Introduction
In a recent ruling in the case of Bhanwar Lal Jajodia v. State Bank of India[i], the Calcutta High Court delved into a significant legal issue concerning the liability of a personal guarantor (‘PG’) in the context of insolvency proceedings. The moot question before the Court was whether the PG’s liability stands extinguished or altered in cases wherein the principal borrower's debt is assigned to a new entity as part of a resolution plan. This case addresses the intricate balance between the rights of creditors, the obligations of guarantors, and the evolving jurisprudence in Indian insolvency law.
Brief Facts
UIC Udyog Limited, the corporate debtor (‘CD’), had secured a loan from the State Bank of India (‘SBI’). Mr. Bhanwar Lal Jajodia (‘Petitioner’), the director of the aforementioned CD, acted as the PG in this case.
In July 2019, SBI issued a show-cause notice to the Petitioner and the CD under the master circular on wilful defaulters[ii] (‘Master Circular’) issued by the Reserve Bank of India (RBI). Subsequently, the CD was admitted into a corporate insolvency resolution process (‘CIRP’) in September 2019 under the Insolvency and Bankruptcy Code, 2016 (‘IBC’).
In March 2020, after reviewing the case, the wilful defaulter identification committee (‘WDI Committee’) declared both the Petitioner and the CD as wilful defaulters (‘WDs’).
Aggrieved by this declaration, the Petitioner approached the High Court and challenged it. He was then given the opportunity to present his case before the review committee (‘RC’).
In December 2022, the RC reaffirmed the WDI Committee's decision to uphold the Petitioner's status as a WD. Subsequently, in April 2021, the National Company Law Tribunal (‘NCLT’) approved a resolution plan (‘Plan’) under which the remaining debt was assigned to a non-banking finance company, DRP Trading and Investment Private Limited (‘NBFC’).
Held
The High Court, while allowing the Petitioner’s writ petition, set aside the decision of the RC, declaring the petitioner to be a WD, thereby directing the removal of the Petitioner’s name from WD’s list and ordering the respondents to reverse any consequential actions taken in such regard.
The High Court judgment was based on the rationale that the Master Circular was not applicable in the Petitioner’s case, considering that the guarantee was executed before 09.09.2014. At the same time, as per the Master Circular, proceedings against PGs could only be initiated for guarantees given on or after 09.09.2014. Thus, considering that the PG in the present case by the Petitioner before this date, declaring the Petitioner as a WD was invalid and, hence, liable to be set aside.
Regarding the issue ‘whether the PG’s liability is extinguished or altered when the principal borrower's debt is assigned to a new entity as part of a resolution plan?’, the High Court clarified that when a debt is assigned to a new entity (in this case, an NBFC), the assignment does not include the liabilities of the PG. Therefore, SBI still has the authority to recover the debt from the PGs. This situation highlighted an issue of dual recovery, where the NBFC and SBI could claim the same debt. The High Court analysed the Plan to resolve the issue and converted the assigned debt into preference shares. As a result, the NBFC no longer retained the right to recover the debt from the CD in cash but instead received shares equivalent to the debt’s value. This conversion meant that the NBFC could not pursue the CD for the same debt the SBI could pursue from the PGs.
Our Analysis
The High Court’s decision provides clarity on the legal principles governing PG liabilities in debt assignments and insolvency proceedings. The Court emphasised that a Plan involving the assignment of debt must explicitly address the status of the PG’s liabilities to avoid ambiguity. This interpretation highlights the distinction between CDs' and PGs' obligations. By maintaining the original financial creditor's (FC) right to recover from the guarantor, the court preserved that a personal guarantee is an independent commitment, irrespective of the RP’s impact on the CD.
End Notes
[i] 2024 SCC OnLine Cal 7320.
[ii] Reserve Bank of India - Notifications (rbi.org.in).
Authored by Shreya Manchanda, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.