Whether subrogation right claimed by personal guarantor is valid under IBC 2016

This NCLAT ruling clarifies that a Resolution Plan approved under the Insolvency and Bankruptcy Code (IBC) 2016 does not automatically discharge the liabilities of personal guarantors. The court found that the promoters, who were also personal guarantors, could not claim discrimination or seek subrogation rights after the approval of the resolution plan. The IBC aims to maximise asset value and balance creditors' interests, and promoters, being related parties, have limited rights during the resolution process.

LALIT MISHRA & ORS (Appellant) vs. SHARON BIOMEDICINE LTD. & ORS. (Respondent)
NCLAT Company Appeal (AT) (Insolvency) No. 164 of 2018

BRIEF FACTS

The Appellants are the promoters of 'Sharon Biomedicine Ltd.'- ('Corporate Debtor'). In the appeal they have challenged the order passed by the National Company Law Tribunal [NCLT], whereby and where under, the 'Resolution Plan' submitted by the 3rd Respondent- 'Successful Resolution Applicant' has been approved.

The Appellants have challenged the order of approval of the 'Resolution Plan' on two counts namely –

(i) The Appellants, promoters were the shareholders and for them no amount has been provided under the 'Resolution Plan'; and
(ii) Some of the Appellants, promoters are also 'personal guarantors' who have been discriminated.

DECISION: APPEAL DISMISSED.

REASON

1. The restructuring of the financial debt as part of the 'Resolution Plan' approved by the Adjudicating Authority under the 'I&B Code' does not envisage complete discharge of the liability of personal guarantors of the 'Corporate Debtor'.

2. This will be evident from Clause 12 of Section 5 of the 'Resolution Plan' which deals with 'treatment of security'. Therein it is mentioned that all securities/ collaterals/ margin money/ fixed deposit with lien provided by the Company shall be deemed to be released immediately on Effective Date.

3. It is subsequently mentioned that the personal guarantee provided by the existing promoters of the Company, shall result in no liability towards the 'Company' or the 'Resolution Applicants'. This 'treatment of security' and with regard to personal guarantee provided by the existing promoters of the Company is alleged to be in violation of Section 140 and Section 133 of the 'Indian Contract Act'.

4. However, the aforesaid submissions cannot be accepted, as on approval of the 'Resolution Plan', the claim of the entire stakeholders stand cleared and the 'Personal Guarantor' thereafter cannot claim that they have been discriminated.

5. All the stakeholders have already been cleared by the 3rd Respondent- 'Successful Resolution Applicant'. It was open to them to say that the personal guarantee will not result into any liability towards the 'Company' or the 'Resolution Applicant'.

6. It was not the intention of the legislature to benefit the 'Personal Guarantors' by excluding exercise of legal remedies available in law by the creditors, to recover legitimate dues by enforcing the personal guarantees, which are independent contracts.

7. It is a settled position of law that the liabilities of guarantors are co-extensive with the borrower.

DECISION

8. This Appellate Tribunal held that the resolution under the 'I&B Code' is not a recovery suit. The object of the 'I&B Code' is, inter alia, maximization of the value of the assets of the 'Corporate Debtor', then to balance all the creditors and make availability of credit and for promotion of entrepreneurship of the 'Corporate Debtor'. While considering the 'Resolution Plan', the creditors focus on resolution of the borrower 'Corporate Debtor', in line with the spirit of the 'I&B Code'.

9. The present appeal has been preferred by the promoters, who are responsible for having contributed to the insolvency of the 'Corporate Debtor'. The 'I&B Code' prohibits the promoters from gaining, directly or indirectly, control of the 'Corporate Debtor', or benefiting from the 'Corporate Insolvency Resolution Process' or its outcome. The 'I&B Code' seeks to protect creditors of the 'Corporate Debtor' by preventing promoters from rewarding themselves at the expense of creditors and undermining the insolvency processes.

10. For the aforesaid reasons, it will be evident from the 'I&B Code' that the powers of the promoters as the members of the Board of Directors of the 'Corporate Debtor' are suspended. The voting right of the shareholders, including promoter shareholders, are suspended and shareholders' approval is deemed to have been granted for implementation of the 'Resolution Plan' as apparent from explanation to Section 30(2)(f) of the 'I&B Code'.

11. The promoters, being 'related parties' of the 'Corporate Debtor', have no right of representation, participation or voting in a meeting of the 'Committee of Creditors'.

12. Admittedly, the shareholders and promoters are not the creditors and thereby the 'Resolution Plan' cannot balance the maximization of the value of the assets of the 'Corporate Debtor' at par with the 'Financial Creditors' or 'Operational Creditors' or 'Secured Creditors' or 'Unsecured Creditors'. They are also ineligible to submit the 'Resolution Plan' to again control or takeover the management of the 'Corporate Debtor'.

13. In the aforesaid background, if no amount is given to the promoters/ shareholders and the other equity shareholders who are not the promoters have been separately related by providing certain amount in their favour, the Appellant cannot claim to have been discriminated.

CONCLUSION

It well-settled practice in case of CIRP, the management of Corporate Debtor has been transferred from Promoters and Shareholders to Committee of Creditors and the IP. Promoters being related party to the Corporate Debtor have no right of representation, participation or voting in a meeting of COC. The promoters are also not eligible to participate in the Resolution Plan to again gain control of the Corporate Debtor.

DISCLAIMER: The case law presented here is only for sharing information and knowledge with the readers. The views are personal. In case of necessity do consult with professionals.