DRT UPDATE | LIABILITY OF PERSONAL GUARANTORS UPON ASSIGNMENT OF DEBT OF PRINCIPAL BORROWER
The Debt Recovery Tribunal, Ahmedabad (DRT), vide an
dated 11 March 2022 in the recent case of State Bank of India (SBI) v Mr
Prashant Ruia held that after the resolution process under Insolvency and
Bankruptcy Code, 2016 (IBC), proceedings for recovery of the debt
against a personal guarantor cannot be initiated. This update briefly
analyses this DRT case.
The Applicants, being SBI and others, in the capacity of secured financial creditors, filed an application before the DRT to initiate recovery proceedings against Mr Prashant Ruia and Ors (Personal Guarantors) for recovery of the dues of Essar Steel India Limited (Essar) .
Under the insolvency proceedings which were initiated against Essar under IBC before the National Company Law Tribunal, Ahmedabad (NCLT) , the Resolution Plan of ArcelorMittal was approved for the Corporate Insolvency Resolution Process (CIRP) of Essar and the same was upheld by the Supreme Court vide Order dated 15 November 2019.
Issue for adjudication
Having assigned A ``Debt`` as defined u/s 2(g) of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, for valuable consideration, as part of Resolution Plan under IBC, are the Personal Guarantors discharged of their liability in respect of the principal borrower?
DRT observed that under the Resolution Plan which has been approved, the dues of Essar were assigned to ArcelorMittal, therefore, there were no dues pending from Essar and the question of invoking personal guarantee against such debt does not exist. It was also admitted that the Applicants, being the secured financial creditors, have accepted the amounts paid to them by ArcelorMittal in discharge of the total debt owed by Essar under the Resolution Plan. However, it is the contention of the Applicants that they had only assigned the debt of Essar and not the Personal Guarantors, who were specifically excluded from such assignment.
DRT has relied on Various decision, including the judgment of the High Court of Australia in the case of Hutchens v. Deauville Investments Pty Ltd, wherein it was held that if a debt is assigned and the guarantee is not, then the right of invoking the guarantee by the creditor must be suspended as long as the debt is assigned.
Accordingly, DRT held that there is no existing debt which can be claimed against the Personal Guarantors, as all the underlying debts of Essar have been assigned to and paid for by ArcelorMittal to the secured financial creditors under the resolution plan; and without an underlying ``debt due``, personal guarantees could not be invoked.
MHCO Comment :
DRT, by this order, has redefined the liability of personal guarantors in cases of assignment of debt of the principal borrower. This Order has made infructuous all contracts and clauses separating debts and the guarantees thereof previously executed by financial creditors.
This update was released on 24 March 2022.
The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or firstname.lastname@example.org for any assistance.
Legal Update Team
MANSUKHLAL HIRALAL & COMPANY
Advocates, Solicitors and Notaries
T: +91 22 40565252
Mumbai Office: Surya Mahal, 2nd Floor, 5, Burjorji Bharucha Marg, Fort, Mumbai-400 023, India
Delhi Office: Block C-9, Lower Ground Floor, Jangpura Extension, New Delhi - 110 014, India
``Noted lawyer in the Real Estate practitioner from India`` - Chambers & Partners
Please consider the environment before printing this email
The information contained in this communication is intended solely for the use of the individual or entity to whom it is addressed and others authorized to receive it. This communication may contain confidential or legally privileged information. If you are not the intended recipient, any disclosure, copying, distribution or action taken relying on the contents is prohibited and may be unlawful. If you have received this communication in error, or if you or your employer does not consent to email messages of this kind, please notify the sender immediately by responding to this email and then delete it from your system. No liability is accepted for any harm that may be caused to your systems or data by this message.
Subscribe to our Knowledge Repository
If you would like to receive content directly in your inbox from our knowledge repository, please complete this subscription form.