Tribunal Dismisses Appeal, Confirms Guarantor Liability Despite Resignation and Claims of Contract Novation
In a significant judgment, the National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi, has dismissed the appeal filed by Nakul Gupta challenging the initiation of personal insolvency proceedings against him. The proceedings were initiated following the default by Technofab Engineering Limited (TEL), the corporate debtor, on credit facilities availed from a consortium of banks led by State Bank of India (SBI).
The appeal was primarily based on two grounds: first, Gupta’s resignation from the directorship of TEL, which he claimed should discharge him from his personal guarantee obligations, and second, the alleged novation of contract due to variations in terms of credit facilities which should have discharged him from his liability.
The Tribunal, consisting of Justice N Seshasayee and Member (Technical) Arun Baroka, meticulously examined the deed of guarantee dated October 17, 2017, executed by Gupta and others in favor of the consortium of banks. The Tribunal held that the deed was a continuing and irrevocable guarantee, enforceable irrespective of any disputes between the bank and the borrower. The Tribunal emphasized that the resignation of a director does not revoke the guarantee unless a notice of revocation is served as required under Section 130 of the Indian Contract Act, 1872.
Furthermore, the Tribunal rejected Gupta’s argument of novation, noting that the renewal of credit facilities within agreed limits does not constitute novation or variance under Sections 62 and 133 of the Indian Contract Act, 1872. The Tribunal clarified that the renewal of facilities by SBI did not cause any enhancement of the credit limit secured under the deed of guarantee, and thus, did not affect the liability of Gupta.
The Tribunal also referenced judgments from the Supreme Court, including Sita Ram Gupta v. Punjab National Bank and HR Basavraj v. Canara Bank, which uphold the principles of continuing guarantees and the conditions under which they can be revoked.
In conclusion, the Tribunal affirmed the adjudicating authority’s decision to initiate personal insolvency proceedings against Gupta, finding no merit in his appeal. The Tribunal dismissed all related interlocutory applications, with no orders as to costs.
Bottom line:-
A personal guarantor cannot claim discharge from liability under a deed of guarantee on the grounds of resignation from the corporate debtor or variation in terms of credit facilities, unless expressly provided or a notice of revocation as per law is given.
Statutory provision(s): Indian Contract Act, 1872 Sections 62, 129, 130, 133; Insolvency and Bankruptcy Code, 2016 Section 95
