plans
The National Company Law Appellate Tribunal (NCLAT), in a recent judgment, has clarified the position of personal guarantors in the context of resolution plans. The case in question, presided over by Mr. Justice Ashok Bhushan (Chairperson), Mr. Barun Mitra (Technical Member), and Mr. Arun Baroka (Technical Member), has significant implications for personal guarantors and their liabilities.
The Case: Roshan Lal Mittal and Ors v. Rishabh Jain and Ors
The Hon’ble NCLAT held that the Resolution Plan does not absolve the personal guarantors from their guarantee. This aligns with the law well settled by the Hon’ble Supreme Court in the matter of Lalit Kumar Jain vs. Union of India & Ors., that by approval of a resolution plan, the guarantees are not ipso facto discharged.
Implications of the Judgment on personal guarantors
The resolution applicant has taken liability of only one crore, leaving the other liabilities of the financial backers undischarged. This means that even after the approval of a resolution plan, collateral providers are still liable for their guarantees. This judgment reaffirms the principle that a resolution plan does not automatically absolve personal guarantors of their obligations.
Additional Insights from Other Cases
In another case, SVA Family Welfare Trust & Anr v. Ujaas Energy Limited & Ors1, the NCLAT held that a resolution plan can contain a clause which extinguishes security interest, such as financial backers, after paying compensation to the financial creditor in whose favor such security interest was created1.
In yet another case, the NCLAT considered the converse issue—can a resolution plan provide for the release of financial backers, when the personal guarantor has not been subject to the insolvency resolution process2. The NCLAT held that it was well within the commercial wisdom of the committee of creditors to approve a plan that provided for the release of financial backers2.